Planning the Legion Appliance Audit
Legion Appliance Manufacturing Company has been your firm's audit client for the past five years. Approximately four years ago Legion developed a better toaster than had been available and sales took off, especially during the most recent two years, 2014 and 2015. Currently, the company controls approximately 25 percent of the toaster market in the United States. In addition, the company manufactures other products, including vacuum cleaners, floor polishers, and electric fondue pots.
Much of the increased sales performance is due to Michael Sinclair, who became the chief executive officer in 2011. Michael and several other officers were able to accomplish a leveraged stock buyout in 2013. This seems to have worked out very well since Michael suggests that his net worth grew from less than $300,000 to well over $5 million due to increases in the value of the common stock he holds in the company. He is also excited since the company's unaudited results show earnings per share of $1.21, one cent more than the most optimistic analysts had projected. He points out to you that sales are up over 38 percent compared to the previous year and net income has increased by 54 percent. All is well.
You are beginning the planning analytical procedures for the 2015 audit to obtain information to help plan the nature, timing, and extent of other audit procedures.
Use the information from your analysis to identify areas/accounts that may represent specific risks relevant to this year's audit (uses the Planning Risks workpaper). For each area/account provide a justification for why you believe it represents a risk.