Read the following description of Drea Tech Company and identify the elements of inherent risk associated with the revenue cycle. Determine the appropriate audit response (audit procedure) to address the risks.
Drea Tech Company has been growing rapidly and has recently engaged your firm as its auditor. It is actively traded over the counter and management believes it has outgrown the service capabilities of its previous auditor. However, on contacting the previous auditor, you learn that a dispute led to the firm's dismissal. The client wanted to recognize income on contracts for items produced but not shipped. The client believed the contracts were firm and that all the principal revenue-producing activities were performed. The change in accounting principle would have increased net income by 33% during the last year.
Drea is 32% owned by Anthony Dreason, who has a reputation as a turnaround artist. He bought out the previous owner of Drea Tech three years ago. The company's primary products are in the materials handling business, such as automated conveyors for warehouses and production lines. Dreason has increased profits by slashing operating expenses, most notably personnel and research and development. In addition, he has outsourced a significant portion of component part production. Approximately 10% of the company's product is now obtained from Materials Movement, Inc., a privately held company 50% owned by Dreason and his brother.
A brief analysis of previous financial statements shows that sales have been increasing by approximately 20% per year since Dreason assumed control. Profitability has increased even more. However, a tour of the plant gives the impression that it is somewhat old and not kept up to date. Additionally, a large amount of inventory is sitting near the receiving dock awaiting final disposition.

  • CreatedSeptember 22, 2014
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