June 21, 2012 ACCT 440-01

Dermaceutics, Inc. Part I

1. The common sources of business and industry information could be the financial statement, internal control, risk management, external control, and code of ethics and related activities. the type of procedures that can be performed from the auditors in order to obtain relevant business and industry information are, understanding of the basis of the cost, and underlying processes, potential material non-compliances, understating of key internal controls / policies and procedures, and relevant reported deficiencies to design further audit procedures to achieve the objectives of the audit. 2. The information obtained from the clients accounting personnel is not enough, the auditor needs to indentifying situation for which accounting estimates are required. Also, auditors identifying the relevant factors that may affect the accounting estimate. Auditors must accumulating relevant, sufficient, and reliable data on which to base the estimate. The auditors needs to developing assumption that represent managements judgment of the most likely circumstances and events with respect to the relevant factors. Finally, auditors must determining that the accounting estimate is presented in conformity with applicable accounting principles and that disclosure is adequate.
3. after an auditor has developed an expectation for a particular account balance (e.g., sales revenue); the next step in the analytical procedures process is to compare the expected balance to the actual balance. The auditor uses the planning stage to update their knowledge of client throughout the five types of Analytical procedures, 1. Compare client and industry data 2.compare client data with similar prior period data. 3. Compare client data with client determined expected results. 4. Compare client data with auditor-determined expected results. 5. Compare client data with expected result, using non-financial data.

4. An auditor should look at every aspect of the business to see how similar the two are. They need to have similar business practices. They have to be in the same industry and have a similar revenue stream. If the business makes significantly less money or work in several different areas then comparing the two will be pointless. It would also be preferable if they used similar inventory and depreciation methods which would help the books be more comparable. All in all you want to have the two businesses to be extremely alike so that their financial sheets should be the same. 5. A major competitor should always be considered a peer because there should be no other company that has books closer to your own. A competitor should be in the same exact industry and sell the same exact products so their books should almost match pending on how financially well they do. I work at a Menards and every week someone goes to Home Depot to see their prices and other things so that we can beat them. I imagine they do the same with their financial statements so they can have a competitive advantage. 6. What is meant by overall audit risk is the risk that materially misstated financial statements might be issued by the company. This is the stuff that the CPA firms must look for before they do an

engagement. If a firm goes into an engagement without knowing the audit risk then they can risk losing lots of money and even their license to practice. 7. The major components of audit risk are control, inherent, and detection risk. Inherent risks are those that arise from significant business issues that you face; happenings in the economy, global market, within the industry itself, competition, and litigation. The second is control risk which is the risk that your companys policies and procedures will not prevent or detect material misstatements. Control risks deal with the accounting practices and procedures and how the managers feel about them. The last risk is detection risk which is the risk that the auditors will not be able to detect the material misstatements. This is affected by the companys management and if they will disclose everything. If employees or management has been colluding then it will be nearly impossible to detect.