Case Study: Star Technologies
1. Explain why "industry knowledge" is so important to an audit engagement team Identify risk factors commonly posed by companies in high-tech industries.
Industry knowledge is so important because it helps auditors identify areas that need special attention where errors and fraud might exist. Auditors are then able to evaluate the reasonableness of the accounting estimates made by management. It will also help them evaluate the accounting principles used by management. Auditors need to be familiar with the industry that they are auditing so that they can understand the transactions and the journal entries made by the company. They will be able to recognize what normal transactions are concerning the company. A risk factor identified with high-tech companies would be the rapid growth of technology causing inventory obsolesce.
2. What changes in Star's financial status between fiscal year-end 1988 and 1989 should have been of concern to the company's independent auditors? How should these changes have affected key audit planning decisions for the 1989 Star audit? A major concern for the auditors from the financial statements should have been the loss from net income. The company was experienced a major loss that year.
3. What information can auditors obtain from a client's cash-flow data that is relevant to the audit plan developed for the client? Information that can be obtained would assist with the audit plan developed for the client would be if the resources are being used wisely. The statement of cash flow will illustrate how cash is being produced and where it is being spent.
4. What management assertions did Star violate in its original 1989 financial statement? Management violated the existence assertion with the "assets in progress." Management was not able to prove the existence of those assets. The auditors should have insisted on being shown those assets. Another assertion that...
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