Question

You are assigned as a staff auditor for a high growth technology company that is in the process of planning for an IPO in 2 – 3 years. You are reviewing the sales of new technology and notice that sales growth is double digit and has increased considerably. Most of the sales occur in December (last month of the year). Management tells you that initial stock price is contingent on high sales growth. The CFO also confides in you that he is planning on retiring in a few years and is dependent on a high IPO stock price to make his retirement dreams come true in the next two years.

1.Are there any “red flags” regarding sales reporting? Explain.

2.What are the possible issues of concern based on the red flags?

3.Describe how you would alter the audit plan to address these issues?

Answer 1

1. For Income Transactions, there is an underlining risk that management will overstate incomes to show healthy financial statements. Here it is clearly seen as the Stock price of the company is linked to high sales, and CFO is planning to retire after IPO which is a Red Flag for Auditor.

2 Management will want more stock price and thus they will try to manipulate sales figures and overstate it. Major issues against the auditors are to find the overstatement of sales.

3 An auditor needs to plan his substantive audit procedure to detect overstatement, he needs to verify the "existence and occurrence" assertions of management. An auditor needs to do more Vouching for the sales of December month. Eg. Vouch from sales Journal to Sales invoice to Shipping Documents.