What is the initial audit risk?

Assignment Details
Due 11/08/2019
The SCQ Corporation manufactures specialty medical tools ranging from $10,000 to$15,000 per unit. The tools are used in hospitals, clinics, and the home hospitality market. SCQ Corporation has contracted with YOUCPA to assist in creating its cash flow statement. In the past, its income statement and balance sheet have been prepared by the internal accountant.
It would like you to assist in preparing the cash flows using both the direct and indirect method. Sales and balance sheet information for the years 2009–2010 are below:
Balance Sheet
SCQ Corporation
For period ending 12/31/2010
Assets 2010 2009 Liabilities 2010 2009
Cash 150 100
Account receivable 600 400 Accounts payable 400 300
Inventory 750 500 Accrued taxes payable 200 100
Current assets 1,500 1,000 Current liabilities 600 400
Land 50 50
Equipment 1,300 1,200 Note payable 330 300
Less: Acc. depreciation 700 600 Deferred taxes 35 20
Net fixed assets 600 600 Equity:
Total fixed assets 650 650 Common stock 640 500
Paid-in capital 80 80
Retain earnings 465 350
Total equity 1,185 930
Total assets 2,150 1,650 Total equity and liabilities 2,150 1,650

Income Statement
SCQ Corporation
For period ending 12/31/ 2010

Items 2010 2009
Revenue 1,000 900
Cost of goods sold 400 350
Gross profit 600 550
Wages expense 110 100
Interest expense 50 40
Depreciation expense 100 90
Insurance expense 50 50
Other misc. expenses 90 80
Total expenses 400 360
Operating income 200 190
Taxes:
Deferred taxes 15 20
Taxes expense 70 67
Net income after taxes 115 103
Additions to retains earnings 115 103
The information below can be used to complete the direct method of cash flow:
Cash flows from operating activities 2010
Cash receipts
Received from sales of goods 930
Paid for inventory 400
Paid for employees 110
Paid for interest 50
Paid for taxes 70
Paid for other expenses 320
Cash paid for equipment 100
Cash received for common stock 120
Cash received from note payable 30
Assignment Guidelines:
A. Indirect method cash flow/cash flow statement:
a. What is the operational cash flow?
b. What is the investing cash flow?
c. What is the financing cash flow?
B. Direct method cash flow:
a. What is the operational cash flow?
b. What is the investing cash flow?
c. What is the financing cash flow?
C. What are the differences in the cash flow concepts and procedures between the direct and indirect methods?

Assignment Details
Due 11/15/2019
You were recently hired as Management Director of the new I Can Business Incorporated (ICBI). You have been asked to establish policies and systems for the business. The first one you choose to work on is a financial reporting system.
For this assignment, you must develop a 4–5-page memo that you will deliver to the ICBI Board of Directors. You will describe what a financial reporting system is and explain how the management team at ICBI should use an activity-based budget instead of an operating budget. Be sure to explain the similarities and the differences of the two. Finally, give examples of budget guidelines for ICBI. You must answer the following:
• Describe the meaning and the components of a financial reporting system.
• Explain the budget process.
• Describe a budget contingency plan.
• Give an example of financial guidelines that ICBI should follow to successfully plan for finance management.
o Identify and describe at least 5 basic financial guidelines.

Assignment Details
Due 11/15/2019
The BakFirn Corporation, a publicly traded firm, has contracted with YOUCPA, your public accounting firm, for an audit. The BakFirn Corporation manufactures specialty construction tools. The tools are used in the unique construction of homes, warehouses, and multiunit dwellings. The prices range from $1,000 to $5,000 per unit.
During the audit, the audit team has determined the risk assessment of the client. Consequently, the audit has to respond to the assessed risks of material misstatement at the financial statement and assertion levels. The YOUCPA audit team has asked you, the auditor, to prepare a list of actions that you will take to assess the audit risk.
The following information is available in the year just finished:
• The BakFirn Corporation end-of-year is 12/31/20XX.
• Sales for the previous year were $10,000,000. Sales this year are coming in at $9,500,000.
• The firm is in the construction machine industry, making specialty tools.
• Account receivable days sales outstanding (DSO) has been averaging 90–120 days. The year before, it was 80–90 days.
• Inventory turns have decreased from 3 to 2 per year.
• Account receivable and inventory make up 80% of total assets.
• Internal auditing has been reduced by one person to reduce costs.
• An initial test of controls in cash receipt indicated a lack of following procedures.
• The construction industry is in the third year of a downturn. It is forecasted to last two more years.
• The audit team has defined materiality to be focused on account receivable and inventory with $3,000 being the initial threshold. Net income for last year was $1,000,000.
• Inventory at the end of the year was $2,500,000.
• Account receivable at the end of the year was $2,740,000, or 100 DSO.
• The previous auditors did not disclose any fraud or any management issues at the meeting with BakFirn and YOUCPA. The reason for the auditor change was explained as a costs reduction program.
Assignment Guidelines:
A. Audit Assessment Steps:
a. What is the initial audit risk? High, medium or low?
b. What factors made you decide on this level?
B. Audit Plan Assertions
a. What would you include in the audit plan, and why?
b. Would you plan a test of controls or substantive tests? Why or why not?
c. Would these tests make a difference in the nature, timing, and extent of audit procedures? If so, how?
C. Audit Plan Evidence
a. Would you plan to put reliance on prior-year evidence? Why, or why not?
b. Would your evidence come from observation, analytical procedures, or other means? Explain your reasoning.
c. Would the evidence prove or disprove an assertion on the reliance of a specific balance sheet account or financial statement account? Explain your reasoning.

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