Auditing Hw Solutions Essay Example

Auditing Hw Solutions Paper Newspaper circulation audits: Assurance service Third-party reimbursement minimization: Assurance service Annual financial report to stockholders: Audit service Rental property operations review: Assurance service Examination of financial forecasts and projections: Attestation service Customer satisfaction surveys: Assurance service Compliance with contractual requirements: Attestation service Benchmarking/best practices: Assurance service Evaluation of investment management policies: Assurance service Information systems security reviews: Assurance service Productivity statistics: Assurance service Internal audit strategic review: Assurance service Financial statements submitted to a bank loan officer: Audit service Controller as Auditor When Hughes Corporation hired the CPA, she or he can no longer be considered independent With respect to the annual audit and, as a result, can no longer perform an independent audit of the financial statements. It is true that the in- house CPA can perform all procedural analyses that would be required of an independent audit; however, it is extremely unlikely that the CPA could inspire the confidence of users of financial statements outside the company. Because he or he is no longer independent of the company, the CPA cannot modify the perception of potential conflict of interest that creates demand for the independent audit, As a matter of ethics rules, this CPA would he prohibited trot signing the standard unqualified attest opinion. Moreover, it Hughes were a public company, under Serbians-Cooley, it would be restricted from hiring one of its auditors into a senior accounting position for a full year under Section 206 of the law. We will write a custom essay sample on Auditing Hw Solutions specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Auditing Hw Solutions specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Auditing Hw Solutions specifically for you FOR ONLY $16.38 $13.9/page Hire Writer I CAB Assertions PEPCO Assertion Corresponding CAB assertion Nature Of assertion Existence or Occurrence Existence Occurrence Balance Transactions Disclosures Rights and Obligations Balances Disclosures Completeness Transactions Balances Disclosures Cutoff Valuation and Allocation Accuracy Transactions Transactions Disclosures Valuation Presentation and Disclosure Classification Transactions Disclosures Understandability Disclosures 1. 51 Auditor as Guarantor. Loot Starting appears to be uninformed on the following points: Inform your neighbor that Dodge management is primarily responsible for preparing the financial statements and deciding upon the appropriate accounting principles, The auditors did not prepare the Dodge Corporation financial statement. An unqualified opinion does not mean that an investment is safe. Rather, it merely means that the financial statements are free of material misstatement Tell your neighbor that the financial statements are a historical record of the business performance. The value Of Loots investment depends on future events, including the many factors that affect market prices. Thus, the financial statements are just one piece of information that should be analyzed. Tell Loot that the unqualified opinion means only that the statements conform to the appropriate reporting framework (e. G. , IGMP) and that the financial statements re free of material misstatement. 1. 52 Identification of Audits and Auditors The responses to this matching type of question are ambiguous, The engagement examples are real examples of external, internal, and governmental audit situations. You might point out to students that the distinctions among compliance, economy and efficiency, and program results audits are not always clean The solution is shown in the following matrix form, showing some engagement numbers in two or three cells. The required schedule follows, Type of Audit Engagement Financial Statement Auditor Independent CPA Internal auditor Governmental (GAO) auditor IRS auditor Bank examiner 5 72, 10 6, 8 4, 8 I, 3 1, 3, g Compliance Economy and Efficiency Program Results Type Of Audit I. Proprietary schools training expenses Advertising agency financial statements Dept. F Defense launch vehicle Municipal services Tax shelters Test pilot reporting Bank solvency Economy and efficiency or program results Financial statement Economy and efficiency or program results Economy and efficiency Compliance Compliance Compliance Type of Auditor Governmental (GAO) auditors Independent Caps Governmental GAO) auditors Internal auditors IRS auditors Internal auditors Bank examiners Materials inspection by manufacturer States reporting chemical use data Sports complex forecast Compliance or Economy and Efficiency Program goal Internal auditors Governmental (GAO) auditors Independent Caps Financial statement . 3 Financial Assertions and Audit Objectives The objectives for the audit of securities investments at December 31 are to obtain evidence about the assertions implicit in the financial presentation, specifically: Existence. Obtain evidence that the securities are bona fide and held by Spillage r a responsible custodian. Occurrence. Obtain evidence that the loan transaction and securities purchase transactions actually took place during the year under audit. Completeness. Obtain evidence that all the securities purchase transactions were recorded. Rights, Obtain evidence that Spillage owned the securities, Obligation. Obtain evidence that $500,000 is the amount actually voted on the loan. Valuation. Obtain evidence of the cost and market value of the securities held at December 31 _ Decide whether any write-downs to market are required by the appropriate reporting framework. Presentation and disclosure. Obtain evidence of the committed nature of the assets, Which should mean they should be in a nonoccurrence classification like the loan. Obtain evidence that restrictions on the use of the assets are disclosed fully and agree With the loan documents. Chapter 2 2. 