Reference no: EM132638645
Question - Introduction
It is November 20X6, and you are part of the audit team that is performing various audit planning procedures for the audit of the financial statements of Newport Soup, Inc. (NSI), as of December 31, 20X6.1 NSI makes soups and sells them in the United States (US) and all around the world. After years of losing popularity domestically, the US Department of Agriculture (USDA) reports that soup has made a comeback. Evidence of the comeback is observed by a ten percent increase in soup consumption in 20X6 relative to 20X5. While end consumers of NSI's soup are individuals, the bulk of NSI sales are to grocery, department and convenience stores. Three of NSI's most significant grocery store customers are Hammis Fleeter, Pubticks and Alexis Foods.
Table 1 contains six account balances as reported in NSI's September 30, 20X6 un-audited financial statements. Table 2 contains the balances as reported in NSI's 20X5 audited financial statements.
NSI has never had to restate its financial statements and has a reputation for having a fairly ethical management team. Top management (i.e., CEO, CFO) receives base salaries and bonuses that are triggered by NSI's ability to grow sales and meet Wall Street analysts' earnings per share (EPS) expectations. NSI has met or beaten analysts' EPS forecasts in only five of the last 12 quarters.
Table 1
Unaudited balances as of September 30, 20X6, Newport Soup, Inc.
Sales revenue $2,325,000
Cost of goods sold $1,453,125
Accounts receivable $1,200,000
Less: Allowance for doubtful accounts ($50,000)
Net accounts receivable $1,150,000
Inventory $200,000
Less: Reserve for spoilage ($10,000)
Net inventory $190,000
Table 2
Audited balances as of December 31, 20X5, Newport Soup, Inc.
Sales revenue $2,400,000
Cost of goods sold $1,500,000
Accounts receivable $800,000
Less: Allowance for doubtful accounts ($50,000)
Net accounts receivable $750,000
Inventory $100,000
Less: Reserve for spoilage ($5,000)
Net inventory $95,000
Required -
1. Identify potential risks to the financial statements overall, if this risk increases or decreases you IR risk assessment and identify the overall financial statement IR for NSI this year.
2. Identify potential risks to the NSI REVNEUE for this year, if this risk increases or decreases you IR risk assessment, what assertion(s) are affected, and identify the overall IR for REVENUE this year.