Reference no: EM132836427

One roommate is thinking of selling his share in the company but does not want to sell his ownership stake to one of the other owners of the business. He has had conversations with two outside investors to purchase his shares in the company. One investor is willing to purchase the company based on a firm value of 1.25 times 2021 sales, while one investor is willing to pay 11 times 2021 Net Income. Assume that this current shareholder is the primary personnel in charge of recording sales for the company.

Problem 1: Are there any risks associated with this scenario that the auditor should be aware of. If so, please describe. If not, why?

Problem 2: If you identify any risks in (1), what is an example of a system or process within the company that would potentially reduce this risk? If you do not identify any risks in (1), what information presented in either the overview or this prompt suggests that a system or process is already in place to reduce this risk?

Problem 3: Based on your answers to (1) and (2) at what level would you set detection risk (high or low)? Why? Does this mean the auditor would have to obtain more or less evidence?

Problem 4: Whether you believe this prompt represents an audit risk or not, what are two management assertions about sales that are potentially at risk? What type of audit evidence do you think would meet the requirement for sufficient, appropriate audit evidence in this case? What is one example of actual audit evidence that you would want to obtain?