The key purpose of the audit risk analysis project is to integrate and operationalize the important...

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The key purpose of the audit risk analysis project is to integrate and operationalize the important concepts and issues you have studied during the term.

You will be assigned a public company for which you will complete an audit risk analysis project. You will assume the role of an audit manager of a public accounting firm who has been asked by an audit partner to assess the acceptability of the given company as an audit client and to write a memo summarizing this assessment.

You are required to analyze the most recent financial data for your assigned company, which is typically obtained from the company's most recent annual report, the EDGAR website, or any of several online financial databases. You should also obtain other pertinent financial and non-financial data regarding your assigned company. These latter data would include information gleaned from articles appearing in The Wall Street Journal, major metropolitan newspapers, and various business publications concerning the company or its industry; peer group data provided for the company's industry or sub-industry by such investment services as RMA, Dun & Bradstreet, Moody's, etc.; and financial disclosure documents filed with the SEC, such as 8-K auditor change announcements.

Your memorandum should be between 7–10 pages, double spaced, not including the title and reference pages. It should cover the following elements/points using these headers:

Historical Overview of the Company and its Industry:The memorandum should present a brief company profile that comments on, among other items, the history of the firm, its major products, its principal officers, recent developments concerning the firm (such as a merger, planned merger, or new products or technological advancements), etc.

Potentially Problematic Non-Financial Items:Of particular interest to the partner will be what some audit firms refer to as "key items." These are potential "hot spots" that may demand special attention during the course of the audit. Examples: Existence of a management compensation plan (bonus scheme) tied to reported profits; a significant number of related parties and related-party transactions; new, high-risk projects/products; important technological advancements or changes in the company's industry; a significant increase in bad debts over the past year, etc.

Analytical Procedures:Somewhere within the memorandum, you will need to discuss the apparent financial condition of the firm and highlight key financial ratios, such as the current ratio, return on assets, inventory turnover, etc. Complete a ratio analysis for your company and its peer group using the format found on page 333, Figure 8.7 in the Boynton Textbook. Here are the ratios to use:

Liquidity — Current ratio, Quick ratio

Solvency — Debt to assets, Long-term debt to equity

Activity — Inventory turnover, Accounts receivable turnover

Profitability — Gross margin, Profit margin, Return on total assets, Return on equity

This information can be located from industry groups such as Dun & Bradstreet, Robert Morris & Associates, Standard & Poor’s, Morningstar, among others. In particular, you should bring to the partner's attention the ratios and trends that may be indicative of the future prospects of the firm (good or bad). For instance, if the return on sales percentage has plummeted in recent years, that fact should probably be brought to the attention of the partner (and, of course, you should provide some explanation as to why this sharp downturn has occurred).

Conclusion:Finally, you should conclude your memo with a recommendation for the partner. For example, the recommendation may be that the firm appears to be an acceptable client although it does pose a fairly high level of audit risk and business risk, you may recommend that the company not be considered any further as an audit client, or your recommendation may be that more information is needed before an acceptance/rejection decision is made. (If this latter conclusion is reached, you should identify the additional information you believe needs to be obtained before an acceptance/rejection decision can be made).

Feel free to use all reference sources available in the Library or online, such as Disclosure, Dun & Bradstreet, Moody's, Robert Morris & Associates, Standard & Poor’s, Morningstar, Value Line, WSJ Index, etc., in preparing your memorandum. Those online sources that supply comparative industry data will be particularly helpful. For a discussion of other factors to consider when evaluating a potential client, refer to your auditing textbook (Boynton & Johnson, 2006).

Angel K · Accepted Answer

EXECUTIVE SUMMARY
The purpose of this assignment is to analyze the financial statements and the audit report of a public company and to create an understanding about its drafting and some of the paragraphs mentioned therein. As a part of the assignment we will also evaluate the monetary figures mentioned in those reports with the help of ratio analysis. For a better understanding of the company provided, we will look into the nature, and the history of the entity. Finally, we will conclude with the data obtained through investigation and analysis of the reports and also with the information obtained by working with the company. 
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
2. HISTORICAL OVERVIEW 
2.1. THE COMPANY
2.2. THE INDUSTRY
3. POTENTIAL KEY AUDIT MATTERS
4. ANALYTICAL PROCEDURES
5. CONCLUSION
2. HISTORICAL OVERVIEW
The company that was assigned for this project is the American Insurance group and it is functioning in the industry of insurance business. In this section we will draft a detailed picture of the American Insurance Group and also the industry they are allocated in. 
 2.1. The Company
The American Insurance group is a company incorporated during the year 1872. Even though it is an American company having their headquarters at Ohio, currently they are having business in many countries including UK, Canada, Singapore, and Mexico. The company is focused on the business of property and causality insurance. In addition to that, this company is also engaged in providing specialty insurance for commercial products and business entities. During the time of incorporation this company was known as German American Insurance Company, and their main business was focused on providing risk management solution for business entities from disasters. Within a few years of incorporation, the entity becomes well known around the nation due its financial stability and the efficient services. 
After the First World War, the collaboration of the company with a German entity created a lot of distress and it lead to change in name to American Insurance Company during 1918. The entity gained its goodwill during the 1906 San Francisco Earthquake. When most of the insurance companies got collapsed during this time, the American Insurance company was not only able to withstand the disaster and but also was able to satisfy all their clients equally. As per the records, the American Insurance company had not only satisfied the claims of their customers of around $2 million but also contributed significantly to the rebuilding of California City. 
The time between 1960 and 1978 is considered as the evolution period of the American Insurance Company because they started diversifying the business and also started to enter different countries around the world. As mentioned earlier, initially, the American Insurance Company focused only on the disaster insurance and business risk management solutions. However, during 1960, this company made their step to the Life insurance segment. Later they also started different ventures for providing insurance support for agriculture, construction, motor vehicle, etc. Presently, the American Insurance Group is one of the most leading and trusted insurance providers in the United States of America and also in many other countries. As per their last financial reports, this company is having a turnover of more than $6 billion. 
2.2. The Industry
The American Insurance Group is a group of companies falling in the industry of insurance providing business. Tracing the history of this industry is a hard task as it is span to the ancient era. The insurance business has many segments such as fire insurance, accident insurance, marine insurance, and life insurance. Some of the companies falling in this industry will be focusing only on a single segment while others will be providing insurance coverage for all the contingencies mentioned above. Initially, it was considered as an optional support but now, most of the governments around the world have made this mandatory. The primary income of this industry is the premium received from the clients and the main expenses are claim matured and commission payable. 
3. POTENTIAL KEY AUDIT MATTERS
Key audit matters can be defined as records that can be identified in the financial statements that require special attention as it has significant potential to create or become a part of deliberate or accidental misstatement. Key audit matters can be identified from every financial statement. Since there are no specific procedures to identify the same, it takes the judgment and the skill of the audit manager to compile them. Even if the key audit matters are identified by the auditors,

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