Risk of material misstatement
Your client, a
manufacturer of computer components, has experienced slowing demand for its
product. Recently, it cut back from three shifts a day to two shifts a day, and
the company has eliminated the backlog of orders that existed in prior years by
providing financing to customers.
Newspaper reports indicate that competition has taken
significant business away from the client because a large investment in R&D
has not resulted in improved products. Furthermore, a small handful of your
client’s customers are experiencing financial difficulties because of slowing
demand for your client’s products.
Required
a. Consider the implications of the above information for
revenues. What assertions, if any, are likely to be misstated? As a result,
what accounts are likely to be overstated or understated? Explain your
reasoning.
b. Consider the
implications of the above information for inventory. What assertions, if any,
are likely to be misstated? As a result, what accounts are likely to be
overstated or understated? Explain your reasoning.
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