ACC 405 Auditing

Date	19/04 /2020		Time: 2: 00 pm			Total Mark:
							20
Student’s Name
Student’s ID
Course Name	Auditing
Course Code	ACC 405
Semester	Spring 2020
Instructor’s Name	Dr. Asma Masrouki

Questions	1	2	3	4	Total
Point	5	6	3	6	20
Student Mark

Note: This Assignment accounts for 20% of the student’s final grade.

Question 1: (5 marks)

Discuss the similarities and differences between the two types of services provided by audit firms.

Question 2: (6 marks)

Review Enron scandal case on the internet, and explain the misconduct of auditors and how they hid management’s manipulation.

Question 3: (3 marks)

Identify for each of the following cases if the auditor independence is impaired or not and if yes, indicate due to which categories of threats.

Cases	In Dependence impaired?	Categories of threat
A An audit partner assigned to a new audit client holds sh 1,000 shares of the client’s stock.
A A member of the audit team joins as an ordinary M member a charity association which the client is also a m member.
A A member of the audit team provides recruiting Se services to an audit client.
A A member of the audit team accepting a gift from a cliclient and the acceptance of the gift is made public.
T The compliance department noted that a member of the th audit team had performed tax services for the client ovthe past 2 years. After further investigation, it was deemed m that these services were not material in nature.
A A new employee recruited of the audit client having re recently been a member of the audit firm.

Question 4: (6 marks)

The risk of material misstatement is a combination of two client-controlled factors: what are these factors? Explain which factor is more important and give 2 examples for each risk factors.

Answer Sheet

Q1) Two types of services provided are review and audit of the historical financial statements.

Similarities between Audit and Review- 

1. Both services are performed at the end of the year.
2. Both are provided by the professional accountants.
3. Both meet financial statement users need
4. Both require evidence and follow of accounting as well as auditing standards while performing the duty

Difference between Audit and Reviews– Are as following:

1. Audit is the process of checking the accounts, entries and financial statements to make sure that all statements are made according to GAAP and other accounting standards. Review is the process of analyzing the audited financial statements so as to know if any modification is required or not.
2. Audit provides the reasonable assurance while review provides the limited assurance.
3. Audit is the most important and primary task while review is the secondary one.
4. Audit includes many aspects and elements so it is a costlier task while review is less costlier than audit.

Q2) Enron scandal case is one of the biggest fraud in the history that took place due to corrupt practices of the company’s management like Lay, Jeffrey Skilling, Andrew Fastow, and other executives such as Rebecca Mark. Besides company’s management this fraud was possible due to company’s auditor  Arthur Andersen LLP. This incident not only lead to bankruptcy of enron but also forced dissolution of Arthur Andersen LLP one of the big five accounting firm in the world. Some of the reasons behind downfall were that company was making investments which turned unfavourable and lead to huge debts on company. Management try to hide these debts by entering into complex transactions which could not be easily understood by investors. Jeffey Skilling constantly focused on meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting based on market value, which was then inflated) and pressurised Enron executives to find new ways to hide its debt. Audit committee of company just meet few times in a year and members were having very less experience of accounting and finance. All of above factors were responsible for enron downfall.

Here Auditor who were responsible for reporting the misconduct became part of the scandal. They never reported what was going on in company, how management was manipulating financials of the company. Reason behind there non reporting was that enron was biggest client of that firm. Besides this billables were huge from enron. But this accounting firm did not perform its role properly due to pressure from top management of company. Out of various ways this fraud was committed as reported above, there was one more aspect to this fraud. That was the creation of shell companies who bought the stocks of poorly performing enron stocks.    

To sum up auditor’s role and how they hid management’s manipulation, we will talk about various factors. Like thay applied reckless standards in its audits because of a conflict of interest over the significant consulting fees. They did not fairly reported as per auditing and accounting standards. They did not review revenue  recognition, special entities, derivatives, and other accounting practices. Besides this  Andersen shred several tons of relevant documents and delete nearly 30,000 e-mails and computer files, causing accusations of a cover-up when news of U.S. Securities and Exchange Commission (SEC) investigations was heard.

So, to conclude we can say that if auditor has performed their roles properly, this scandal could have never taken place. After this scandal new legislation was enacted, the Sarbanes–Oxley Act which increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

Note: As per answering rules only one question is answered. If you want other questions answer, please post them separately.

Q3)

1) Yes the Independence of auditor will be Impaired. It will Create an “Self Interest Threat” as the auditor has financial interest in the company reason being he holds 1000 shares of the stock.

2) Yes. The independence of auditor will be Impaired. It will create Familiarity Treat as the auditor and his client can become close while working together for a charity association.

3) Yes, Auditor’s Independence will be impaired. Self -review threat will arise.

4) Yes, auditor’s independence will be impaired. It will create advocacy threat

5) Yes, Auditor’s independence will be impaired. It can create self review threat as the auditor is reviewing his own work also although those transaction are not material in nature.

6) Yes, Auditor’s Independence will be impaired as it will create familiarity threat reason being employee of the client can be too close with the audit team as he has been a member of the same team sometime.

Q4) The Risk Of Material Misstatement is a combination of two client-controlled factors. Those are a) Inherent Risk and b)Control Risk.

Inherent Risk: Inherent Risk is one of the two client factors of 3 Audit Risks. In herent `Risk is the risk which arises due to the complex nature inherent in the Business. THis type of risks occur before maintaining the internal Controls in the Business.The Auditor When conducting an Audit has to look into the financial Statements if there are any Inherent Risk.There may be inherent risk because of complex transactions or there is a need of high degree of judgement in fiancial estimates. The other factors that arise inherent risk is the way it conducts its day to day operations, recording of its complex transactions, lack of integrity in company’s management.Inherent Risks Can be mitigated with the help of Internal Controls.

Examples :

1) High volume of transactions is one of the exmples. If there are high volume of transactions in an organisation, without proper internal controls there is a chance of Inheresnt risk.

2) Inherent risk may also arise in case of un common or irregular transactions such as fire break out or theft.

Control Risk: Control Risk is the internal Control risk which arises due to the failure of the internal controls. The internal Controls could not find the material misstaement in the financial Statements.The Management has to assess the efficiency and effectiveness o fth einternal control over financial reporting in order to make free of material misstatements in financial statements.But if the internal control is weak there is a chance of material misstatement and further the auditors might not find it and leads to Detection Risk. Control risks can be mitigated by maintining and reviewing proper internal controls and assesing the risks regualrly over the financial statements.

Examples:

1) If the Manager of the Accounts Department has not review the accounts at the end of the period which leads to Control risk due to the lack of proper internal control.

2)The Manager has not segregated the duties among the staff which increases the control risks.

Inherent risk is more important than the control risk because , Inherent risk occurs where the internal controls are not implemented at all which makes the situation worse than the control risk, which atleast maintains some internal controls.

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