Reference no: EM131000055

Stainless Steel Specialties (SSS) is a manufacturer of hot water-based heating systems for homes and commercial businesses. The company has grown about 10% in each of the past five years.

The company has not made any acquisitions. Following are some of the statistics for the company:

Overview of Operational Data Stainless Steel Specialties (SSS)

(Sales and Net Income Reported in $ Millions)

					2014
	2010	2011	2012	2013	(unaudited)
Sales	$800	$880	$950	$1,050	$1,300
Net income	$28	$38	$42	$52	$68
Stock price	$17	$24	$19	$28	$47
Economic growth in areas	1.00	1.04	1.09	1.13	1.14
served (index with 1.00 for
20 1)
Percent of heating market by	8.9	9.4	9.6	10.8	14.0
SSS
Accounts receivable	$180	$170	$196	$210	$297
Percent of sales made in last	38	36	40	38	43
quarter
Gross margin (%	28.0	28.3	28.8	29.2	33.6

Additional information available to the auditor includes the following:

• The company has touted its new and improved technology for the increase both in sales and in gross margin.
• The company claims to have decreased administrative expense, thus increasing net profits.
• The company has reorganized its sales process to a more centralized approach and has empowered individual sales managers to negotiate better prices to drive sales as long as the amounts are within corporate guidelines.
• The company has changed its salesperson compensation by increasing the commission on sales to new customers.
• Sales commissions are no longer affected by returned goods if the goods are returned more than 90 days after sale and/or by not collecting the receivables. SSS has justified the changes in sales commissions on the following grounds:
• The salesperson is not responsible for quality issues-the main reason that products are returned.
• The salesperson is not responsible for approving credit; rather credit approval is under the direction of the global sales manager.

a. What is the importance of the information about salesperson compensation to the audit of receivables and revenue? Explain how the information would be used in performing preliminary analytical procedures.

b. Perform preliminary analytical review procedures using the data included in the table and the information about the change in performance. What are the important insights that the auditor should gain from performing the analytical review?

c. Why should the auditor be interested in a company's stock price when performing an audit, since stock price is dependent, at least in part, on audited financial reports?

d. What information about SSS might be considered as fraud risk factors?

e. Identify specific substantive audit procedures that should be performed as a result of the preliminary analytical procedures performed by the auditor[audit]Stainless Steel Specialties (SSS) is a manufacturer of hot water-based heating systems for homes and commercial businesses. The company has grown about 10% in each of the past five years.