Assignment Type: Individual Project Deliverable Length: 500–1,000 words Points Possible: 125 Due Date: 3/3/2013 11:59:59 PM CT APA formatted references The BakFirn Corporation, a publicly traded firm,...

The following points are highly significant from the point of view of the audit:
1. Account receivable day’s sales outstanding (DSO) has been averaging 90-120 days. The year
efore, it was 80-90 days.
2. Inventory turns have decreased from 3 to 2 per year.
3. Account receivable and inventory make up 80% of total assets.
4. Internal auditing has been reduced by one person to reduce costs.
5. An initial test of controls in cash receipt indicated a lack of following procedures.
6. The construction industry is in the third year of a downturn. It is forecasted to last two more
years.
While the other factors are important, the above listed are crucial to this audit. #5 is the biggest
problem, right from the start.
A. Audit Assessment Steps:
a. What is the initial audit risk? High, medium or low?
This is definitely a high risk audit. An auditor would never be able to justify this as being
a low or medium risk audit. There are too many high risk indicators in the scenario.
. What factors made you decide on this level?
#5 highlighted above is a big problem. Based on #5 alone, an auditor can set the audit
isk as high because a test of controls already indicated that proper procedures aren't being
followed. In addition to this, we have several additional indicators that make this a high risk
audit. A/R are taking longer to collect, which means that the company still needs to look good to
anks and investors, giving an incentive to manipulate transactions, even though they're taking
longer to collect on AR. Sales are slightly lower and this is coupled by the fact that sales in the
industry are declining in general and this company makes specialty goods, which means they
have a select, specialty market. Their goods can't be sold in wholesale or widely distributed, so
their market is smaller, which means there is even a greater likelihood that their sales will
decline further, making it an even higher risk audit. AR at the end of the year was 100 DSO;
they're taking over three months to collect. This shows really inefficient credit and/or
management practices (Porter, 2008). They're taking way too long to collect their money. This
would concern us as auditors because it shows a lack of good, sound managerial practices. All of
these points combined would definitely justify this as a high risk audit.
B. Audit Plan Assertions
a. What would you include in the audit plan, and why?
We would definitely want to test several areas, and our first area would include testing
income. Due to the other factors presented, it is really surprising that sales only dropped by the
amount that it did. Something may be amiss with sales, particularly since DSO increased so high
and sales only decreased by what is really a relatively small amount. In addition, we would want
to include adequate testing of AR and inventory in our plan because they make up 80% of our
total assets. Our total assets remaining are only 1,310,000 after we take the 80% out of total
assets for our two categories mentioned....