Question

Create a scenario that demonstrates specific ways in which management could manipulate transactions impacting inventory values that the auditing team might not detect. Recommend key strategies that the auditor could implement in anticipation of such manipulation. Justify your response.

Discuss the difference between a subsequent event and a subsequent discovery of facts. Next, determine the auditor's responsibility for each event after the audit report is completed. Support your position.

Answer 1

1. Create a scenario that demonstrates specific ways in which management could manipulate transactions impacting inventory values that the auditing team might not detect. Recommend key strategies that the auditor could implement in anticipation of such manipulation. Justify your response.

Answer :

The agency relationship between an owner and manager produces a natural conflict of interest because of differences in the two parties’ goals and because of information asymmetry that exists between them. That is, the manager generally has more information about the ‘true’ financial position and results of operations of the entity than the absentee owner does. If both parties seek to maximize their own self-interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the information provided to the owner accordingly.

The sales of the company are on the basis of specific orders, leading to specific purchases of different amounts. Since the sales are not of standard amounts, there is considerable room for manipulation by the sales assistants who appear not to be supervised. The auditor should therefore be cautious in his examination, bearing in mind that staff may have committed fraud which he will conceal. He should adopt an attitude of professional skepticism.

2. Discuss the difference between a subsequent event and a subsequent discovery of facts. Next, determine the auditor's responsibility for each event after the audit report is completed. Support your position.

Answer :

An independent auditor's report ordinarily is issued in connection with historical financial statements that purport to present financial position at a stated date and results of operations and cash flows for a period ended on that date. However, events or transactions sometimes occur subsequent to the balance-sheet date, but prior to the issuance of the financial statements, that have a material effect on the financial statements and therefore require adjustment or disclosure in the statements. These occurrences hereinafter are referred to as "subsequent events."

Auditor's responsibility:

a.

Obtaining an understanding of any procedures that management has established to ensure that subsequent events are identified

b.

Inquiring of management and, when appropriate, those charged with governance about whether any subsequent events have occurred that might affect the financial statements

c.

Reading minutes, if any, of the meetings of the entity's owners, management, and those charged with governance that have been held after the date of the financial statements and inquiring about matters discussed at any such meetings for which minutes are not yet available

d.

Reading the entity's latest subsequent interim financial statements, if any

The auditor is not required to perform any audit procedures regarding the financial statements after the date of the auditor's report. However, if a subsequently discovered fact becomes known to the auditor before the report release date, then those inoformation may be termed as "subsequently discovered facts."

Auditor's responsibility

a.

Discuss the matter with management and, when appropriate, those charged with governance.

b.

Determine whether the financial statements need revision and, if so, inquire how management intends to address the matter in the financial statements.