Assume you are a partner of Hornswaggle & Twitterpate, CPAs, and you are in charge of the audit of a new client, Big Computer Manufacturing Company, a leader in the personal computer industry. What information would you obtain in order to develop an understanding of the client?

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The Answer is {Note: While answers may vary, students should mention that they can review information gathered as part of the client acceptance process; use firm databases, industry Internet sites, the AICPA industry audit guides, Moody’s reports, the client’s corporate web site, marketing and investment literature, analyst reports, and corporate documents; talk to company personnel dealing with aspects of the business outside of the accounting department, talk with industry specialists within the accounting firm. }
a. Questions they will want to address include items like these:
i) What are the company’s products? Do they manufacture all of the computer parts or do they assemble computers from component parts manufactured by suppliers.
ii) Who are the company’s customers? Do they sell to wholesalers or individuals or in bulk to corporate clients?
iii) What are the company’s markets? Do they sell locally, nationally, internationally?
iv) What is the company’s strategy for developing and maintaining a sustainable competitive advantage over its competition? Who is the competition?
v) What is the nature of the company’s operating cycle, i.e., how do they produce, market and deliver the computers?
vi) What are the key processes and activities of the operating cycle?
vii) What is the nature and composition of the company’s asset base and sources of financing?
viii) What is the nature of the company’s strategic relationships with outside organizations or companies including suppliers and customers and, perhaps, competitors?
ix) How sophisticated is the company’s information system(s) that is used to record the activities of each of the elements of the operating cycle?
x) What is the company’s attitude and strategy for generating reliable accounting information?
xi) What financial reporting information needs to be generated and reported by the information system(s)?
xii) What are the critical risks that the auditor should be aware of that reported information will not fairly present results?

Assume You Are a Partner of Hornswaggle & Twitterpate, CPAs