Assume you are an auditor at an accounting firm. Your team is getting ready to start a financial audit of Robbins Network Solutions (RNS). You will start with the initial review and audit preparation.
You know the following information about RNS.
Objectives of the Engagement
Audit of the financial statements for the year ended December 31, 2017.
Business and Industry Conditions
RNS sells and installs computers and networking hardware and software, and provides information technology consulting to businesses. It is currently developing its own computer networking software to sell to customers.
RNS’s success depends on attracting and retaining personnel with a high level of technical expertise who are able to provide a broad range of services. The market for staff is highly competitive.
The market for computers and networking products is extremely competitive. RNS’s main competitors are companies like Dell, Hewlett Packard, and Apple. RNS also competes with local and regional resellers that provide similar products and consulting services directly to customers. To be competitive, RNS has relied on its ability to provide its customers with state-of-the-art products in a timely manner. Because the company does not have the buying power of some of its competitors, it generally must charge a higher price for its products, but it is also able to provide a higher level of service and expertise to its customers to compensate for the higher price.
The market for computer products and technology services is sensitive to economic conditions. Economic indicators predict the U.S. economy will be relatively stagnant for the next few years, with the annual growth in spending for information technology products and services expected to be 1 percent per year for the next three years. In the past year, RNS has decided to increase sales by relaxing credit rules to provide credit to customers with slightly higher credit risk.
Ownership and Management
RNS is a closely held company owned by six stockholders. Two stockholders are active members of the company’s board of directors. None of the other owners take an active part in the management of the business.
Objectives, Strategies, and Business Risks
RNS’s primary business objectives are to increase sales, services, and consulting revenues by five percent and increase net income by seven percent each year for the next three years. Strategies to achieve those objectives include:
New software development
Aggressive marketing of products and services through increased advertising
Sales to customers with a higher credit risk profile
The primary business risks associated with the company’s strategies include the following:
The U.S. economy may suffer a significant downturn.
Competitors may engage in predatory pricing to gain market share.
Increased advertising expenditures may not produce desired results.
Credit losses may exceed the benefits of increased sales.
Software development activities may not generate viable products.
The company has developed the following responses to these risks:
Frequent monitoring of economy and industry conditions
Monitoring of competitor actions
Hiring of a marketing consulting firm to evaluate the performance of advertising methods
Daily review of aging of accounts receivable
Adherence to a controlled software development budget
Measurement and Review of Financial Performance
Management uses the following measures to monitor the company’s performance:
Inventory and receivables turnover
Aging of accounts receivable
Sales and gross margins by type of revenue
Total inventory balance
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