1)  In their review of the public accounting profession, James Harris and Associates warn that an audit report too often is viewed as a "certificate of health" for a company.

The report states:

The most serious consequences stemming from such a misunderstanding are that the independent auditor can quickly be portrayed as the force that represents all good in financial accounting and the guarantor of anything positive anyone wants to feel about a given company.

Required:

a.    Why is public accounting often viewed as a guarantor of results or even as a provider of assurance that one's investment is of high quality?

a.    To what extent is it reasonable to view the auditor as a guarantor? Explain.

b.    How does the auditing profession work to create or communicate a reasonable set of expectations that users should hold?

c.    To what extent do you believe that user expectations of the public accounting profession appear to you to be unwarranted? Explain

 

1.    Materiality is an important audit concept because audits must be designed to detect "material" misstatements.

Required:

a.    Define materiality and describe how it is used in both accounting and auditing.

b.    Should the determination of the materiality be discussed with (i) the audit committee and (ii) management before the beginning of the audit engagement? Explain your rationale

c.    What factors might an auditor look at in determining materiality for an audit client prior to the start of the audit?

 

2.    The existence of fraudulent financial reporting has been of great concern to both the accounting profession and regulatory agencies such as the SEC. It has been asserted that companies in trouble frequently go bankrupt shortly after receiving unqualified opinions from auditors. The auditing profession has historically argued that such cases are rare, and that the cases appearing in the press give the impression that the profession is doing a poorer job than it actually is.

Required:

a.    Distinguish between an "audit failure" and a "business failure." Explain why the press may have difficulty in distinguishing between the two.

b.    Identify a recent fraud that has been reported in the press. For the fraud identified:

• Identify the motivations for the fraud and how the fraud took place.

• Identify the internal control failures that would have allowed the fraud to take place.

Part -1

Why is public accounting often viewed as a guarantor of results or even as a provider of assurance that one's investment is of high quality?  

There is a misrepresentation on the part of many of the users that the clean' opinion of audit means the health of the company is good. This is a miscommunication. A clean audit only means that the presentation of the financial statements is fair and not that the financial health of the company is good. The function of audit provides that the data is presented fairty according to GAAP. So it should be rembered that Auditor is not a guarantor

Step-by-step explanation

To what extent is it reasonable to view the auditor as a guarantor?

A clean audit only means that the presentation of the financial statements is fair. It doesn't guarantee that the financial health of the company is good. The function of audit provides that the data is presented fairty according to GAAP. Auditor is only the guarantor of the following generally accepted standards of accounting to determine whether the statements are represented fairly in all respect or not they are in accordance with GAAP or not.

To what extent do you believe that user expectations of the public accounting profession appear to you to be unwarranted?

The discussion can be wide for this part of the question, the points that can be covered include

1. The deficiencies in GAAP
2. The ability to detect and find out the fraud when the management has made the attempt to cover it up.
3. The total responsibility of the management for the financial statements integrity.
4. Difficulty of the measurement of the economics of the complex transaction

Part - 2

Materiality is an important audit concept because audits must be designed to detect "material" misstatements.

a. Define materiality and describe how it is used in both accounting and auditing

Materiality refers to the impact of an omission or misstatement of information in a company's financial statements on the user of those statements. If it is probable that users of the financial statements would have altered their actions if the information had not been omitted or misstated, then the item is considered to be material.

In Acoouting, materiality concept is used especially in the following instances,

• Application of Accounting Standards. A company need not apply the requirements of an accounting standard if such inaction is immaterial to the financial statements.
• Minor Transactions. A controller who is closing the books for an accounting period can ignore minor journal entries if doing so will have an immaterial impact on the financial statements.
• Capitalization Limit. A company can charge expenditures to expense that would normally be capitalized and depreciated over time, because the expenditures are too small to be worth the tracking effort, and capitalization would have an immaterial impact on the financial statements.

The concept of materiality is therefore fundamental to the audit. It is applied by auditors in the following stages of Auditing

1. Planning stage,
2. Performing the audit 
3. Evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.

Materiality is the convention or the concept in accounting and auditing related to the significanc loan amount discrepancy, and transaction The main objective of the audit of the financial statements is to make sure that the auditor expresses the opinion whether the preparation of financial statements is complete in all material respect and are in accordance with GAAP.

b) Should the determination of the materiality be discussed with (i) the audit committee and (ii) management before the beginning of the audit engagement?

Yes, the determination of materiality should be discussed both with the audit committee and the management because they form an important part of the users of the audited results of any company. The board of directors or the audit committee represents the creditors or the investors hence they are the primary use of the financial reports.

c)  What factors might an auditor look at in determining materiality for an audit client prior to the start of the audit?

The assessment of materiality is done to assess the risk purposes. The materiality of the financial transactions is determined by using the following factors

1. The need of various stakeholders and how they assess and use the financial statements
2. The sensitive nature of the transactions in the financial statement used by the stakeholders
3. The need for the regulation and legislative oversight in a particular area
4. The need for the transparency and openness

Part - 3

The existence of fraudulent financial reporting has been of great concern to both the accounting profession and regulatory agencies such as the SEC

a.    Distinguish between an "audit failure" and a "business failure." Explain why the press may have difficulty in distinguishing between the two.

Audit Failure

Audit failure occurs when an auditor gives an incorrect audit opinion due to lack of compliance with the requirements of generally accepted auditing standards. Example of an incident that might lead to audit failure is when a company employs an unqualified person to audit its financial statements then he or she fails to identify errors that might have been discovered by a qualified auditor. Normally, audit failure is associated with lack of implementation of auditing standards which leads to issuance of an unqualified audit opinion.

Business Failure

Company experiences a business failure when it is unable to meet its investors' expectations or when it cannot repay its lenders due to economic conditions. Examples of economic conditions that may cause business failure include unexpected competition, poor management decisions, and economic recession. Although companies may act appropriately to take care of business failure, extreme cases may be difficult to correct and a company may be compelled to file for bankruptcy.

It is difficult to distingush a failure as business failure or Audit failure because a systematic audit plan and execution sometimes prevents from busniess failure.

b.    Identify a recent fraud that has been reported in the press. For the fraud identified:

B) There are a number of fraud cases of Sarbanes-Oxley. It will help in analysis whether number of lawsuits against CPA's had decreased or not. When an organization is become bankrupt, they sue their auditors.

Identify the motivations for the fraud and how the fraud took place.

Motivation

when an employee runs after greed and did some illegal act for selfness .They may be successful, but the desire of being developed and more earnings one commit such crime.

Nature of fraud

in such situation the firm set up few companies and transferred it assets to them. These companies come together as a family or part of family. Some of these companies may be held privately and weren't consolidated

Failure of Internal Control

inner control failure starts with material frauds and nature of top management. Also, there were lack of control or no control to review most inter-company transfers

Identify the internal control failures that would have allowed the fraud to take place

Following are the major internal control areas

data security controls

Data security controls keep sensitive information safe and act as a countermeasure against unauthorized access. 

 Technical control weaknesses

Technical security controls focus on hardware and software. Weaknesses in technical controls stem from changes in technology and maintenance or configuration failures.

Operational control weaknesses

Operational security (OPSEC) focuses on monitoring operations and enforcing a risk management program. Operational control weaknesses stem from the human factor. 

Administrative control weaknesses

Administrative security controls are also referred to as procedural controls. Failure in daily operations to adhere consistently to established standards or regulations results in administrative control weaknesses. 

Architectural control weaknesses

Security architecture focuses on creating a unified design that documents and addresses the risks across an organization's integrated information technology environment.  

Feel free to Rate & Comment. Stay safe, Stay well ...