It is now October 31, 2020 you are performing preliminary analytical review of Whole Soups Company (WSC),

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Question:

It is now October 31, 2020 you are performing preliminary analytical review of Whole Soups Company (“WSC”), a manufacturer of gourmet soups and sauces using certified organic ingredients with a calendar year end. WSC is a private company and carries a business loan with a local bank. The loan agreement requires WSC to maintain a debt equity ratio of .75 to 1. Management has indicated to you that a new Vice-President Sales was added in late January who is remunerated using a formula of base salary and commission on new sales. WSC also hired a new cost accountant who previously worked for a major US manufacturer.

Based on your quantitative analysis of WSC’s interim financial statements for the first nine months, you noted the following:

A) Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same.

B) Current year inventory is larger than last year but the current year gross margin (profit) is larger.

C) Current year long-term liabilities are larger than last year but the interest expense is the same

D) Current-year capital assets total is larger than last year but current amortization expense is the same as last year.

Required:

1. For each of the observations above, identify the account(s) and related assertion that need(s) to be audited carefully AND the reason; for example, "potential overstatement or understatement of _______."

2. Based on what you have gathered from WSC’s management, what is your assessment of risk of material misstatement, support your answer using facts from the scenario. Based on your assessment, what is the impact on detection risk?