5-34 Risk of Material Misstatement

5-34 Risk of Material Misstatement - most likely to be...

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5-34 (Risk of material misstatement) Your client, a manufacturer of computer components, has experienced slowing demand for its product. Recently, it cut back from three shifts a day to two shifts a day, and the company has eliminated the backlog of orders that existed in prior years by providing financing to customers. Newspaper reports indicate that competition has taken significant business away from the client because a large investment in R&D has not resulted in improved products. Furthermore, a small handful of your client’s customers are experiencing financial difficulties because of slowing demand for your client’s products. Required a. Consider the implications of the above information for revenues. What assertions, if any, are likely to be misstated? As a result, what accounts are likely to be overstated or understated? Explain your reasoning. In the revenue cycle, existence and occurrence and valuation and allocation assertions are the
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Unformatted text preview: most likely to be misstated since companies would be more likely to overstate rather than understate asset accounts. Since some customers experience financial difficulties, in this case, the allowance for doubtful accounts may be understated which impacts the valuation assertion. Since the company has recently implemented cut backs they may be experiencing a slowdown in sales. If the company is pressured to meet earnings target they cannot achieve legitimately, the company may purposely misstate sales using fake transactions or through channel stuffing and side agreements to meet targets expectations. When discussing inventory the assertion to be misstated is valuation since the company as slow moving inventory. This creates the risk that the inventory is obsolete or has lost value and may be overstated on the balance sheet with an equal understatement of cost of goods sold on the income statement...
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