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Apple Inc. Understanding Client's Business Essay

958 words - 4 pages

In order to evaluate the vulnerability of client’s financial statement assertions to material misstatement, auditors must understand the nature of the client’s business and the industry in which the client operates. Understanding the client’s business is helpful to auditors not only to outline the scope and the timing of the audit, identify the audit strategy, and isolate the most significant factors of materiality, but also to determine the client’s business risks and their potential translation to the financial statements.

Every industry has inherent risks and there are many factors that contribute to the increase of these risks as described in AU-C §315.A18; however, Computer and ...view middle of the document...

The diagram at the last page visually shows these three business risks and the potential material misstatement risks they directly or indirectly cause.

Known for its i-products, Apple’s business revolves around its intellectual property. Apple’s largest assets are its copyrights, patents and research and development related to its software, i.e. all intangibles, i.e. all hard to audit. Apple is a member of the Business Software Alliance whose principal activity is trying to stop copyright infringement of software. As such, the Company is prone to frequent litigation related to copyright infringement. Litigation is significant for Apple’s business not only because of its inherent unpopular nature and the costs associated with it, but also because of the complexity of Accounting for Contingencies which requires plenty of judgment, estimates, and uncertainty that are reflected on financial statements. Needless to say, litigation increases the risk of material misstatement. The particular financial statement accounts that can be compromised by litigation are accruals related to litigation and these will receive special audit attention during an engagement.

Besides its constant effort to protect it intellectual property from “copy-cats,” Apple is also battling its rivals for market share. The Company is not only under constant threat of its competitor’s innovations, but it is also bearing the risk that its new products may fail or not perform in the market as expected. Due to the intangible nature of a large amount of Company’s products, revenue recognition is already an issue, and with increased competition and pressure to stay “at the top” the incentive to overstate revenue grows. Apple also spends significant amounts on R&D, which is one of the company’s most valuable assets; however, in the eyes of accounting, it is an expense. Showing profits while having to expense a major asset against them is hard and it creates encouragement to either overstate revenue or understate expenses, especially when they are so hard...

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