Question: You are working on a part of a repeat audit of a client with a September 30 fiscal year end. The client company is in the insurance brokerage industry, which means that it gets requests for coverage and finds insurance companies willing to accept the coverage. It charges a fee for its service. It operates as a brokerage for insurance agents, and insurance companies, and also has its own customers for insurance policies. One of the nice things about this business is that it tends to be nice and stable, both all year long and from one year to the next. Once it gets a client--whether the ultimate purchaser or an insurance agent--it tends to have a stream of renewals for years, if not decades. You notice that revenue is down about fifteen percent for the year compared to the preceding year. When you talk with A. Baker, the controller, Baker reminds you that Baker used to work for your accounting firm. Then Baker tells you that the drop in revenue was caused by the events of September 11, 2001, when hijackers took over four commercial airliners, crashed two of them into the twin towers of the World Trade Center in New York, and crashed another one of them into the Pentagon. If it hadn't been for that, Baker said, the year's revenue probably would have been up, not down.
Required: a. Evaluate the explanation provided by Baker. Show calculations, if any, to support your conclusions.
b. How should you obtain sufficient competent evidential matter related to Baker's explanation in order to evaluate it further? What procedures and audit tests should you perform?
c. Which specific aspects of the client's financial statements require intensive investigation in this audit?