Alvarez Solar Solutions (ASS) is a manufacturer of solar systems for homes and commercial businesses. The company has grown about 10% in each of the past five years. The company has not made any acquisitions. Following are some statistics for the company:
|
2011
|
2012
|
2013
|
2014
|
2015*
|
|
Sales
|
$800
|
$880
|
$950
|
$1,050
|
$1,300
|
|
Net income
|
$28
|
$38
|
$42
|
$52
|
$68
|
|
Economic growth in areas served (index 1.00 for 20 × 1)
|
1.00
|
1.04
|
1.09
|
1.13
|
1.14
|
|
Percent of solar market by ASS
|
8.9
|
9.4
|
9.6
|
10.8
|
14.0
|
|
Accounts receivable
|
$180
|
$170
|
$196
|
$210
|
$297
|
|
Percent of sales made in last quarter
|
38
|
36
|
40
|
38
|
43
|
|
Gross margin (%)
|
28.0
|
28.3
|
28.8
|
29.2
|
33.6
|
*Unaudited
Additional information available to the auditor includes the following:
- The company has touted its new and improved technology for the increase both in sales and in gross margin.
- The company claims to have decreased administrative expenses, thus increasing net profits.
- The company has reorganized its sales process to a more centralized approach and has empowered individual sales managers to negotiate better prices to drive sales as long as the amounts are within corporate guidelines.
- The company has changed its salesperson compensation by increasing the commission on sales to new customers.
- Sales commissions are no longer affected by returned goods if the goods are returned more than 90 days after sale and/or by not collecting the receivables. ASS has justified the changes in sales commissions on the following grounds:
- The salesperson is not responsible for quality issues-the main reason that products are returned.
- The salesperson is not responsible for approving credit; rather credit approval is under the direction of the global sales manager.
Required
Answer the following questions relating to Alvarez Solar Solutions
- Discuss the use of analytical procedures as a risk assessment tool. What are the important insights that the auditor should gain from performing such procedures?
- Perform planning analytical procedures using the data included in the table and the information about the change in performance. For each year, you will most likely want to focus on the % change of the various statistics over the prior year.
- Comment on the results of each item in your analytical procedures for
- Identify 3 factors from the results of your analytical procedures might be considered as fraud risk factors. Explain fully why each identified factor is a fraud risk.
- Explain the importance of the information about salesperson compensation to the audit of receivables and revenue?
- Identify and explain one specific assertion that you would be concerned about testing regarding revenue. For the assertion identified, discuss in detail
a. Why testing that assertion is important
b. The substantive audit procedures that you would perform
7. Identify and explain at least 2 specific assertions that you would be concerned about testing regarding receivables. For each assertion identified, discuss in detail
a. Why testing that assertion is important
b. The substantive audit procedures that you would perform