Exercise 7-16 of Modern Auditing by Boynton
7-16.
a.First risk that comes up is that the contributions from owners are pending. There are no patents to protect the design of the company or to give it a competitive advantage, because no patents were granted yet. Sunny contracts 100 percent of the work to other companies. All work is performed by outsider contractors, so that rises the risk of vulnerable costs to others and access to vendors is critical in order to be able to generate sales.
Other risk of this engagement would be that the unrecovered development costs that are $42000, the largest asset of the company, might be research and development costs that should not be capitalized. As we can see Sunny is a new company and the entire balance sheet is potential asset, total of $78000. The potential owners are new in business, they are inexperienced. The owners are also officers and that makes them risky, what concentrates their control and ability to override controls. Plus the former officer of Canadian Brass Co. Float has prior integrity issues and is sued by the SEC. Prior entity for both officers is under suspicion, because the funds were used as compensatory balances for loans.
The company is selling solar-powered swimming pool heaters so it sells to the public. That means that are going to need an integrated and complex audit, including test controls and financial statements. The company is still a new player in industry, what it makes it vulnerable and weak. Because the company is new, it is risky not having any track record.
b. Here is the list of auditing and accounting problems appearing to exist:
1. In Accounting there is one question/problem, it is the capitalizing of assets legitimate?
2. In Auditing:
Is the audit firm registered with the PCAOB to audit public companies? establishing the existence of owners determining the existence of development assets avoiding weaknesses of the management integrity eliminating the high fraud risk not having experience of prior record to
a.First risk that comes up is that the contributions from owners are pending. There are no patents to protect the design of the company or to give it a competitive advantage, because no patents were granted yet. Sunny contracts 100 percent of the work to other companies. All work is performed by outsider contractors, so that rises the risk of vulnerable costs to others and access to vendors is critical in order to be able to generate sales.
Other risk of this engagement would be that the unrecovered development costs that are $42000, the largest asset of the company, might be research and development costs that should not be capitalized. As we can see Sunny is a new company and the entire balance sheet is potential asset, total of $78000. The potential owners are new in business, they are inexperienced. The owners are also officers and that makes them risky, what concentrates their control and ability to override controls. Plus the former officer of Canadian Brass Co. Float has prior integrity issues and is sued by the SEC. Prior entity for both officers is under suspicion, because the funds were used as compensatory balances for loans.
The company is selling solar-powered swimming pool heaters so it sells to the public. That means that are going to need an integrated and complex audit, including test controls and financial statements. The company is still a new player in industry, what it makes it vulnerable and weak. Because the company is new, it is risky not having any track record.
b. Here is the list of auditing and accounting problems appearing to exist:
1. In Accounting there is one question/problem, it is the capitalizing of assets legitimate?
2. In Auditing:
Is the audit firm registered with the PCAOB to audit public companies? establishing the existence of owners determining the existence of development assets avoiding weaknesses of the management integrity eliminating the high fraud risk not having experience of prior record to