Risk of material misstatement
Your
client, a manufacturer of computer components, has experienced slowing
demand for its product. Recently, it cut back from three shifts a day to
two shifts a day, and the company has eliminated the backlog of orders
that existed in prior years by providing financing to customers.
Newspaper reports indicate that competition has taken significant
business away from the client because a large investment in R&D has
not resulted in improved products. Furthermore, a small handful of your
client’s customers are experiencing financial difficulties because of
slowing demand for your client’s products.
Required
a.
Consider the implications of the above information for revenues. What
assertions, if any, are likely to be misstated? As a result, what
accounts are likely to be overstated or understated? Explain your
reasoning.
b. Consider the
implications of the above information for inventory. What assertions, if
any, are likely to be misstated? As a result, what accounts are likely
to be overstated or understated? Explain your reasoning.
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