In this assignment, you will prepare a two to three (2-3) page report that addresses the requirements specified in the case. Fully address each requirement and include at least two (2) current references to scholarly and/or authoritative sources.
Specifically you will be required to:
Explain the effects on the account of the opening of the first retail store.
Describe how the business change will affect audit risk components.
Determine expected changes to inventory transactions and balances and specify which will be most affected by the business structure change.
Describe the population(s) and recommend a sampling approach for substantive inventory testing.
Use at least two (2) current, quality academic or authoritative sources in this assignment. Note: Wikipedia and similar websites do not qualify as quality scholarly and/or authoritative sources. Use the Strayer University Library to conduct your research.
Your assignment must follow these formatting requirements:
Be typed, double-spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or SWS format. Check with your professor for any additional instructions.
Include a cover page containing the assignment title, the students name, the professors name, the course title, and the date. The cover and reference pages are not included in the required page assignment page length.
Case
Suzie and Ian are discussing how sample size might change from the prior year when performing substantive tests of transactions related to total sales. At an interim date when Suzie and Ian are planning the audit, Cloud 9 has increased its revenues by approximately 10%. Ian notes that he expects that the increase in revenue will cause an increase in sample size. However, Suzie observes that the increase in the total revenues also caused an increase in the auditor’s level of tolerable misstatement. As a result, these two changes may offset each other and have little effect on sample size.
Ian also asserts that because top-line revenues are so important to many financial statement users, the auditor should want a high level of assurance that tolerable misstatement is not exceeded by expected misstatement. Suzie responds with a question. Based on our planning work, how strong are internal controls? And how will our control risk assessment affect the assurance that we need from substantive tests of revenues? As Ian attempts to answer this question, he suggests, Inherent risk is probably maximum for sales revenues, but internal controls are expected to be strong, so overall risk of material misstatement is low. Because risk of material misstatement is low, we can allow ourselves to obtain a higher detection risk that the actual misstatements do not exceed tolerable misstatement, which allows for a smaller sample size for substantive tests of revenue transactions. Suzie likes Ian’s reasoning.
Now she asks, Is there anything else we need to consider? Ian thinks for a minute and then suggests that they also need to consider the expected amount of misstatement in the population: If internal controls are good, then the expected amount of misstatement should be fairly low. I now see that good internal controls are really important to our audit strategy, and we will need to emphasize testing controls, and strong controls will allow us to minimize the sample sizes we need for substantive testing.
Finally, Suzie asks Ian if they should stratify their sample selection regarding sales. Ian suggests that before answering that question, he really needs to understand the variation in the size of sales made to various customers. Suzie likes the fact that this needs to be determined based on Cloud 9’s sales history. However, she notes that, based on prior experience, some large customers have many stores, but the average invoice for each store is relatively similar. Suzie suggests that stratification may be more important for testing accounts receivable than for testing sales. They agree to quickly investigate this more and then reach a final conclusion.
