Madison, CPA, is the engagement partner on the audit of financial statements of Fortitude Corporation as of and for the year ended December 31, 2020

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Madison, CPA, is the engagement partner on the audit of financial statements of Fortitude Corporation as of and for the year ended December 31, 2020. On January 4, 2021, Britney, the senior associate assigned to the engagement discussed with Madison some concerns relating to the planning of the audit. Their conversation is found below:

 

Madison: Britney, were you able to update all our audit programs for the Fortitude Corporation audit?

Britney: Almost done Miss, I just have remaining work on the fraud risk assessment program.

Madison: Why? Can’t we just use last year’s fraud risk assessment program? The program was reviewed by quality assurance team before, and it satisfied their assessment. After all our objective is all about the fairness of the financial statements, not specifically to detect fraud. If we encounter one, we’ll deal with it.

Britney: Hmmm, but there was a recent change in their governance structure. They hired a new CEO, Mr. Fortun, and I find his compensation package a bit strange. He has almost no salary, mostly share options and bonuses.

Madison: Okay, but remember his contract was unanimously approved by their Board three months ago, so I can’t see any problem with that.

Britney: Okay granted, the problem is, Mr. Fortun released a press statement saying that Fortitude’s shares earnings could increase by 30% next year. Now the company’s all-over social media specially in the investing-related pages. How can he deliver such an optimistic figure?

Madison: Who knows; besides we’re auditing the 2020 financial statements not next year’s. Probably he’ll institute many changes this year to meet his target.

Britney: Fine, won’t it affect our other audit programs?

Madison: Not at all, the programs are fine as they are. If you find any irregularities in conducting the procedures, let me know. Maybe we can extend the tests or report it to their audit committee.

Britney: What would they do? Remember Mr. Frank is the chair of the audit committee, and he was the one who hired Mr. Fortun in the first place. They were friends and business partner for years. After all, Mr. Fortun dominates the Board now. Ms. Alicia, the previous CEO, is still part of the Board but she is hardly around. No one in the current management or Board will stand up to Mr. Fortun.

Madison: That’s nothing new. Alicia was like that years ago. She had frequent disputes with Von, their previous auditor. In fact, Von commented on how ineffective their internal audit department was then. Next thing you know, they replaced Von with me. So why bother I’m actually glad that those inexperienced internal auditors don’t get in our way. Just remember the bottom line is…are the financial statements fairly presented? And they always have been. We are not expected to provide any assurances on fraud. That’s the responsibility of the management.

Britney: Okay but how about the lack of segregation of duties in the cash disbursement department? That staff could write a check for anything.

Madison: Just include that in the Management Letter, we have been reporting that every year, thus, just report it again this year until they address it. We’re talking cost-effectiveness here, not fraud. Plus, just extend your tests on cash disbursements this year and report if you found something unusual.

Britney: How about the big layoffs coming up next month? The employees know it’s not just a rumor and they are real apprehensive about it.

Madison: I know, the management is still mum about it, but we don’t have to consider it now. Even if it happens, it might improve their bottom-line next year. Besides, Alicia should have let those people go years ago. After all, how can Mr. Fortun meet his aggressive target if he will not implement drastic changes?

 

Based on the above information answer the following questions:

 

1. Which of the following least likely describe the fraud risk factors that are indicated in the conversation above? [ Select ] ["Mr. Fortun’s contract was approved by the Board of Directors.c.\tMr. Fortun’s contract was approved by the Board of Directors.", "Aggressive and unrealistic target.", "Mr. Fortun’s compensation based on bonuses and share options.", "Mr. Fortun dominates the management."]
2. Which of the following most likely describe the fraud risk factors that are indicated in the conversation above? [ Select ] ["Disputes with the Board and previous auditor.", "The financial statements are fairly presented in previous years.", "Mr. Frank is the chair of the audit committee.", "The company has an internal audit department."]
3. Which of the following least likely describe Madison’s misconceptions regarding the consideration of fraud in the audit of Fortitude’s financial statements that are contained in the conversation above? [ Select ] ["Lack of concern over the CEO’s contract.", "The need for the financial statements to be fairly presented.", "Lack of concern over the aggressive target.", "Overall responsibilities for fraud."]
4. Which of the following most likely describe Madison’s misconceptions regarding the consideration of fraud in the audit of Fortitude’s financial statements that are contained in the conversation above? [ Select ] ["Lack of concern over uncorrected reportable conditions.", "Lack of concern over internal audit department.", "Lack of concern over layoffs.", "All the other choices are misconceptions."]
5. The auditor should document [ Select ] ["Fraud risk factors are not required to be documented.", "Fraud risk factors identified as being present during the auditor’s risk assessment process.", "The auditor’s response to fraud risk factors identified.", "Both the fraud risk factors identified as being present during the auditor’s risk assessment process and the auditor’s response to fraud risk factors identified."]