1. Identify the key variables that influenced the level of inherent risk Arthur Andersen faced during the 1971 and 1972 audits of Mattel.
2. The SEC noted six reasons why the bill and hold sales recorded by Mattel did not qualify as consummated sales transactions. Identify and discuss the general conditions for recognizing revenue from sales transactions. Also, identify circumstances in which revenues may be recognized on sales transactions even though one or more of these conditions are not met.
3. Identify and discuss the principal audit objectives associated with the performance of year-end sales cutoff tests. In general, is it appropriate to perform these tests at an interim date? Why or why not?
4. SAS No. 31, "Evidential Matter," identifies five key management assertions that underlie a set of financial statements. Identify the management assertions that would have been of primary concern to Arthur Andersen regarding the following items: the reserve for inventory obsolescence, royalty expense, and the receivable recorded by Mattel for the business interruption insurance claim. Why is it important for an
auditor to identify the underlying management assertions for each major account of a client? (Compare to new standards)
5. In at least two instances, key issues raised during the review of Mattel's work-papers by Arthur Andersen personnel were not resolved satisfactorily prior to the completion of the audit. Which member of the audit engagement team has the primary responsibility to ensure that such issues are properly resolved and documented in the audit workpapers? Defend your answer.
6. Assume that Arthur Andersen had compared Mattel's monthly sales during the early 1970s with the comparable monthly sales figures of prior years. What additional audit procedures should Arthur Andersen have performed once it discovered the extreme volatility in these monthly sales figures?
7. Arthur Andersen proposed a $2 million adjusting entry to the deferred tooling costs account during its 1971 audit of Mattel. However, Mattel adjusted the balance of that account by only $1.4 million. Identify the conditions under which Arthur Andersen would have been justified in accepting this smaller adjusting entry.