EXERCISE – ENGAGEMENT AND AUDIT RISKS

Consider the following client situations. Indicate whether you feel the client should be a high
or low risk engagement, which account balances and/or audit issues you feel should receive
the most attention.

1. This is our second year on the engagement. In the prior year things were pretty
messy and the client required a lot of assistance with general bookkeeping. We are
hoping the client has improved their accounting processes and this year will be much
better. It is a public client and the accounting personnel are relatively inexperienced.
The client has issued a large number of stock options in the current year and some
suppliers have been paid in shares rather than in cash.
2. Encontramos alto riesgo dentro de este caso gracias al registro contable que
se maneja al igual que el libro de actas con control deficiente.

3. A privately held client that we have been working with for approximately 10 years.
There are always a few issues they need assistance with at year end, but they are
good about asking for help. The client is a distributor with a large portion of the
assets consisting of inventory and accounts receivable. Net income is usually around
$5,000,000. The owner takes about $3,000,000 in dividends every year. Total equity
is approximately $4,000,000 and total debt is approximately $39,000,000 including
$20 million in bank debt.

4. Podemos decir que existe bajo riesgo, sería uimportante prestarle atencion a
los inventarios y cuentas por cobrar de la empresa, otro punto a
consideracion mia importante es la forma en el pago de la deuda.

3. A public company that has been a client for approximately 10 years. The accounting
personnel are all very experienced. They are on track to have a loss of almost $2,000,000 at
year end. In the prior year they had approximately $10,000,000 in cash. They used it all in
the current year to finance operations and in addition utilised some of their line of credit.

Es considerable el bajo riesgo, pero es importante tomar en cuenta los flujos de

efectivo que se manejan.

5. A privately held company that has been an audit client for four years. Accounting
personnel have been with the company for a number of years and are very
competent. There are a few journal entries every year, but nothing significant. The
client is a wholesaler who receives a large amount of its product from a supplier in
China. All transactions are in US dollars. They are involved in a dispute with the
government over tariffs.
6. Bajo riesgo, cuidar de manera especial los inventarios al igual los registros
internos que se tienen de las operaciones y/o transacciones tomar en cuenta
el curso de la disputa legal que se tiene contra el gobierno en base a las
tarifas

5. A privately held company that has been an audit client for 15 years. The controller is new
and has been with the company for about four months. He does have previous accounting
experience. The client distributes books and periodicals and allows customers to return to
them all unsold merchandise. The client can in turn return these items to its suppliers.

Es de bajo riesgo, lo importante aqui es tener en consideracion los inventarios, con

las entradas y salidas que se dispongan al igual que las devoluciones que existan.