Financial statement require intensive investigation in audit

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Reference no: EM132234375

You are working on a part of a repeat audit of a client with a January 31 fiscal year end. The client company is a retail supermarket chain, which means that it operates stores from which it sells products to consumers. It earns a profit by selling products for more than they cost to buy.

One of the peculiarities about this business is that it tends to be both seasonal and cyclical. By seasonal, I mean that people will buy at some times of the year but not others. (For example, patio furniture does not sell well as Christmas presents, so the chain does not stock patio furniture at that time of year.) By cyclical, I mean that certain classes of products do better when the economy is booming than when times are tight and people are getting laid off left and right. (For example, kitchen accessories for recreational vehicles do better in good economic times than in bad economic times.)

You notice that revenue is down about fifteen percent for the year compared to the preceding year. When you talk with B. Castaneda, the controller, Castaneda reminds you that Castaneda used to work for your accounting firm. Then Castaneda tells you that the drop in revenue was caused by the Federal Reserve, which stopped lowering interest rates at its most recent meeting in February of 2002. If it hadn't been for that, Castaneda said, the year's revenue probably would have been up, not down.

Required:

a. Evaluate the explanation provided by Castaneda. Show calculations, if any, to support your conclusions.

b. How should you obtain sufficient competent evidential matter related to Castaneda's explanation in order to evaluate it further? What procedures and audit tests should you perform?

c. Which specific aspects of the client's financial statements require intensive investigation in this audit?

Reference no: EM132234375

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