Discussion Questions-Seminar 3 Chapter 5

Discussion Questions-Seminar 3

Chapter 5

5-51 Briefly describe each of the ten standards in the PCAOB guidance and indicate how the actions of Holmes resulted in a failure to comply with each standard.

1.The audit is to be performed on the adequate technical training and proficiency as an auditor- Holmes had the adequate technical training and proficiency as an auditor, however the two accounting students did not poses the adequate training and proficiency as auditors. (Chapter 1, p. 10)

2. Auditors are to be independent-the auditor is not acting independently because the intention of the audit is to submit audited financial statements to a bank as part of a loan application. An independent auditor plans, conducts, and reports the results of an audit in accordance with generally accepted auditing standards (GAAS).

3.The audit is to be conducted with due professional care-due professional care is expected to be demonstrated by a competent professional, set by GAAS, by a reasonably prudent auditor. Holmes did not comply with due professional care because he prepared an unqualified auditor’s report, and the report did not refer to GAAS.

4. An audit is properly planned and supervised-Holmes engaged accounting students to do the audit. The students are not trained or authorized to perform audits. The students did what they were told to do, without any professional support.

5. Auditors develop an understanding of the client’s controls. An important aspect of risk assessment is obtaining an understanding of internal control over financial report. The quality of internal control directly affects the risk of material misstatement. Holmes told the students not to spend time reviewing the controls. (Chapter 5, p. 194).

6. Auditors obtain sufficient appropriate audit evidence-Audit evidence is information obtained by the auditor to support audit opinion through audit procedures. The auditor has a responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence that supports the auditor’s opinion. Holmes did not provide any information to support the audit opinion by following the audit procedures. (Chapter 5, p. 189).

7. The auditor will state explicitly whether the financial statements are fairly represented in accordance to GAAP. Holmes did not state that the financial statements were fairly represented in accordance to GAAP.

8. The auditor will identify in the auditor’s report, the circumstances in which accounting principles have not been consistently observed. Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The common set of accounting principles is the generally accepted accounting principles (GAAP). There is no indication of the company’s observance of following the rules and guidelines when reporting financial data. Retrieved from http://www.investopedia.com/terms/a/accounting-principles.aspevidence

9. The auditor will review disclosures for adequacy. Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed. The footnotes describe in detail the practices and reporting policies of the company’s accounting methods and disclose additional information that can’t be shown in the statements themselves. In other words, footnotes expand on the quantitative financial statements by providing qualitative information that allows for a greater understanding of a company’s true financial performance over a specified time period. The financial statements did not include or disclose any footnotes. (Chapter 5, p. 190). Retrieved from http://www.investopedia.com/terms/a/accounting-principles.asp

10. Opinion on financial statements. An auditor’s certification that accompanies financial statements and is provided by the independent accountants who audit a company’s books and records and help produce the financial statements. The auditor’s opinion will set out the scope of the audit, the accountant’s opinion of the procedures and records used to produce the statements, and the accountant’s opinion of whether or not the financial statements present an accurate picture of the company’s financial condition. Holmes did review the statements and prepared an unqualified auditor’s report. The report did not refer to GAAP. Retrieved from http://www.investopedia.com/terms/a/auditors-opinion.asp

5-63 What types of controls would an auditor expect a client to have in place to address fraud risk? Controls to address fraud risk: controls over significant, unusual transactions, particularly those that result in late or unusual journal entries, controls over journal entries and adjustments made in the period-end financial reporting process, controls over related-party transactions, controls related to significant management decisions, and controls that mitigate incentives for, and pressures on, management to falsify or inappropriately manage financial results. Why is this documentation important? The documentation is an important aspect of risk assessment in obtaining an understanding of internal control over financial reporting. The quality of internal control directly affects the risk of material misstatement. The focus is on internal control design and implementation and includes entity-wide controls, transaction controls, and fraud-related controls. (Chapter 5, p. 194- 195).

5-76 If deficiencies are identified: assess those deficiencies to determine whether the preliminary control risk assessment should be modified (should controls risk be increase form low to high?), and document the implications for substantive procedures (should the substantive procedures be modified?). Deficiencies are not identified: assess whether the preliminary control risk assessment is still appropriate, determine the extent that controls can provide evidence on the accuracy of account balances, and determine planned substantive audit procedures. The substantive testing in this situation will be less than what is required in circumstances where deficiencies in internal control were identified.

Chapter 6

Refer to Exhibit 6.5 to identify the nine types of audit procedures.

a. analytical procedures-obligations, valuation, and disclosure

b. inspection of documentation-completeness

c. recalculation-valuation

d.inspection of documentation-existence

e. inspection of documentation-existence and valuation

f. inspection of documents-existence

g.inspection of assets-existence and valuation

h. inspection of documents-completeness

i. external confirmation-existence

j. inspection of documents-completeness and valuation

k.inquiry- valuation and disclosure

l. inquiry-valuation

m. reperformance-completeness and existence

n. inquiry-existence, and disclosure

o. inspection of documentation-existence, and completeness

p. external confirmation- disclosure, and valuation

6-52 Analytical Procedures are Not Client Estimates-What is the relationship between the auditor’s use of analytical procedure and a client estimate?

Substantive analytical procedures are designed to provide independent evidence about account balances-not to replace the client’s underlying estimate process. Management is responsible for estimating the allowance. The auditor’s work is to gather evidence on the accuracy of that estimate, and the testing may come from gathering evidence to support the client’s underlying assumption. Substantive analytical procedures are designed to provide independent evidence about account balances, and not to replace management’s underlying estimation process. (Chapter 6, p. 250).

6-55 What is the likely concern of your senior?

The likely concern of the senior are the revenue increases with prior period increases and with the industry increases. The increases could possibly be misstatements on the financials to make the company look good on its own behalf and to outside investors. The auditor should reexamine the increases, and inquire of management as to the possible reasons for the increases. (Chapter 5, p. 245).

References:

http://pcaobus.org/Standards/Auditing/Pages/AU150.aspx

Johnstone, K., Gramling, A., & Rittenberg, L. E. (2015). Auditing: A Risk Based-Approach to Conducting a Quality Audit. Boston, MA: Cengage