28 Dec In this case study,

ACC522 Advanced Audit Issues

Unit 1 Discussion

Let’s explore what CPA firms do during the course of a financial statement audit by answering the following questions:

What is the main objective of the audit of an entity’s financial statements?

What representations or guarantees do auditors make about the accuracy of the financial statements?

Is it the responsibility of the auditor to detect all kinds of fraud that may have taken place for the financial statements being audited? Explain.

Why is there a need for the CPA firm to understand the business of the audit client?

Read Introductory Case on pages X and XI in the Lakeside Company text. Read chapters 1 and 2 and use your library resources to answer the following questions:

What are the main duties of each of the positions that comprise Abernethy and Chapman’s engagement team (i.e., partner, manager, senior auditor, and staff auditor)?

What is the purpose of having a partner-in-charge and a consulting partner on each engagement? What are the rules regarding partner rotation? Why is this important?

ACC522 Advanced Audit Issues

Unit 2 Discussion

What is the purpose of a peer review? Discuss the reasons why peer reviews have become necessary and the type of examination that is performed.

What is the purpose of an engagement letter? What sections should be included in an engagement letter? Let’s discuss.

What are the responsibilities of the successor and predecessor auditor when a company is changing auditors?

Explain where the auditors need to have an understanding of the client’s industry in performing an audit.

ACC522 Advanced Audit Issues

Unit 3 Discussion

MATERIALITY

What is materiality as it relates to accounting and auditing? What is the relationship between materiality and the phrase “obtain reasonable assurance” in the auditor’s report?

How are benchmarks used in setting a preliminary judgement about materiality? How will these benchmarks differ based on the client’s industry?

Explain why materiality is important but difficult to apply in practice.

What’s the BIG DEAL about RISK?

What procedures would you perform during the risk assessment process? Why would you choose these procedures?

Besides inquiring from the management involved in preparing the financial statements, who else should you inquire from as part of your risk assessment procedures? Describe how these individuals might be helpful to you in assessing risks of material misstatement?

When the auditor determines that “a risk of material misstatement is considered a significant risk, what are the next steps that the auditor may likely perform?

ACC522 Advanced Audit Issues

Unit 4 Discussion

Fraud versus Error

What is the difference between fraud versus and error?

Let’s discuss the importance of distinguishing the auditor’s assessment of the risk of material misstatement due to fraud from the assessment of the risk of material misstatement due to error.

How should the auditor consider risks related to revenue recognition when assessing the risk of material misstatement due to fraud?

What types of inquiries should the auditor make when considering the risk of material misstatement due to fraud?

Internal Control Environment and Processes

What aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?

What is the control environment? What is the relationship between the control environment and the other four components of internal control?

The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of custody of assets from accounting. Explain the difference in the purposes of these two types of separation of duties.

What is the auditor’s responsibility for obtaining an understanding of the internal control?

What is an internal control walkthrough? What is its purpose?

ACC522 Advanced Audit Issues

Unit 5 Discussion

Read Case # 6 in Lakeside Company along with the chapters assigned in the audit text. Respond and challenge is other respectfully on the following questions:

The first generally accepted auditing standard of fieldwork states that assistants, if any, are to be properly supervised. Why is this requirement necessary, and what supervision is indicated on the audit document produced in Exhibit 6-1?

On the audit document, Heyman has included the objective, conclusions, and scope of this testing. Why is this information important on the audit document?

The case states that audit procedures are designed by the auditor in-charge of the engagement. Are audit procedures designed separately for each audit? Do auditing firms ever use standardized audit procedures? Which is preferable for the firm’s quality controls, client-specific or standardized procedures?

Assume that Art Heyman had found one or more apparent inconsistencies during his work on this part of the audit. What would be his responsibility in addressing these problems? To whom should he inquire? What documentation should he maintain?

Read Case # 5 in Lakeside Company and assigned readings in the Audit text. Answer the following questions. Challenge each other respectfully.

You were up all hours studying for your audit class. You decided to go to a fast food restaurant for a quick bite. On the drive through window you see a sign that says, “If you did not receive a receipt for this transaction, please let us know and your meal is free.” Why is the restaurant posting this sign? What does it hope to accomplish?

Discuss the auditor’s responsibility for detecting fraud, including fraudulent financial reporting and misappropriation of assets.

After having read the first 5 cases in Lakeside Company, discuss the potential signs that you have read that should alert the auditors of the potential existence of fraud.

ACC522 Advanced Audit Issues

Unit 6 Discussion

Read Case 8 – Observation of Physical Inventory Count about Lakeside Company

There is a discrepancey between the perpetual inventory records of Lakeside Company when compared against the physical count.

Questions:

1) Is this difference a material amount that would justify further investigation by Abernethy and Chapman (A & C)? Why or why not?

2) Management may sometimes deliberately attempt to either overcount or undercount ending inventory. Explain the rationale behind this type of irregularity. In your opinion, does this potential problem exist with Lakeside Company? Explain the level of significance.

3) Let’s assume that a material misstatement occurs in counting Lakeside’s inventory that A & C did not discover until the audit was completed and the audited financial statements were released. What is the CPA firm’s responsibility for such misstatements?

Audit standards require the auditor to accumulate sufficient appropriate evidence to support the opinion issued.

The specific methods of gathering evidence depend largely on the type of account in question an the auditor’s judgment.

Now, it’s your turn to put this into practce. From the cases that we have gone over with Lakeside Company, do the following:

Choose 3 accounts that you need to gather evidence for

For each account, name, describe and defend evidence-gathering techniques that in your opinion are appropriate for the accounts you are testing.

Describe the relative significance and reliability of each technique.

ACC522 Advanced Audit Issues

Unit 7 Discussion

Read Case #10 – Sampling for Attributes

From the case above, let’s discuss the following:

1) Auditors must evaluate an entire set of financial statements to express an opinion. Considering that risk is always involved in selecting only a sample, why are auditors willing to accept less than a complete review and analysis when accumulating evidence?

2) Mitchell has indicated that she assumes Luck has made some mistakes in allocating year-end expenses. How can the auditor tolerate using work that is known to be incorrect? Why might Luck or other individuals in his position commit errors like these?

Read Case #9 – Resolving Audit Problems

In this case study, you will read through common audit issues that auditors discuss with the management as the audit is winding down. Items to be included in the notes to financial statements “disclosures” are always challenging issues between the auditor and the client.

What are considered “related party transactions” in preparing audit financial statements?

In this post, find an audited financial statement online with disclosures concerning “related parties,” share the link to the article then describe the related party transactions disclosed. Do you agree or disagree with the inclusion of the disclosure? Justify the importance of the disclosure and how this disclosure impacts the users of the financial statements.

Do auditors have any ethical obligations as to what is disclosed on the client’s financial statements? Why or why not?