2 Apple Inc: Evaluation of Client Business Risk

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R EQ U I R ED

[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:

Apple’s:

Sales

Total assets

Net income

Number of employees

Cash flow from operating activities

[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.

[a]



[2]



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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.



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C A S E



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

L EA R N ING OB JE C T IVE S

After completing and discussing this case you should be able to

[1]



[2]



Identify and understand the implications of key

inherent and business risks associated with a

new client

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, 2014. 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 2014 and January 2015 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 2015). 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 2014 that Flash has prepared.



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.



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R EQ U I R ED

[1]



Perform a risk analysis of Flash Technologies and document your findings in a written report.

Use the two-part solution template provided on the next two pages (an electronic version of

the template is available on www.pearsonhighered.com/beasley). 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.



P R O F ES S I ON A L JU DG M E NT QU E ST ION S

It is recommended that you read the Professional Judgment Introduction found at the beginning of

this book prior to responding to the following questions.



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[2]



Describe how the confirmation tendency might affect auditors' risk assessments. Describe some

strategies to mitigate potential bias caused by this tendency.



[3]



What "judgment frames" does management of Flash use when discussing the company's

performance and prospects? How might judgment framing be used to boost professional

skepticism in performing a risk assessment?



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You will find an electronic version of the following template at www.pearsonhighered.com/beasley

S U G G ES TED FO R M AT FO R FLASH TECHN OLOGIES MEMO

GENERAL BUSINESS AND INDUSTRY RISKS

As illustrated in the table below, provide an analysis of business objectives and strategies and how they map to business risk, audit risk, related

accounts, and their potential effect on the audit plan. For the two business objectives illustrated below, identify one or two additional risks

associated with each objective and complete the remaining columns for all risks (note that the template has been partially completed).



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ADDITIONAL GENERAL AND INDUSTRY RISKS

Provide a list of additional general and industry risks you identified. Only list the risk, no need to fill out a table as shown above. You should

identify at least three additional risks beyond those listed in the table above and provided in the example immediately below:

DCI experiencing losses

There is pressure to increase sales to be a leader in the flash memory market

Identify at least three additional general/industry risks…

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FINANCIAL ACCOUNTING/REPORTING RISKS



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Fill in the table below by completing the final box for the first risk and by identifying two additional financial accounting/reporting risks

through examination of Flash’s financial statements and related disclosures (e.g., significant or unusual increases in ending balances, unexpected

patterns such as slower growth in accounts receivable than sales, unexpected differences between Flash’s ratios and the industry averages). The

two additional risks included in the table below should be the financial accounting/reporting risks you consider most significant.



ADDITIONAL FINANCIAL ACCOUNTING/REPORTING RISKS



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Provide a list of additional financial accounting/reporting risks you identified. You need only list the risk, no need to fill out a table as shown

above. You should identify at least three additional risks beyond those listed above.

Identify at least three additional financial accounting/reporting risks…



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