Week 2 Discussion Questions Chapters 6 & 8 1. Why is audit planning so important? What is the most important step in audit planning? Why is this step so important? Posted on wed 5/8/2013 Responded to one classmates on 5/08/2013 Auditing planning is important because it helps the auditor determine his/her approach to the audit. There are two considerations that affect the approach: 1). Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility and 2). The cost of accumulating the evidence should be minimized. Concern for sufficient appropriate evidence and cost necessitates planning the engagement.
The plan should result in an effective audit approach at a reasonable cost. The most important step in audit planning is Phase I, to plan and design an audit approach. This step is important because this is where the auditor obtains an understanding of the entity and its environment. To adequately assess the risk of misstatements in the financial statements and to interpret information obtained throughout the audit, the auditor must have a thorough understanding of the client’s business and related environment, including knowledge of strategies and processes.
The auditor should study the client’s business model, perform analytical procedures and make comparisons to competitors. The auditor must also understand any unique accounting requirements of the client’s industry. Secondly, the auditor needs to understand internal control and assess control risk. The risk of misstatement in the financial statements is reduced if the client has effective controls over computer operations and transaction processing. The auditor identifies internal controls and evaluates their effectiveness, a process called assessing control risk.
If internal controls are considered effective, planned assessed control risk can be reduced and the amount of audit evidence to be accumulated can be significantly less than when internal controls are not adequate. Thirdly, the auditors assess risk of material misstatement. The auditor uses the understanding of the client’s industry and business strategies, as well as the effectiveness of controls, to assess the risk of misstatements in the financial statements. This assessment will then impact the audit plan and the nature, timing, and extent of audit procedures. 2. Describe the auditor’s responsibility for discovering illegal acts.
What barriers do you see in terms of their ability to accurately uncover fraud? What are the sources of the barriers? If possible, would you eliminate the barriers? If so, why? Posted on 5/9/2013 Illegal acts are defined in SAS 54 (AU 317) as violations of laws or government regulations other than fraud. Two examples of illegal acts are a violation of federal tax laws and a violation of the federal environment protection laws. The first course of action when an illegal act has been identified is to consider the effects on the financial statements, including the adequacy of disclosures.
These effects may be complex and difficult to resolve. For example, a violation of civil rights laws could involve significant fines, but it could also result in the loss of customers or key employees, which could materially affect future revenues and expenses. If the auditor concludes that the disclosures relative to an illegal act are inadequate, the auditor should modify the audit report accordingly. The auditor should also consider the effect of such illegal acts on the CPA firm’s relationship with management.
If management knew of the illegal act and failed to inform the auditor, it is questionable whether management can be believed in other discussions. The auditor should communicate with the audit committee or others of equivalent authority to make sure that they know of the illegal act. The communication can be oral or written. If it is oral, the nature of the communication and discussion should be documented in the audit files. If the client either refuses to accept the auditor’s modified report or fails to take appropriate remedial action concerning the illegal act, the auditor may find it necessary to withdraw from the engagement.
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If the client is publicly held, the auditor must also report the matter directly to the SEC. Such decisions are complex and normally involve consultation by the auditor with the auditor’s legal counsel. 3. As an auditor for Franken’s Markets, you discovered fraudulent activities. In your previous discussions with management, no one with the Franken organization identified fraudulent behavior or activity, and any questions relating to such matters were met with defensive behavior. How might you address this situation?
Post this in individual forum—answered on 05/8/2013 Who should be responsible for detecting fraud? Please post your answer to this question to your individual forum. For example, should it be the auditors, management, the board of directors, etc.? You don’t have to post an explanation—just your answer. We’ll discuss it once I compile the results from everyone’s answers. I’ll post a summary of everyone’s answers to this thread, and we’ll see which group receives the most votes. Miscellaneous topics:
What is the most valuable asset of an auditor, and how does it differ from the most valuable asset of an accountant? (posted on 05/09/2013) ETHICS AS A BARRIER: (POSTED ON 5/09/2013) Ethics is a code of conduct that dictates a person’s or group’s behavior. Many successful business owners understand the importance of ethical practice because without it, failure is probable. The result of a business that employs ethical practices will result in customer loyalty, and finding a company that you can trust is always in demand.
Though large oversight bodies such as the Securities and Exchange Commission attempt to regulate businesses into operating with ethical standards, maintaining integrity is the responsibility of every employee. Ethical behavior is a constant concern for professionals in every industry. Anyone who works with clients must be concerned about staying within company policies without running into ethical barriers. Whether the professional is a lawyer, social worker, doctor or police officer, ethical problems that can appear in any line of work include client confidentiality, reporting unethical behavior and engaging in conflicts of interest.
I believe that no one intentionally works for a company that does not uphold his or her beliefs, so I would have to say that in whatever career you choose you follow the policies established by that company, and hopefully you would conduct the necessary research to find out what the company is about. So my answer would be no, I don’t think that auditor’s ethical beliefs would be a barrier. As an auditor you know what your duties are and what rules and standards are in place for your profession. Made 2 posts on 05/10/2013 and posted synopsis to team folder