Darter Ltd. is a medium-sized business involved in manufacturing and assembling consumer electronic products, such as DVD players, radios, and satellite receivers. It is privately owned. Its minority shareholders requested that the annual financial statements be audited for the first time this year. Your firm is engaged to do the current year’s audit. You are now reviewing Darter’s preliminary general ledger trial balance in order to begin preparing the planning memorandum.
Consider the following accounts that appear in this trial balance:
• Inventory, finished goods
• Inventory, work-in-progress
• Inventory, unassembled components
• Inventory, spare parts
• Property, plant and equipment
• Deferred development costs
• Accounts payable
• Warranty provision
• Bank loan, long term
• Share capital, common shares
• Retained earnings
• Cost of goods sold
• General and administration expense
a. Evaluate the inherent risk for each of the above accounts. List two accounts that you think would have the highest inherent risks, and two that would have the lowest. Indicate whether there are any particular assertions (i.e., existence, completeness, ownership, valuation, presentation) that the risks mainly relate to. Give reasons that support your assessments and state any assumptions you need to make.
b. For one of the high risk accounts you identified in part (a), explain how the inherent risk level will relate to the types of controls that Darter’s management implements for each of these accounts? Consider costs and benefits of implementing effective controls.
c. For one of the high risk accounts you identified in part (a), describe the procedures you would use to assess the control risk.
d. How would you expect the company’s accounts to differ, and how would your inherent risk assessment differ if the company’s business was:
• An iron mine
• A piano manufacturer
• A bank
• A shipping line