05 Jun Question 4-15 Identify five other ways in whi
Question
4-15 Identify five other ways in which the Private Securities Reform Act of 1995 will
potentially change auditors’ legal liability. Explain how each is of potential benefit to the
auditor.
4-17
1. Identify how the Sarbanes-Oxley Act of 2002 changed the audit environment for
auditors.
2. Identify and explain new liabilities for managements of public companies created
by the Sarbanes-Oxley Act of 2002.
5-34 (Risk of material misstatement) Your client, a manufacturer of computer components,
has experienced slowing demand for its product. Recently, it cut back from three shifts a
day to two shifts a day, and the company has eliminated the backlog of orders that existed
in prior years by providing financing to customers. Newspaper reports indicate that
competition has taken significant business away from the client because a large investment
in R&D has not resulted in improved products. Furthermore, a small handful of your
client’s customers are experiencing financial difficulties because of slowing demand for
your client’s products.
Required
1. Consider the implications of the above information for revenues. What assertions,
if any, are likely to be misstated? As a result, what accounts are likely to be
overstated or understated? Explain your reasoning.
2. Consider the implications of the above information for inventory. What assertions,
if any, are likely to be misstated? As a result, what accounts are likely to be
overstated or understated? Explain your reasoning.
5-35 (Developing responses to assessed risks) Your client, General Television, Inc.
manufactures televisions and during the current year acquired Micro Engineering, Inc.,
which manufactured flat panel plasma screens for computers so that it could compete in
the market for flat panel televisions. Following is a list of several risks that have been
identified in the audit of this television manufacturer.
1. General Television has strong internal controls over the existence of inventory. It
has a good perpetual inventory system and regularly compares inventory on hand
with the perpetual records.
2. Prices have been changing rapidly in General Television’s marketplace. Although
the marketplace is relatively stable for traditional televisions, the prices on flat
panel televisions have become much more competitive.
3. General Television had to pay a premium to acquire Micro Engineering. General
Television had independent appraisals of the fair value of assets and has
determined that about 35 percent of the purchase price should be allocated to
goodwill.
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