Aerospace Lighting, Inc. (ali) Linking Business Strategy to Audit Planning Case Analysis

In order to decide whether to accept a client or not, auditors need to have a thorough understanding of the business and its structure by assessing risks that affect the operations and potential outcome of the organization. According to this case, ALI was a private company, but being acquired by BmG in 2003. Therefore, the auditor should assess the risk of the acquisition planning to verify effectiveness of strategy and legality of the contract. The auditor firstly should review the acquisition plan and related documents to ensure the plan is realistic and comprehensive. Then, the auditor needs to determine company’s environment and the objective of the acquisition by review the company’s financial statements, contract management procedures, sources of revenue, extent of competition and information from predecessor auditor’s working papers. Furthermore, the auditor should evaluate the strategies, management tools, techniques, and ability to identify and respond to risk during the acquisition plan. In this case, since the performance measurement system of BmG to ALI is just based on its return to BmG stockholders, ALI has been pursuing a rapid expansion strategy to increase revenue. Therefore, BmG’s objective and performance measurement system potentially encourages aggressive accounting which may increase the possibility for ALI to record sales for non-existent transaction in order to achieve the goal. In this way, the inherent risk of financial misstatement might be increased. Additionally, since ALI’s management team has not discussed its new strategy with its board, there is a lack of communication between ALI and its parent company. In another word, the control risks may be increased as well. Therefore, the planned synergies may not develop and the risk of misstatement of financial statement will be higher.