Assignment: Review case- Apple Inc.

CASE: Apple Inc.- Evaluation of Client Business Risk by MARK S. BEASLEY, FRANK A. BUCKLESS, STEVEN M. GLOVER and DOUGLAS F. PRAWITT.

LEARNING OBJECTIVES

After completing and discussing this case you should be able to

[1] Describe the implications of an audit client's business risk on the audit engagement
[2] Describe the types of information relevant to evaluate an audit client's business risk
[3] Identify and evaluate the factors important in assessing an audit client's business risk and risk of material financial misstatement

INTRODUCTION

Apple Inc. (Apple) is a worldwide provider of innovative technology products and services. Apple's products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store , App Store, iBooks Store, and Mac App Store. Net revenue for fiscal 2013 was $170.9 billion and net income was $37.0 billion.

Apple's common stock is traded on the NASDAQ national market, and Apple is required to have an integrated audit of its consolidated financial statements and its internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Company's fiscal year is the 52 or 53-week period that ends on the last Saturday of September. As of the close of business on October 18, 2013, Apple had 899,738,000 shares of common stock outstanding with a trading price of $508.89.

INFORMATION ABOUT THE AUDIT

Your firm, Smith and Jones, PA., is in the initial planning phase for the fiscal 2014 audit of Apple for the year ended September 27, 2014. As the audit senior, you have been assigned responsibility for gathering and summarizing information necessary to evaluate Apple's business risk. Your firm's memorandum related to the client business risk evaluation has been provided to assist you with this assignment. Assume no material misstatements were discovered during the fiscal 2014 audit.

1 The background information about Apple Inc. was taken from Apple Inc.'s Form 10-K for the fiscal year 2013 filed with the Securities and Exchange Commission.

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of an administrative situation.

REQUIRED

[1] Go to Apple's website (investor.apple.com) and explore the website. Click on the "SEC Filings" link. Obtain the most recent SEC Form 10-K provided for Apple. Based on the information obtained from the website and your knowledge of the industry, prepare a memo discussing the following items:

[a] Apple's:

- Sales
- Net income
- Cash flow from operating activities
- Total assets
- Number of employees

[b] What are Apple's products?

[c] Who are Apple's competitors?

[d] Who are Apple's customers?

[e] Who are Apple's suppliers?

[f] How does Apple market and distribute its products?

[g] What is Apple's basic business strategy (cost leadership or differentiation)?

[h] What are critical business processes for Apple given its basic business strategy (for example, supply chain management)?

[i] What accounting information is associated with the critical business processes and how does Apple measure up on that information?

[j] What accounting methods does Apple use to report the accounting information associated with critical business processes and what is the risk of material misstatement?

This memo is to be used as a foundation document for the preliminary business risk assessment. In evaluating Apple's performance and assessing the risk of misstatement, please be sure to describe your reasoning. Your memo should be double-spaced and addressed to the partner for the engagement (your instructor). Your firm demands polished, concise, professional analyses and writing. Be thorough, but get to the issues without unnecessary verbiage. In describing your analyses and conclusions, please consider relatively short "punchy" or to-the-point sentences. When appropriate, consider using bullet point listings.

[2] Professional auditing standards provide guidance on the auditor's consideration of an entity's business risks. What is the auditor's objective for understanding an entity's business risks? Why does an auditor not have responsibility to identify or assess all business risks? Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.