3. Inherent risk is a measure of the firm’s assessment of the susceptibility of

Question

3. Inherent risk is a measure of the firm’s assessment of the susceptibility of material misstatement before
considering the effectiveness of internal control. Briefly comment of the following areas that are
inherent in auditing a business such as the Lakeside Company:
a. Lakeside holds an inventory of high technology items: consumer electronic equipment.
b. Lakeside distributes merchandise to retail stores.
c. Lakeside sells on credit throughout two states.
d. Lakeside rents a number of its stores.
e. Lakeside has a large amount of debt.
f. Lakeside is considering going public.
4. An audit program is designed to generate appropriate evidence on which the auditor can base an opinion.
How does the auditor know when sufficient evidence has been accumulated?
5. What is the quality of the evidence that is gathered by analytical procedures? More specifically, how
competent is evidence provided by analytical procedures compared with other types of evidence?
6. In performing analytical procedures, how extensive should an auditor’s knowledge of a client’s industry
be and how does the auditor go about getting this type of information?
7. Assume that price competition with other CPA firms was an important factor in securing this audit
engagement. What are the potential problems for a CPA firm that can arise from acquiring clients
through price competition?
8. The following is a summary of observations from the review of the trial balance and general ledger for
Lakeside Company for 2007 and 2008:’
#
Observations from Trial Balance and General Ledger
Comment on
Significance
1. The sales for Store Three have increased by approximately
94% since the previous year. At the same time, the cost of
the goods sold has dropped from 58.5% of sales (which is
consistent with the other stores) to only 50.3% of sales.
Also, the inventory held by this store has risen by over
50%.
2. There was a gain on disposition of fixed assets of $14,000.
3. The company's two bank credit lines now have a total
balance that exceeds the $750,000 maximum that was
indicated in the earlier case.
4. The long-term notes payable increased by $50,000.
5. Cash flow from operations declined significantly in 2008.

Explanation / Answer

Answer 3:   

a. Lakeside holds an inventory of high technology items: consumer electronic equipment.

b. Lakeside distributes merchandise to retail stores.

c. Lakeside sells on credit throughout two states.

d. Lakeside rents a number of its stores.

As per the Chegg answering policy i've answered the first 4 questions including subparts.

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