Identifying Risks of Misstatement in Tucker Engineering's Financial Statements

Background
Tucker Engineering, Inc. (“Tucker”), designs, manufactures and sells industrial pumps and related plumbing equipment. You are the audit senior manager assigned to Tucker’s audit for the year ending December 31, 2019. During September 2019, as a part of your risk assessment
procedures, you identified the following information related to Tucker’s business.

1. In response to competition, Tucker took action to modernize certain of its products. In January 2019, Tucker obtained a long-term loan from a bank to complete development and introduction of a new product, a complex computerized control mechanism that can be added on to certain of its other products. It eliminates the need for Tucker’s customers to manually monitor and adjust certain settings. The product can be purchased together with its other products or purchased separately and added to its other products that have already been installed by its customers. First shipments of the new product occurred on September 1. Early interest by customers indicates that the new product is likely to be successful, but more experience will be needed to be certain.

 

2. Because of the nature of the new product, the sales price includes mechanical maintenance and software updates for three years from the date of purchase. Tucker’s other products do not involve software and include only a 90-day warranty.

 

3. The company is required to provide to the bank a compliance certificate related to its new loan no later than 45 days after each quarter-end to show whether the company is in compliance with its loan covenants at the quarter-end. The audit senior prepared the following schedule:

                                           Actual (2019 is unaudited)                         

Covenant             Requirement                 December 2018     March 2019      June 2019
Current ratio:       at least 1.50 to 1            1.74 to 1                1.61 to 1           1.52 to 1
Minimum equity: $450 million                 $487 million          $486 million     $454 million

 

4. At the end of June 2019, Tucker recorded a loss to adjust the value of certain of its older inventory and to recognize the impairment in the recorded value of its older manufacturing equipment.

 

5. Summary financial information is attached.

 

Assignment

Evaluate the information presented, above, and the summary financial information. Identify new or changes in risks of misstatement that should be considered in the audit of Tucker’s financial statements for the year ending December 31, 2019. For each of the risks you identified:

• Describe the risk, using the relevant facts to explain why it is a risk or why the risk has changed from the prior year
• Identify the likely financial statement accounts and assertions affected by the risks
• Consider whether there are any financial statement-level risks and possible auditing or audit reporting consequences
• Describe how the audit procedures and the need for audit evidence would be affected as compared to the 2018 audit (i.e., how do you plan to respond to the identified risks?)

 

Guidelines for Paper

1. Prepare your paper in the form of a memorandum to the audit file.

2. The memorandum should be no more than 4 pages, 1.5-spaced, 11-point font.

3. Approximately 80% of the grade will be based on the content, with the remainder based on the writing. This is a business document, not an essay. Write as clearly, directly and concisely as possible, while not omitting important information. You may use a variety of drafting techniques, such as numbered and bulleted paragraphs. Avoid restating facts not relevant to your response.