Question

One of your accounting firm’s high net worth clients, Todd Caito, is considering investing a significant amount of money in a new toy manufacturing company. The company, Turf Products, is predicting it will have the hottest toy this holiday season, based on the sales revenue it has generated the last three quarters. Todd has provided you with the detail for the revenue account and would like you to conduct some procedures and analyze the results. Todd is concerned the revenue figure might be overstated.  

Identify risks to reliable financial reporting in the revenue cycle, including types of revenue related fraud, and other risks related to proper revenue recognition.

Answer 1

Here our client is making investment in the toy company and that company revenue statements to be studied by us and make risk analysis of investing that company

Here they said that they expect the hot sale of toys as per there sales in last three quarters. But they did not gave explanation for that. they are just predicting the market but there is no valid reasons for increase in market in this quarter.

They gave revenue statements that value are overstated then we know that they are overstated how we can rely on those statements.

The risk is depend upon the following factors.

1. Quality of product.

2. Credit period to customers effects on revenue cycle.

3. Study of toys market whether it is successful or not.

4. Marketing strategies of Todd

4. Distribution policies of Todd .

5. Place of sale promotion like near by schools and parks not in hospitals

6. Amount to be invested by our client in the bussiness.

7. Educational background of the people in the Todd.

All these point effects the risk of the investment.

These are the point to be analysed before the investment is done .

I hope, all the above mentioned points are useful to you .

Thank you.