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Ass 2 in Auditing
Ass 2 in Auditing
Questions
4. What information should a CPA firm seek in its investigation of a prospective client?
In investigation of a prospective client, CPA should seek the background and its reputation
along with major shareholders, directors and officers. As well as to obtain information from third
parties such as underwriters, bankers and attorneys. CPA’s are also required to make inquiries at
previous auditors to acquire information about integrity of management. Financial reports, SEC
filings, credit reports and tax returns are used by CPA firm to acquire financial background
information to prospective client.
Exercise 2
Mary Dizon has been asked to accept an engagement to audit a small financial institution. Dizon
has not previously audited a financial institution.
A. Describe the types of knowledge about the prospective client and its environment that Dizon
should obtain to plan the engagement
CHAPTER 3
Questions
c. Besides encouraging auditors to creatively assess client risks, what other purpose does
brainstorming serve?
The purpose of the brainstorming session is to identify fraud risk factors, guided by the fraud
triangle, and to instill the importance of remaining professionally skeptical, notwithstanding an
auditor’s past experience of management honesty and integrity. To transfer knowledge from top-
level auditors down to senior members of the audit team via interactive and constructive group
dialogue and idea exchange.
D. What are the guidelines that should be followed during a brainstorming session to maximize
effectiveness?
Guidelines during a brainstorming session that should be followed include agreeing on key
conclusions about fraud risks will increase the likelihood of successful application of the team’s
ideas. Also suspension of criticism, freedom of expression, a quantity of idea generation, and
respectful communication all maximize the effectiveness of a brain storming session.
The typical steps in a Brainstorming process: Step 1: To put off with criticism –the best policy is to
forestall any judgment approach; Step 2: Liberty of Expression – Participants should let any
reticence go away in expression individual perceptions; Step 3: Idea generation quantum – “the
higher, the better”. This gives rise to the soaring probability of tumbling on the best of the ideas;
Step 4: Communicating with respect – the opinions of one and all is held in high esteem.
A fraud brainstorming session can be broken down into the following five steps:
2. Choose an Approach
There are many different approaches available for conducting the brainstorming session, and
several of these techniques are outlined later in this article. The most common structure currently
used in practice is an open-ended approach with face-to-face communication. Regardless of the
specific technique chosen for the brainstorming session, the effectiveness and efficiency of the
session can be improved with the use of an agenda.
Beasley and Jenkins (2003)3 advocate circulating an agenda in advance of the meeting to
inform the discussion participants of the timing of the brainstorming session and the specific topics
to be discussed. Doing so can also provide a broader context for participants to think about
potential fraud risks prior to the brainstorming session, which can improve brainstorming
effectiveness. The agenda is also useful for documenting the risks identified and the related
responses along with when the brainstorming session took place and who attended – all of which
must be documented and retained in the audit files.
Multiple choice
9. D. Facts that might bear on the integrity of management.
Before accepting an engagement the possible successor should ask questions about the
integrity of management, disagreements with management, and the reasons for the
change in auditors. All of the other replies are incorrect because they represent
information that the successor may wish to obtain after accepting the engagement.
Exercise 2
4-50
(Materiality and Professional Skepticism, LO 3)
Auditors makemateriality judgments during the planning phase of the audit in order to be sure
they ultimately gather sufficient evidence during the audit to assure that the financial statements
are free of materialmisstatements. The lower the materiality threshold that an auditor has for an
account balance, the more the evidence that the auditor must collect to be sure the account
balance is correctly stated.Auditors often use quantitative benchmarks such as 1% of total
assetsor 5% of net income to determine whether misstatements materiallyaffect the financial
statements, but ultimately it is an auditorsindividual professional judgment as to whether a given
misstatementis or is not considered material
Required
a. What is the relationship between the level of riskiness of the clientand the level of misstatement
in an account balance that an auditor would consider material? For example, assume that Client A
hasweaker controls over accounts receivable compared to Client B(i.e., Client A is riskier than
Client B). Assume that Client B issimilar in size to Client A, and that the auditor has concluded
thata misstatement exceeding $5,000 would be material for Client B
’
saccounts receivable account. Should the materiality threshold for Client A be the same as, more
than, or less than that for Client B?Further, which client will require more audit evidence to be col-
lected, Client A or Client B?
b. How might an auditor
’
s individual characteristics affect his or her professional judgments about materiality?
c. Assume that one auditor is more professionally skeptical than an-other auditor, and that they
are making the materiality judgmentin part (a) of this problem. Compare the possible alternative
mon-etary thresholds that a more versus less-skeptical auditor mightmake for Client A
c. Assume that one auditor is more professionally skeptical than another auditor and that they are
making materiality judgment in part (a) of this problem. Compare the possible alternative monetary
thresholds that a more versus less skeptical auditor might make for Client A
A. The relationship between a financial misstatement and risk is the nature of financial
transactions the company does, the amount of ambiguity involved, any changes which arenot
anticipated. Since in this case the Client A’s control over accounts receivables is less when
compared to the of client B and as the auditor has fixed up a materiality threshold of 5% for client
B, then the materiality threshold for client A must be lower as the risk involved is higher when
compared to that of client B, thus the index needs to be set lowerfor A.
B. An auditor’s individual characteristic can have a telling impact on an audit report as his
negligence in recognizing the lack of congruency of data in the misstatement or misjudging the risk
involved the financial statement and this may impair his judgement on setting materiality threshold
and basis for setting the materiality threshold.
C. A skeptical auditor will keep a lower threshold such as 4% or lower or $3000 than the less
skeptical auditor because he recognizes the risk involved with the client A’s transactions and thus
keeps a higher materiality threshold.
A less skeptical auditor could use a lower monetary threshold. The auditor could conclude that the
misstatement in an account balance (accounts receivable) for the materiality was 4,000.
Therefore, the auditor would have to back up his assertion, and perform more tests, due to his
opinion on what constitutes a higher risk of material misstatement.