Assume you are getting ready to plan the 20X3 audit for your client, West Tech Inc. (WT), a manufacturer of cell phones, tablets, and personal computers. As part of the initial planning process, you have gathered the following background information and performed some analytical procedures.

WT has strategically positioned itself to be very price competitive and as a result, sales have increased by 50% over the last two years. At the beginning of the current year, the Board of Directors approved a new compensation structure for all executive and high-level employees which bases bonuses on WT’s sales growth and profit margins. In the fourth quarter of the current year, WT released a new cell phone product about four months ahead of schedule so they would be the first to market with new technologies. They still had three months of inventory on hand of the current model at the time of the new model release. The results of analytical procedures performed in planning the audit are on the next page.

Required:

1. (8 pts) Based upon the information provided, identify four (4) specific risk factors.*

2. (12 pts) For each of the risk factors identified in part 1, indicate the potential misstatement(s) that may be a concern for the auditor. Explain the connection between the risk factor and the potential misstatement.

	20X3 Unaudited	20X2 Audited	20X1 Audited	20X2 Industry	20X1 Industry
Current Ratio	4.82	5.50	5.56	5.61	5.64
Quick Ratio	3.37	3.09	2.96	2.94	2.89
Debt to Equity	.21	.16	.15	.21	.19
Sales to Total Assets	1.34	1.16	1.12	1.10	1.08
Profit Margin	12.3%	5.7%	6.3%	7.3%	9.1%
Return on Assets	16.5%	6.7%	7.31%	8.0%	9.8%
Return on Equity	19.8%	7.0%	7.9%	9.9%	11.9%
A/R Turnover in Days	86.4	74.8	76.2	69.9	75.3
Inventory Turnover in Days	180.0	169.4	166.3	152.4	160.6
A/P Turnover in Days	22.0	27.6	29.1	33.6	30.8

WT, Inc. Analytical Procedures

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = Quick Assets (cash, marketable securities, and current receivables) / Current Liabilities

Debt to Equity Ratio = Total Liabilities / Total Equity

Sales to Total Assets = Sales / Total Assets

Profit Margin = Profit (before tax) / Sales

Return on Assets = Net Income / Average Total Assets

Return on Equity = Net Income / Average Stockholders' Equity

A/R Turnover in Days = 360 Days / Receivable Turnover

Inventory Turnover in Days = 360 Days / Inventory Turnover

A/P Turnover in Days = 360 Days / Accounts Payable Turnover

* There are many more than four in the background information and the analytical procedure results. No information on controls is provided so do not list any control risks.

Answer rating: 100% (QA)

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