Week 3 Deliverable

Week 3 Deliverable

Letitia Edwards, Kathy Smith, Esther Damani, Karen Lindemann

ACC/546

November 11, 2013

Theresa Robinson

When evaluating the reasonableness of a sampling approach and auditor must identify all accounting estimates that could be material to the financial statements. The auditor must also consider the industry in which the company operates, the manner in which business is conducted, new accounting rules and pronouncements, and other material outside influences.

One of the major changes for Baggum Gun and Rack Shop is a change in personnel; this is considered to be a change in operating strategies. In determining the effectiveness of the estimate an auditor will concentrate on key factors such as:

* Significance to the accounting estimate

* Determine whether the information is sensitive to slight variations

* Are the deviations significant from historical date

* Skewed and prone to misstatements and bias

While conducting the audit, Hip E. Dude was denied several times that the numbers of misstatements were not affecting the company in a negative way. Hip E. Dude was able to determine that due to bad accounting principles, many misstatements had been made that affected sales, and earnings. Within a sample of 100 taken, only 67 were properly recorded. If 33% of the records were improperly recorded by either misstatement or by totally neglecting to record some items entirely, there is a good chance that the sample size is not large enough to gather the true amount of misstatement.

In our opinion, these records are too distorted. The fact that the accountant had major personal problems and that the records are so messed up tells me that there is a high chance that the material misstatements in the financial reporting and ultimately the financial statements may actually be a cover-up for fraudulent activity by the former accountant. These records need to be straightened out before the company’s financials are audited.