54 Independence a. Independence in fact relates to the auditors state of mind and reflects an unbiased and impartial perspective with respect to the financial statements and other information they audit. Independence in appearance relates to others (particularly financial statement users) perceptions of the auditors independence. The two general types of relationships that compromise auditors independence are financial relationships (owning shares to stock or having an outstanding loan to or from a client) and managerial relationships (acting in a decision-making capacity on behalf of a client or providing advice on systems or intimation that will be audited). (1) Although auditors might still be independent in fact with respect to the audit of the client, the large revenues resulting from these services create a financial interest that many users would find to be troubling. For example, consider the possibility hat clients might use the revenues from these services as a bargaining tool with auditors if an issue arises during the audit engagement. Currently, no prohibitions exist on the extent of consulting services or revenues other than the prohibition of certain types of services and the required approval of mountain services by the clients audit committee. This would clearly pose a compromise to auditors independence and would not be permitted under current guidelines. The issues in this case are (1) the fact that the auditor is directly involved with the engagement and (2) the executive-level position occupied y his or her spouse with a client. This introduces a similar issue to (2) but would be less likely to compromise the auditors independence. The major differences in this scenario are (1) the auditor is not directly involved with the engagement, (2) the level Of position held by the auditors relative is not at the executive level, and (3) the relationship between the auditor and other individual is not as close. Professional standards would likely not conclude that this situation would compromise the auditors independence. This represents a direct financial interest in a client. The issue is whether the fact that the staff member is not a part of the engagement team compromises her independence. Professional guidelines would not conclude that this situation compromises the independence of the staff member, but many firms have adopted the practice of not permitting any toothier professional staff to hold financial interests in their audit clients. . 57 Performance Principle: Evidence a. Sufficiency refers to the amount of evidence, which is the number of transactions or components of an account balance of class of transactions examined by the audit team. As it relates to evidence, the term appropriate refers to the quality of evidence, Appropriateness is affected by the information the evidence provides to the audit team (relevance) as well as the extent to which the audit team can trust the evidence (reliability). Relevance raters to the nature to information provided by the audit evidence (the assertion or assertions supported by the evidence). Reliability refers to the extent of trust the audit team can place in the evidence. Relevance and reliability both affect the appropriateness of audit evidence; as the relevance and reliability of evidence increases, the appropriateness of evidence increases. B. The five basic sources of evidence (from most reliable to least reliable) follow, The solution provides one example, but other possible answers would also be acceptable. I) (2) (3) (4) (5) The auditors direct, personal knowledge, such as physical observation of inventory counts. External documentary evidence, such as confirmations returned directly to auditors from one Of the clients banks. External-internal documentary evidence, such as a vendors invoice received by auditors from the client. Internal documentary evidence, such as an invoice repaper by the client for the sale of products or ser vices to one of its customers. Verbal evidence, such as client responses to auditors inquiries about potential litigation. As the entity internal control is more effective, auditors would assess lower levels of the risk of material misstatement. This would allow them to permit a higher level of detection risk. Which means that they could gather less sufficient and less appropriate evidence. In contrast, as the entitys internal control is less effective, auditors would assess higher levels of the risk of material misstatement. This would require auditors to control detection risk to lower levels, which means that they would be required to gather more sufficient and more appropriate evidence. . 61 Responsibilities and Performance Principles a. While auditors typically cannot influence the susceptibility Of accounts to misstatements or the effectiveness of the entity internal control (both of which comprise the risk of material misstatement), this risk needs to be considered in order to determine the nature, timing, and extent of substantive tests. This statement is correct; internal control is less effecti ve, auditors are required to gather more sufficient and ore appropriate evidence. However, in addition to the number of transactions and reliability of evidence, auditors should also consider the relevance of the evidence they gather and the extent to which that evidence supports the assertions of interest. Auditors are not required to provide absolute assurance as to the fairness of the financial statements, which is what is being suggested in this statement. It is true that a great deal of time and effort is necessary in an audit engagement, but auditors are required only to provide reasonable assurance with respect to the ability to detect material misstatements. This statement relates to the concept of materiality and is appropriate. However, it is important to note that the consideration to materiality in an audit is highly complex and requires an extremely high level of professional judgment. While physical inspection of the stock certificates provides more reliable evidence than confirming the certificates held with the custodian, it may not be necessary for auditors to conduct such an inspection. In many cases, a less reliable but still effective procedure such as confirmation with the custodian would be appropriate, Fundamental Principles (Comprehensive) a. This situation is related to the competence and capabilities element of the responsibilities principle, In this case, auditors can accept this engagement assuming that they take appropriate measures to obtain the knowledge necessary to perform the audit and understand important issues affecting this client. It is important to note that the existence of industry-specific accounting issues will require auditors to obtain the knowledge necessary to complete the engagement. This situation is related to