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Zoom SnowBoards: Audit Planning Document Essay

Read the Zoom Snowboard case (on Canvas). Please stop at page 1205 …just glance through page 1206. Then, please complete the template below. This audit planning case is worth 5% of your grade. It requires you to be familiar with Chapters 6, 8 and 9. I only need one issue per row. The information must be specific (indicating that you have read the case) and not vague/ambiguous. While this is an “in-class case”, you may finish this in any other space other than the classroom on 10/14/2013. There will be no “lecture” on 10/14/2013. Submission date: 10/21/2013.

Potential Issue/Flag
Financial Reporting Risk
Impacts Acceptable Audit Risk or Inherent Risk or Control Risk? (As in increase/decrease) Account and Assertion impacted?*

1. Macro-economy Issue: Global warming and climate change affecting snow conditions Lower demand, risk for decrease in sales and lower net income creates an incentive for overstated sales and Net Income AAR can decrease as risk of misstatements on the Income Statement increases. External users may rely heavily on reported Net Income. Overstated net income implies assertion of occurrence, completeness and accuracy..

2. Industry issue:

Sales’ price gone down to compete with U.S’s market

Increase the incentive to smoothing the net income make the financial statement looks better. AAR can decrease as risk of misstatements on the Income Statement increases. External users may rely heavily on reported Net Income. Overstated net income implies assertion of occurrence, completeness and accuracy.

3. Financing Issue: A requirement to get approval for new line of credit is to have positive Net Income by the end of the year. Line of credit requirement creates an incentive for overstated Net Income to avoid cancellation. AAR can decrease as risk of misstatements on the Income Statement increases. External users may rely heavily on reported Net Income. IR is not really affected by accounts such cash, notes and mortgages payable. Overstated net income implies assertion of occurrence, completeness and accuracy.

4. Supply Chain Issue: No internal controls for in-house manufacturing of snowboards Raw material and finished goods inventory may be over/under-stated AAR can decrease as risk of misstatements on the Balance Sheet increases. External users may rely heavily on reported assets. Over/under-statement of inventory implies assertion of existence, completeness, and valuation and allocation..

5. Business strategy Issue: Expand business product line (apparel product) → Company’s operation is effected Affect the risk of material misstatement that related to inventory and other related assets IR goes up: associates with the changing in nature of the company → the new line of product might not be successful CR goes up: increase the size of the company → more internal control concern over new line of product’s inventories. AAR goes down: risk of misstatement on the Income Statement increase Over/Under state inventory, net income, sales implies assertion of occurrence, completeness and accuracy

6. Revenue Recognition issue: TAS paid Zoom $500,000 for 5 year exclusive rights. The entire $500,000 was included in Zoom’s 3rd quarter results. Risk for inflated revenue and net income, revenue being recognized when received instead of when earned. AAR can decrease as risk of misstatements on the Income Statement increases. External users may rely heavily on reported Net Income. Overstatement of revenue and net income implies assertion of accuracy, occurrence, and cut-off

7. Going concern issue: Net income loss, operating at zero cash balance, current asset is too close to current liability→ if continuing the company might not be able to pay the current liability Increase risk for overstated current asset, boost up the net income to cover losses, and understated liabilities and expenses AAR can increase as risk of misstatement in Income Statement and Balance Sheet increase Overstatement of Current Assets implies assertion of accuracy, occurrence, and completeness

8. Fraud Issue: Not enough segregation of duties in Montreal office (only 5 employees: 1 divisional manager, 2 sales people, 2 shipping/receiving clerks) Risk for fraudulent activities or theft of assets, over/under-stated sales and/or inventory AAR can decrease as risk of misstatements on the Income Statement and Balance Sheet increases. CR can increase as the credibility of effective internal control (segregation of duties) decreases External users may rely heavily on reported assets and Net Income. Over/under-statement of sales implies assertion of accuracy

9. Control Environment issue or Corporate Governance issue: No internal control or collections department managing aging AR Risk for over/under-statement of AR and bad debt expense, overstated Net Income AAR can decrease as risk of misstatements on the Income Statement and Balance Sheet increases. CR can increase as the credibility of effective internal control (segregation of duties) decreases External users may rely heavily on reported assets and Net Income Over/under-statement of AR implies assertion of valuation

10. Turnover ratio issue: long lead time for orders for apparel from Chinese manufacturer (12 months) Inventory held for long periods of time, increased risk for obsolete inventory, over/under-statement of inventory AAR can decrease as risk of misstatements on the Balance Sheet increases. External users may rely heavily on reported assets. IR can increase due to nature of the business – use of outsourcing Over/under-statement of inventory implies assertion of valuation and existence

· Note: some issues may be all-pervasive in their impact (for example corporate governance issues)

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