AP 4.2 Analysis AP4.2 (Lo 1) oderate Understanding the client and its risks-risk

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AP 4.2

Analysis AP4.2 (Lo 1) oderate Understanding the client and its risks-risk assessment vy Brown Moderate is g a report for the engagement partner of an existing client, Scooter Inc., an importer ot scooters and other er low-powered motorcyvcles. Ivy has been investigating certain aspects of Scooters encd rapid growth over its first five years in operation, has slowed significantly during the last ditions and solid employment growth, s. She has found that Scooter's business, which the change in economic conditions over the past 12 month year. Initially, sales of scooters were boosted by good economic con coupled with rising gas prices. Consumers needed transportation to get to work and the high gas prices made the relatively cheap running costs of scooters seem very attractive. In addition, the low purchase price of a job could obtain a loan to buy one a small motorcycle or scooter, at between $3,000 and $8,00o, meant that almost anyone who had However, Ivy has found that the sales of small motorcycles and scooters have slowed significantly mporters of these products, not just Scooter, are being adversely affected. The onset of an eco- and all i c recession has restricted employment growth and those people who still have jobs are less certairn of continued employment. In addition, the slowdown in the world economy has made gas prices fall, transportation. Ivy has also discovered that, due to her reducing demand for this type of economical the global financial crisis, the finance scooters and motor cycles has announced that it will not be continuing to provide loans for any type of vehicle with a purchase price of less than $10,000. furt company used by Scooter's customers to finance the purchase of Required a. Identify the issues that potentially impact the audit of Scooter Inc. b. Evaluate how each issue affects the risk assessment by (1) identifying the risks and (2) identifying the financial statement accounts that require closer examination. AP4.3 (LO 1) our intern training at a large public accounting firm, you have been asked to conduct research about adit procedures related to client noncompliance with laws and regulations. You will report the findings your research to the other interns in your training class. Challenging Research Noncompliance with laws and regulations As part of quired to www.aicpa.org/research/standards to access the Clarified Statements on Auditing Standards. igate to AU-C 250 and answer the following questions

Explanation / Answer

AP4.2

(a) Issues:

Change from good economic conditions (solid employment growth, rising petrol prices, easy

access to credit for consumers) to recession (recession with lower employment growth,

falling petrol prices, difficult access to credit).

Changing conditions such as lower petrol prices and lower employment growth have slowed

consumer demand for scooters. Consumer demand is also likely to be affected by less access

to consumer credit for scooter purchases.

The changed economic conditions also likely adversely impact Scooter Ltd’s access to

finance (tighter finance market, slower cash flow to service debt).

(b) Impact on audit plan

Greater risk of fraudulent financial reporting because of pressure on Scooter Ltd management

to meet performance targets (either for bonuses or to satisfy bank covenants)

Sales revenue: Consider risk of fraudulent transactions, cut-off (sales from future period

back-dated to the current period), revenue recognition issues (e.g. scooters loaned to potential

customers recorded as sales despite generous rights of return)

Risk associated with finance company – scooter price inflated to be above $10,000 with

‘allowance’ granted later to customer.

Expenses: Consider risk that expenses post-dated to next period to improve current period

profit.

Going concern risk – is business able to pay its debts as they fall due? What are the terms of

finance between Scooter Ltd and its banks? Is Scooter Ltd locked into a lease on premises

that are now too large?

Risk associated with staff layoffs – poor sales could lead to staff sackings not in accordance

with relevant awards, risk of successful case for unfair dismissal.

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