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Your CPA firm has been asked to perform the first financial…

Your CPA firm has been asked to perform the first financial statement audit of Summit Precision Manufacturing, Inc., a privately held manufacturer of specialized machine components. During the planning process, you learn the following: Summit has experienced rapid growth during the past two years. The company recently obtained a large bank loan. The loan agreement requires Summit to maintain certain financial ratios. Management bonuses are based partly on reported operating income. Summit implemented a new accounting system in October. Reported revenue increased 28% this year, although the number of units shipped increased only 9%. Accounts receivable increased 46%. Inventory increased 38%, including several product lines that have experienced declining sales. The company president tells the audit partner: “Our accounting department is excellent. These people have been with me for years. I don’t expect your team will need to spend much time testing transactions.” The president believes the audit should require relatively little testing because the accounting staff is experienced and trustworthy. Do you agree? Explain how the auditor should respond to the president’s statement. Your answer should incorporate the concepts of: Audit risk Professional skepticism Sufficient appropriate audit evidence Support your conclusion.