Peach Blossom
October 8, 2009
To: Audit Team
Anderson, Olds, and Watershed
Re: Analytical Procedures
Audit Risks:
After analyzing the financial statements of Peach Blossom Cologne Company, we have concluded through the change analysis the following accounts contain some measure of audit risk. In analyzing the change analysis we concluded on threshold amounts of any change exceeding 15% and above the amount of $5000. If both criteria were met, a business reason and possible client error reason were provided. The following accounts provide the possibility for audit risk:
Cash- Business reason: Acquired a loan during the period to obtain cash; Client error: Not properly recording all expenses paid in cash
Accounts Receivable- Business reason: Increase in sales; Client error: recording sales in the wrong period (cutoff error)
Allowance for Bad debts- Business reason: changed percentage of sales used to record; Client error- Used incorrect percentage to calculate to raise revenue amounts
Inventory- Business reason: Reduced inventory through selling goods at a rate faster than produced at current level of production; Client error: were misclassifying goods as inventory instead of sales or WIP (cutoff error)
Machine and Equipment- Business reason: purchased more equipment during the year (forklift and storage machine); client error- Overstated by not writing off machines when fully depreciated
Acc Dep. Machine and Equip- Business reason: had more machines and thus higher depreciation; client error: Not using the correct depreciation rates (too high for purchases)
Auto Equip- Business reason: Purchased company car (sedan); Client error: classified personal automotive expenses to the company
Acc Dep. Auto Equip- Business reason: More cars increased the depreciation amount; client error: not using the correct depreciation rates (too high to justify purchase)
Accounts Payable- Business reason: Purchased more items with cash or purchased fewer items; Client error- not recorded
To: Audit Team
Anderson, Olds, and Watershed
Re: Analytical Procedures
Audit Risks:
After analyzing the financial statements of Peach Blossom Cologne Company, we have concluded through the change analysis the following accounts contain some measure of audit risk. In analyzing the change analysis we concluded on threshold amounts of any change exceeding 15% and above the amount of $5000. If both criteria were met, a business reason and possible client error reason were provided. The following accounts provide the possibility for audit risk:
Cash- Business reason: Acquired a loan during the period to obtain cash; Client error: Not properly recording all expenses paid in cash
Accounts Receivable- Business reason: Increase in sales; Client error: recording sales in the wrong period (cutoff error)
Allowance for Bad debts- Business reason: changed percentage of sales used to record; Client error- Used incorrect percentage to calculate to raise revenue amounts
Inventory- Business reason: Reduced inventory through selling goods at a rate faster than produced at current level of production; Client error: were misclassifying goods as inventory instead of sales or WIP (cutoff error)
Machine and Equipment- Business reason: purchased more equipment during the year (forklift and storage machine); client error- Overstated by not writing off machines when fully depreciated
Acc Dep. Machine and Equip- Business reason: had more machines and thus higher depreciation; client error: Not using the correct depreciation rates (too high for purchases)
Auto Equip- Business reason: Purchased company car (sedan); Client error: classified personal automotive expenses to the company
Acc Dep. Auto Equip- Business reason: More cars increased the depreciation amount; client error: not using the correct depreciation rates (too high to justify purchase)
Accounts Payable- Business reason: Purchased more items with cash or purchased fewer items; Client error- not recorded