OBJECTIVES

• To apply certain steps in the audit planning process, with emphasis on risk identification and audit response (strategy) thereto.
• To provide you with the experience of working as a member of an audit team.
• To acquaint you with the annual report filed on Form 10-K of a publicly-held company audited by a public accounting firm. Interim financial statements are filed quarterly on Form 10Q.

Part 1

A preliminary analytical review of the company's most recent balance sheet and income statement using one or more prior years as a basis of comparison. Focus on these factors:

• Current year (i.e., the year you are auditing) financial results.
• The company's financial viability and earnings trend.
• Any unusual fluctuation of current year amounts from expected amounts.
• Significant and/or unusual transactions in the current year.
• Account balances significantly influenced by management estimates or judgment.
• Selection of accounting principles and practices by management in those instances where alternative principles are acceptable.
• Critical cut-offs and accruals.

Part 2

For each material balance sheet and income statement line item, state your assessment of the level of inherent risk. You may use subjective terms such as "high," "moderate," or "low;" or alternately you may use percentages.

A convenient way to do this is by using a matrix comprising two columns: (1) balance sheet and income statement line item name, and (2) inherent risk.