CASE 2.2 Apple Inc.

Evaluation of Client Business Risk

After completing and discussing this case you should be able to


[1] Describe the implications of an audit client’s business risk on the audit engagement


[2] Describe the types of information relevant to evaluate an audit client’s business risk


[3] Identify and evaluate the factors important in assessing an audit client’s business risk and risk of material financial misstatement




[a] Apple’s:




Net income


Cash flow from operating activities


Total assets


Number of employees


[b] What are Apple’s products?


[c] Who are Apple’s competitors?


[d] Who are Apple’s customers?


[e] Who are Apple’s suppliers?


[f] How does Apple market and distribute its products?


[g] What is Apple’s basic business strategy (cost leadership or differentiation)?


[h] What are critical business processes for Apple given its basic business strategy (for example, supply chain management)?


[i] What accounting information is associated with the critical business processes and how does Apple measure up on that information?


[j] What accounting methods does Apple use to report the accounting information associated with critical business processes and what is the risk of material misstatement?


This memo is to be used as a foundation document for the preliminary business risk assessment. In evaluating Apple’s performance and assessing the risk of misstatement, please be sure to describe your reasoning. Your memo should be double-spaced and addressed to the partner for the engagement (your instructor). Your firm demandspolished, concise, professional analyses and writing. Be thorough, but get to the issues without unnecessary verbiage. In describing your analyses and conclusions, please consider relatively short “punchy” or to-the-point sentences. When appropriate, consider using bullet point listings.


[2] Professional auditing standards provide guidance on the auditor’s consideration of an entity’s business risks. What is the auditor’s objective for understanding an entity’s business risks? Why does an auditor not have responsibility to identify or assess all business risks? Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.

Smith and Jones, PA. Memorandum: Business Risk Evaluation

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