Hello Please help me to solve this question.

"Freecom Inc.

Freecom is an American high-technology IT hardware company based in California. It grew rapidly in the last 15 years (1990-2005) and is a member firm in the Russell 2000 index. It makes certain crucial PC components and is not a software firm. Freecom operates in an industry well-known for heavy expenditure in research and development. In response to fierce competition, Freecom constantly updates its products to incorporate new technology. After 15 years of high growth, by the end of 2005, it has turned into a medium-sized firm with $250 million in total assets. Its 2005 revenues was $500 million with a net income of $50 million.

During the second quarter of 2006, Freecom acquired another company in exchange for $150 million in cash, stock, and debt. The acquisition was recorded as a purchase for financial reporting purpose. Out of $150 million, $100 million was assigned to tangible assets such as inventory ($30 million) and PPE ($70 million), and the remainder to goodwill. The board of directors of Freecom wanted to use this transaction to broaden its product line in order to compete against its main competitor, Indell Inc. The acquired company mainly makes a PC component, Ridon, that speeds up calculation when PC users play games. Ridon is distinct from Freecoms current products, but it complements Freecoms current products and can be sold in bundle to PC makers.

Before the acquisition, the Ridon firm has consistently yielded a 30% return on assets (net income/total assets) in 2004 and 2005. However, you heard that Indell Inc. recently enjoyed a new technology breakthrough and would release the next generation of products in the third quarter of 2006. All industry experts expected a new period of intense competition down the road between Freecom and Indell.

Historically, Freedcom developed its main products internally and this 2005 acquisition was the first time that Freecom has acquired a crucial technology from an external third party.

By the end of 2006, Freecoms trial balance (consolidated balance sheet) shows total assets of $420 million (including $45 million of Ridon inventory), revenues of $700 million, and net income of $60 million. These results include profit from the Ridon division for the eight months of 2006, since the acquisition was concluded by the end of April 2006.

Assume that you are now the senior in charge of the Freecom 2006 audit. You are required to make some preliminary risk assessment and set up certain materiality threshold.

Required:

a) Based on the above facts and figures, identify three balance sheet accounts which might have a high risk of material misstatement. Please describe the type of probable misstatements (overstatement or understatement) about which the auditor would be concerned and provide explanations to support your conclusions.

1. ?

2. ?

3. ?

b) The Ridon inventory is to be used as security for a bank loan and is the subject of a special report. Make a materiality assessment for the Ridon inventory (Tip: Please give specific dollar amounts or a range of dollar amounts).