Adding to your memo from Milestone One, document your

Adding to your memo from Milestone One, document your understanding of the relationship between audit risk, audit evidence, and financial statement assertions as it specifically relates to this company and industry.

A. Describe the audit data or evidence your team will review. Why is this proof important?

B. What if a significant portion of the data is overseas and beyond the auditors’ jurisdiction or audit universe? Analyze how the audit team will compensate for that risk. What governing rules and regulations must be taken into consideration?

C. Describe analytical procedures you will use to determine the sampling program. How will your internal control evaluation affect this step? Be specific.

Scenario:

Business and Industry Conditions
RNS sells and installs computers and networking hardware and software, and provides information technology consulting to businesses. It is currently developing its own computer networking software to sell to customers.
RNS’s success depends on attracting and retaining personnel with a high level of technical expertise who are able to provide a broad range of services. The market for staff is highly competitive.
The market for computers and networking products is extremely competitive. RNS’s main competitors are companies like Dell, Hewlett Packard, and Apple. RNS also competes with local and regional resellers that provide similar products and consulting services directly to customers. To be competitive, RNS has relied on its ability to provide its customers with state-of-the-art products in a timely manner. Because the company does not have the buying power of some of its competitors, it generally must charge a higher price for its products, but it is also able to provide a higher level of service and expertise to its customers to compensate for the higher price.
The market for computer products and technology services is sensitive to economic conditions. Economic indicators predict the U.S. economy will be relatively stagnant for the next few years, with the annual growth in spending for information technology products and services expected to be 1 percent per year for the next three years. In the past year, RNS has decided to increase sales by relaxing credit rules to provide credit to customers with slightly higher credit risk.
Ownership and Management
RNS is a closely held company owned by six stockholders. Two stockholders are active members of the company’s board of directors. None of the other owners take an active part in the management of the business.
Objectives, Strategies, and Business Risks
RNS’s primary business objectives are to increase sales, services, and consulting revenues by five percent and increase net income by seven percent each year for the next three years. Strategies to achieve those objectives include:
 New software development
 Aggressive marketing of products and services through increased advertising
 Sales to customers with a higher credit risk profile
The primary business risks associated with the company’s strategies include the following:
 The U.S. economy may suffer a significant downturn.
 Competitors may engage in predatory pricing to gain market share.
 Increased advertising expenditures may not produce desired results.
 Credit losses may exceed the benefits of increased sales.
 Software development activities may not generate viable products.
The company has developed the following responses to these risks:
 Frequent monitoring of economy and industry conditions
 Monitoring of competitor actions
 The hiring of a marketing consulting firm to evaluate the performance of advertising methods
 Daily review of aging of accounts receivable
 Adherence to a controlled software development budget
Measurement and Review of Financial Performance
Management uses the following measures to monitor the company’s performance:
 Inventory and receivables turnover
 Aging of accounts receivable
 Sales and gross margins by type of revenue
 Net income
 Total inventory balance