Isnaini Nurul Wijayanti (20160420175)

Saddwi Fitri Yuningsih (20160420177)

Dabelistha Seza Depudi (20160420300)
Edi Pribowo (20160420309)
Anggita Tri Wulandari (20160420018)
Rizka Alwathan (20160420090)
Fabio Bolanda Sandy (20160420182)
Novita Rahmawati (20160420312)

CHAPTER 7

Understanding New Technology, Inc. and Its Environment

1. Identify significant factors noted earlier that assist in building a knowledgeable perspective
about NTI.
Answer:
 Industry condition, regulatory environment, and other external factors affecting the
entity’s business
 Nature of entity, including business operations, investment, financing, financial
reporting.
 Entity objectives and strategies related business risk
2. Determine how those factors might influence the risk of material misstatement in the
financial statement.
Answer:
 Industry condition, regulatory environment, and other external factors
The industry conditions. The industry is growing rapidly, professional skepticism
must be exercised with respect to revenue recognition, particularly given the
company’s generous sales term.
 Regulatory environment. NTI is still a private company, it is considering an IPO.
Therefore, it’s important to make sure that it follows GAAP for public companies
if financial statements will be included in a registration statement.
Other external factors. Professional skepticism must be exercised to reconcile the
rapid company growth with the modest growth evidence in the economy as a whole.
 Nature of entity, including business operations, investment, financing,
financial reporting
Revenue recognition represents a significant inherent risk in this audit. The
economic substance of sales agreements that allow for price production while
assemblers are holding inventory is similar to consignment sales. Confirmations
should focus on both the existence of sales by confirming terms of sale and rights
of return.
Most of the company’s research and development expenses should be expensed.
The company reports some other assets, and the existence and valuation of
intangibles represents a significant inherent risk.
The cost of inventory, including the cost of clean rooms and other manufacturing
costs, are significant. The valuation of manufacturing risk, including the need to
carefully audit overhead cost that might be capitalized as part of inventory.
The completeness and valuation of the warranty reserve included in accrued
expenses represents a significant inherent risk.

 Entity objectives and strategies related business risk

Investments, the audit needs to evaluate the lease in Malaysia to determine whether
this is a capital lease or an operating lease. If it qualifies as a capital lease, we need
to consider whether there is a material subsequent even that requires disclosure.
Financing, receipt of cash from customers may represent customer deposit, and
not necessarily revenue that can be recognized in the current period. If the company
acquires a material amount of debt or equity financing after balance sheet date, this
represents a material subsequent event that will require disclosure. If the company
proceeds with an initial public offering, additional review needs to be scheduled.
 We also need to determine whether the company will be prepared for an audit of its
system of internal control.
Financial reporting, the existence and valuation of manufacturing overhead
included in inventory is a significant issue. Careful attention must be paid to the
existence and valuation of patents and other intangible assets.

CHAPTER 8

8-10.
a. State three uses of analytical procedures in an audit engagement.
Answer:
1) In the planning phase of the audit, to assist the auditor in planning the nature, timing
and extent of other auditing procedures.
2) In the tasting phase, as a substantive test, to obtain evidential matter about particular
assertions related to account balances or classes of transactions.
3) At the conclusion of the audit, in a final review of the overall reasonableness of the
audited financial statements.
b. Which uses are required in all audits?
The first and third uses are required on all financial statement audits.
8-11.
a. How can analytic procedures assist the auditor in audit planning?
Answer:
Analytical procedures as “evaluation of financial information made by a study of plausible
relationship among both financial and non-financial data.
Analytical procedures can assist the auditor in audit planning by:
1) Enchasing the auditor’s understanding of the client’s business
2) Identifying unusual relationship and unexpected fluctuations in data that may indicate
areas of greater risk of misstatement.
b. List the steps involved in the effective use of analytical procedures in the planning phase
Answer:
Steps Involved in Performing Analytical Procedures:
 1) Identify calculations and comparisons to be made
2) Develop un expectation range
3) Perform the calculation (using the entity’s data)
4) Analyze data and identify significant differences
5) Investigate significant unexpected differences
6) Determine effects on audit planning

8-12.
a. Describe the types of calculations and comparisons commonly used in analytical
procedures.
Answer:
Calculations and comparisons commonly used in analytical procedures include (1) absolute
date comparisons, (2) common-size financial statements, (3) ratio analysis, and (4) trend
analysis.
b. What premise underlies the use of analytical procedures in auditing?
Answer:
The basic premise underlying the use of analytical procedures in auditing is that
relationships among data may be expected to continue in the absence of known conditions
to the contrary.
c. Identify four sources of information the auditor may use in developing expectations.
Answer:
Several sources of information that may be used by the auditor in developing expectations
include:
1) Client financial information for comparable prior period(s) giving consideration to
known changes.

2) Anticipated results based on formal budgets or forecasts.

3) Relationships among elements of financial information within the period.
4) Industry data.
5) Relationships of financial information with relevant nonfinancial information.
[Note: more than four examples are provided for the student’s benefit as additional
examples might work here.]