Case: Flash Technologies, Inc. Risk Analysis.

Mark S. Beasley. Frank A. Buckless. Steven M. Glover. Douglas F. Prawitt

Learning Objectives

1. Identify and understand the implications of key inherent and business risks associated with a new client.

2. Understand and link audit-client's risk to accounts, assertions, and the audit plan.

3. Appreciate the degree of professional judgment involved in analyzing risk related to the audit of a rapidly growing company in a high technology industry.

INTRODUCTION

Flash Technologies, Inc. has recently engaged your firm to perform the annual audit for the year  ending December 31, 2011. Flash has determined that its current auditors, Adams & Adams LLP, cannot provide the international support that Flash now requires with its increased investment in Korea and Canada. Partners from your firm have discussed the prior audits with the engagement partner at Adams & Adams, and everything seems to be in order. Your firm also met with executives at Flash in December 2011 and January 2012 and a verbal (but informal) agreement was reached regarding fees, timing, scope, etc. Your firm has decided that additional analyses are needed before finalizing the details of the engagement (assume that it is now late January 2012). On the following pages you will find (1) a memo from the audit manager of your firm to the planning files regarding background information, (2) an industry article, (3) industry ratios, and (4) the draft annual report for fiscal year 2011 that Flash has prepared.

Required:

Perform a risk analysis of Flash Technologies and document your findings in a written report. Use the two-part solution template (an electronic version of the template is available on www.pearsonhighered.com/beasley5e). The template is organized by General Business and Industry Risks (e.g., foreign ventures, high tech, etc.) and Financial Accounting/Reporting Risks (e.g., unusual ratios or significant increases in balances). Using only the information provided in the case (e.g., memo, annual report, and article), identify key business objectives and strategies and then map those on the template from business risks to the potential effect on the audit plan.

Auditors are required to specifically assess the risk of material misstatement whether caused by error or fraud. The AICPA's and PCAOB's "Risk Assessment Standards" may be useful source materials for your risk analysis. In addition, to help you identify risk factors, you should also perform analytical procedures based on the company's financial data and compare those results to your expectations and general industry ratios and trends. You may attach your analytical procedures to the solution template. Please provide polished, concise, professional analysis and writing. Get to the issues without unnecessary verbiage.