Charles is an articling public accounting student working on his first financial statement audit engagement. The client is BBB Appliances Inc. One of his duties was to prepare an aging of the company’s accounts receivables.
His audit supervisor explained that the company’s receivables have increased from $650,000 last year to $950,000 this year, which in both cases exceeds materiality. These amounts are given as security to the bank for the company’s short-term bank loan. Total assets have increased from $4,000,000 to $4,300,000 and total sales have increased from $10,300,000 to $10,900,000 in the year. Charles knows that his firm will be relying on the procedure of positive confirmations to verify valuation, but is wondering why his supervisor has also arranged for a review of the corporate minutes of BBB’s board of directors’ meetings.
REQUIRED
a. Provide examples of evidence that Charles could obtain related to the accounts receivable and the bank loan from BBB’s board of directors’ meeting minutes.
b. Using one of your examples from part (a), explain how Charles could use that evidence in inspecting the adequacy of BBB’s financial statement notes.
c. Using only the information above for BBB [ignore your answers to parts (a) and (b)], provide examples of analytical procedures for planning that Charles could use to conduct risk assessment procedures in the audit of BBB’s financial statements. Show your calculations.