Current Issues in Auditing
Volume 8, Issue 1
American Accounting Association
ABC Electronics: An Instructional Case
Illustrating Auditors’ Use of Preliminary
Paul M. Clikeman and Jamie Diaz
SUMMARY: This instructional case demonstrates auditors’ use of analytical procedures
during the planning/risk assessment phase of a financial statement audit. An Excel
spreadsheet enables instructors to embed up to seven operating problems or potential
accounting issues into a fictitious consumer electronics manufacturer’s current year
financial statements. Questionnaires from students at two ...view middle of the document...
The authors thank Richard W. Houston (editor) and an anonymous reviewer for their helpful suggestions.
Supplemental material can be accessed by clicking the link in Appendix A.
Submitted: September 2013
Accepted: March 2014
Published Online: April 2014
Clikeman and Diaz
Because first and second-year auditors often are assigned to perform analytical procedures, it
is important for auditing students and staff auditors to learn the purpose and potential value of
analytical procedures, and to have some experience performing such tasks. This instructional case
provides participants with an example of auditors’ use of analytical procedures during the planning/
risk assessment phase of a financial statement audit. The learning objectives are to help
participants understand (1) auditors’ use of analytical procedures during the planning stage of the
audit, and (2) the types of accounting issues and operating problems that might be identified using
The case materials include a brief description of a fictitious consumer electronics
manufacturer and three years of income statements, balance sheets, and schedules of gross
profit for its two products. The case instructions direct participants to compare the most recent
year’s financial statements with the previous two years and write a memorandum identifying
potential accounting issues or operating problems that the company may be experiencing.
This instructional case has three advantages over previously published analytical review
exercises (e.g., Calderon and Green 1994; Lindberg 1999; Boockholdt 2000). First, the case is
flexible. The case materials offer seven operating problems or potential accounting issues that
instructors, at their discretion, can embed or omit in the current year financial statements. This
flexibility allows instructors to tailor the case to suit their own curriculum and vary the case from
semester to semester to reduce the probability of students relying on solutions from prior years.
Second, the case addresses operating problems, including slow-moving inventory and cash flow
shortages, while previous cases almost exclusively address fraudulent financial reporting. Using
analytical procedures to evaluate the client’s profitability and efficiency is an important component of
the business risk audit methodology currently practiced by many major accounting firms (Bell, Marrs,
Solomon, and Thomas 1997; Robson, Humphrey, Khalifa, and Jones 2007). Finally, the case
materials disaggregate sales and cost of goods sold by product line. Unlike other teaching cases that
provide only aggregated financial statement data, this case enables participants to analyze the
growth, profitability, and turnover of individual products. Allen, Beasley, and Branson (1999) conclude
that disaggregated data help auditors develop more precise estimates of account balances.
The case materials are presented in the next section. The financial...