Identifying significant accounts and calculating materiality. Anaheim Enter-prises, which operates in California, sells patio furniture imported from China; the merchandise is marketable twelve months of the year in California. Shipments from China come by sea and take two months to arrive unless a strike idles the shipping ports. The firm does not have a retail store but rents warehouse space with a small office. Anaheim sells on the Internet and through phone orders from customers and retail shops. The firm stocks fifty different sets of tables and chairs and a variety of benches, lounge chairs, and table umbrellas. It places all orders four months before delivery, and its payment is expected when it places the order.
Anaheim accepts credit cards and extends thirty days of credit to retail stores. Its balance sheet shows cash, accounts receivable, inventory, and office equipment.
On the liability side of the balance sheet are a few accounts payable and a short-term bank loan to cover the payment for goods before they arrive. The income statement shows revenue from both Internet and phone sales, cost of goods sold (averaging about 60% of revenue), and a few operating expenses (mainly rent and utilities). At any one time, the firm has on hand a three-month supply of inventory, which turns over about four times a year. The inventory does not tend to become obsolete. Anaheim is not a public company, but its books are audited to allow it to obtain bank financing. The company’s two owners have no employees. The firm’s total revenue is $2,800,000 for the current year; it had total assets of $700,000 at year-end. You are working on the year-end audit.
a. Calculate the company’s materiality, and describe how you used it in the audit.
b. Identify significant accounts and disclosures for the company as well as any relevant assertions associated with the significant accounts. Explain how you determined the significant accounts and disclosures.
c. Did you test internal controls at this company? Explain your answer.
d. How did you gather evidence regarding the significant accounts and disclosures?
e. Assume that during substantive testing, you found misstatements in net income equal to $32,206. What decision would you make regarding the financial statements? What action would you take?

  • CreatedJanuary 22, 2015
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