7-25 In the audit of Whidand (.:hettitcal (.7tatinaln,,.:„Itst,t: Case pubwiy traded compain..ou have been aNi.ietiled the tew ,i::, sibilitv 6v obtaining Wet:a:wound infonnatton tot I , i.,:t lent liar iS auditing the client for the lint time in the int .. .. Near as a result of a dispute betneen \‘'hirlainl and the pm. ¦ i MU auditor or! the proper valuation of workditittoscs; inventory and the Inclusi011 ill sales of iinentor¦ that has in been delivered but has. for practical pilipuses. been cony - MetedUbirlam] Chemical has been highly successful in its and sold. field in the past tux, decades, primarily because of inauy suc-cessful mergers negotiated by Bert Randolph, the president and chainnan of the boarri. Fax') though the industry as a whole has suffered dramatic setbacks iii recent years, Whirland continues to prosper. as evidenced by its constantly increasing earnings and grouth. ()illy in the last two years have the company's profits turned downward. Randolph has a reputation for having been able to hire an aggressive group of ioung executives by using relatively low salaries combined pith art unusually generous profit-sharing plan. A major difficulty you firm in the new audit is that ‘‘'hirland Licks the highly sophisticated accounting records expected of a company of its size. Ramlolph believes that pmfil5 come primarily from intelligent and aggressiVC action based on forecasts. not by relying on historical data that come after the fact. Most of the forecast data are generated by the sales and production department rather than by the account-ing department. The personnel in the accounting department do seem competent but somewhat overworked and underpaid relative to other employees. One of the recent changes that sill potentially improve the record-keeping is the installation of sophisticated information systems. Not all of the account-
ing records are fully integrated yet, but such major areas as inventory and sales are included in the new system. The first six months' financial statements' for the current year include a profit of approximateh. only 10 percent less
th, sIN .001. the 110.‘ ,11,1lietillit the redo su' ;:i toh,eoth,: ,,,,,,, Ihr Co. The sird""3. %min bccame had .1/411,e:f,ifn ofr itsMac:piisition Isar 1:7tril I.:;3titl'u•C 14 Bert Itad lutliilp,111;i1,111‘clycodmi 311' • intorno of MCICOly Supply Co. j fit &lc and was consi crc • es '117s. (nr'oJri°sro;:ition, which is owned by Roger Ra the market for its products declined as Co.oration began diversifying arid phasing products in favour of 1110fC profitable business. Mercury Corporation is no longer buying from ply Co.. it compensates by buying a large s • products from Wiirland Chemical. The only XXXXXXXXXXdifficulty \Vineland according to financial analysts, is undetfina high amount of current debt and long-term the depressed capital markets. Ntanagement obtain equity capital at this point because the her of shares would decreasc the earnings more than 10 percent. M the present time, tiating with several cash-rich companies in able to merge with them as a means of m tal problems. REQUIRED a. List the major concerns you would inherent risk and audit risk for Chemical Company. Explain problems. Provide a conclusion for inherent risk and audit risk. b. State the appropriate approach to icance of each item you listed in (a).