How does the decline in stock price affect your assessment of client business risk and acceptable audit risk?

E-Antiques, Inc., is an Internet-based market for buyers and sellers of antique furniture and jewelry. The company allows sellers of antique items to list descriptions of those items on the E-Antiques website. Interested buyers review the website for antique items and then enter into negotiations directly with the seller for purchase.
E-Antiques receives a commission on each transaction.
The company, founded in 2015, initially obtained capital through equity funding
provided by the founders and through loan proceeds from financial institutions. In early 2018, E-Antiques became a publicly held company when it began selling shares on a national stock exchange. Although the company had never generated profits, the stock offering generated large proceeds based on favorable expectations for the company, and the stock quickly increased to above $100 per share.
Management used the proceeds to pay off loans to financial institutions and to reac-
quire shares issued to the company founders. Proceeds were also used to fund purchases of hardware and software used to support the online market. The balance of unused proceeds is currently held in the company’s bank accounts.
a. Before performing analytical procedures related to the capital acquisition and repay-
ment cycle accounts, consider how the process of becoming publicly held will affect
accounts at E-Antiques, Inc. Describe whether each of the following balances would
In-class
Discussion
Required
Required
750Part 4 / APPLICATION OF THE AUDIT PROCESS TO OTHER CYCLES
have increased, decreased, or experienced no change between 2017 and 2018 because
of the public offering:
(1) Cash
(2) Accounts receivable
(3) Property, plant, and equipment
(4) Accounts payable
(5) Long-term debt
(6) Common stock
(7) Additional paid-in capital
(8) Retained earnings
(9) Treasury stock
(10) Dividends
(11) Revenues
b. During 2019, the stock price for E-Antiques plummeted to around $19 per share. No
new shares were issued during 2019. Describe the impact of this drop in stock price
on the following accounts for the year ended December 31, 2019:
(1) Common stock
(2) Additional paid-in capital
(3) Retained earnings
c. How does the decline in stock price affect your assessment of client business risk and acceptable audit risk?

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