Star Audit

Star Audit

1. Industry knowledge is important because each industry has its own peculiarities that need to be known by auditors of companies of that industry.   An auditor fresh out of college may not know what particular items look like during counts or what the production and control process is for particular products.   They are more easily tricked by management or other employees who want to fraudulently boost the company‚Äôs financials.
The high tech industry is one place where industry knowledge is essential as computers are always changing and not an area where most people have great exposure or expertise in, especially during that particular time. Without industry knowledge, an auditor may not know if certain inventory should be written down as obsolete, to count it properly or to even understand common financing plans in the industry that could be potential liabilities.   These risk factors could lead to overstatements of assets or understatements of liabilities and cause the financial statements to be extremely inaccurate.   With the help of experts, these risks can be minimized.

2. There were dramatic changes in the cost of revenue and research and development costs.   These costs were much greater in 1989 than they were in 1988.   Thus, the company was no longer profitable in 1989 and the company would probably try to improve its financials by understating expenses or by inflating other aspects of its financial statements.   In addition, there were changes in inventory, accounts payable and depreciation, which probably also need closer evaluation.   The company should have also looked at the advance to Culler as that appears to be potentially a risky transaction and the acquisition of Graphicon.   Furthermore, the company should evaluate what costs were correctly expensed and what expenses were correctly deferred. In addition, there was no net operating loss carry forward present in 1989 that was present in 1988.
These changes should have made the...