Capital structure affect overall amount of audit evidence

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Reference no: EM131887634

Using the relevant audit risk and materiality concepts from the text, address the following scenarios regarding Tucker & Company’s audits of the financial statements of Foursquare Industries, Inc.

BACKGROUND

1. Tucker & Company auditors are planning their audit of Foursquare Industries, Inc.’s 2018 financial statements. The Company manufactures and sells industrial pumps and related plumbing equipment. Early in 2018, Foursquare introduced a new product, a complex computerized control mechanism that can be added on to certain of its other products. It eliminates the need for Foursquare’s customers to manually monitor and adjust certain settings. The product can be purchased together with its other products or purchased separately and added to its other products that have already been purchased by its customers. Despite its high cost, the new product has been a success and accounts for approximately 30 percent of 2018 revenues. Because of the nature of the new product, however, the sales price includes mechanical maintenance and software updates for three years from the date of purchase. Foursquare’s other products include only a 90-day warranty.

Because of its growing success, Foursquare attracted the interest of a venture capital firm, which offered to make a significant investment in the company. Up to that time, Foursquare had been owned and operated by a single family. The company decided to accept the offer, and sold 40 percent of the company’s common stock to the investors before the end of 2018. With the agreement of the new investors, Foursquare used the proceeds of the investment to pay off the substantial bank loans the company had incurred in connection with the development of its new product. The company’s patents related to its new product and certain manufacturing equipment had fully collateralized the bank loans.

Questions: Does this change in Foursquare’s capital structure affect the overall amount of audit evidence the Tucker & Company auditors will obtain in its audit of Foursquare’s 2018 financial statements, as compared to the prior year? Why or why not?

Reference no: EM131887634

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