the reporting principle, which addresses the conformity of the financial statements with GAP. If the client elects to treat these leases as operating leases in violation of GAP, auditors should issue either a qualified or adverse opinion, depending upon the materiality of the departure from GAP. This situation is related to the performance principle, Vichy indicates that the audit should be properly planned. In this case, auditors should evaluate whether the clients deadline will allow an audit to be properly planned and conducted according to generally accepted auditing standards. The fact that this would be an initial audit makes this possibility even more questionable than usual. This situation is elated to the performance principle, which requires auditors to obtain sufficient appropriate audit evidence. Given the low level Of control risk, auditors would then proceed to perform the necessary auditing procedures, which provide the basis for their opinion on the clients financial statements. In this case, confirming a smaller number of customer accounts would be appropriate. This situation is related to the responsibilities principle, which requires auditors to be independent. In this particular case, the fact that the husband of one of the partner is an officer of the prospective client would likely result in the rim declining this particular engagement because of a lack of independence. This situation is related to the reporting principle. Auditors should insist upon disclosure of the potential litigation and, if the client refuses, issue either a qualified opinion or adverse opinion, depending upon the materiality to the omission of the disclosures. In addition, the auditors report should provide information regarding the omitted disclosures. This situation is related to the performance principle, which requires auditors to assess the risk of material misstatement, which includes obtaining an understanding of the entity and its internal control Once this understanding has been obtained, auditors would then proceed to perform the necessary substantive audit procedures. This situation is related to the performance principle, which requires proper planning and supervision. An important element of supervision is critical review fork performed by persons at various levels within the firm. Because the supervisors review of the work performed by the assistant indicates that the work supports the opinion on the financial statements, no further actions are necessary _ Chapter 24 (Module C) C. 62 Liability to Clients a. B. Clients may bring suit against auditors for either breach of contract or tort actions. To bring suit against auditors, clients must ordinarily demonstrate: (1) (2) (3) (4) They suffered an economic loss Auditors did not perform in accordance with the terms of the contract (for breach of contract). Auditors failed to exercise the appropriate level of professional care (for tort actions). The breach Of contract or failure to exercise the appropriate level of professional care caused the loss. Auditors defenses against legal actions brought by their clients include: (1) (2) (3) Auditors exercised the appropriate level of professional care (tort) or performed he engagement in accordance with terms of the contract (breach of contract). The clients economic loss was caused by a factor other than auditors failure to exercise appropriate levels of professional care or breach of contract. Actions on the part of the client were, in part, responsible for the loss. The potential basis for legal action in each of these cases is as follows: Brown Company: Because the delay in completing the audit resulted in additional costs of financing, Browns legal action would be based on Thomas inability to complete the audit on a timely basis. Green Stores: Green Stores legal action old be based on Thomas failure to identify the embezzlement scheme during its audits of Green Stores financial statements. Green Stores would likely seek recovery of the $2 million in losses. Fuchsia, Inc: Fuchsias legal action would be based on any additional costs associated with changing auditors and any costs associated with delays in providing audited financial statements to its lenders as a result of the need to change auditors. Note to instructor: Depending upon the assumptions made by students, they may arrive at different conclusions with respect to Thomas liability to clients n some Of these scenarios. The key is that they considered the relevant facts and potential defenses that may either increase or decrease the likelihood of an unfavorable outcome to Thomas. Brown Company: It appears that Brown Companys most viable action for recovery will be alleging that it informed Thomas of the need to have the audit completed by a certain date and that failure to do so would constitute a breach of contract, There is no evidence that a substandard audit has been conducted or that Thomas did not exercise the appropriate level of professional care. In this case, the following are important incinerations: C] Was a deadline or other date explicitly communicated by Brown Company to Thomas or otherwise identified in the engagement letter? If no such date was communicated, or any deadline known by Thomas, it would not appear that Brown Company has a viable suit for breach of contract, Regardless of the response to the preceding point, did Brown Companys actions result in delays or otherwise affect Thomas ability to complete the engagement on a timely basis? If so, this might serve as a defense for Thomas in the form Of contributory negligence on the part of Brown Company. Green Stores: Green Stores would cost likely bring suit for tort liability, alleging that an audit conducted under generally accepted auditing standards would have revealed the existence of the embezzlement scheme and prevented the $2 million loss. In this case, the following are important considerations: Were Thomas audits conducted in accordance with generally accepted auditing standards? If so, Thomas would likely use the defense that it exercised appropriate levels of care during the engagement and emphasize that a GSM audit cannot be relied upon to detect all instances of fraud, Regardless of the response to in the preceding point, old Green Stores have taken actions (through strengthening internal controls or other) to create an environment that would have made the creation and execution of this embezzlement scheme more difficult?