Question

Assignment #2 Integrated Audit Practice Case

1. AICPA auditing standards require a discussion among the engagement team about the susceptibility of the financial statements to material misstatement. What are some of the purposes of this discussion?

2. The auditor reviews important financial statement numbers and ratios at both the beginning and the completion of the audit. Compare and contrast the purposes of (1) preliminary analytical procedures and (2) analytical procedures performed near the completion of the audit.

3. When you identified income statement fluctuations in steps (e) and (f) of this assignment, which information did you find most helpful — comparisons of the current year’s and prior year’s balances, or comparisons of the current year’s and prior year’s balances as a percentage of sales? Explain.

4. The auditor should consider the results of analytical procedures performed in planning the audit that indicate possible implausible or unexpected relationships in assessing the risk of fraud. For example, if the auditor compares revenue reported by product line each month (i.e., monthly sales volume) with sales (or production) capacity, and determines that the number of items reported as sold exceeds capacity, then the auditor should be concerned that revenue may be materially overstated due to fraudulent revenue transactions. What other types of unexpected relationships, ratios, or trends might suggest an increased risk of fraud? Discuss any relationships, ratios, or trends you identified in this assignment that might represent an increased fraud risk.

5. The client’s “going concern” status is an audit reporting issue that is addressed at the conclusion of the audit. Auditing standards require the auditor to assess whether the client is likely to continue in existence for a reasonable period of time after the date of the financial statements. Indicate reasons why the auditor should also assess the company’s going concern status in the planning stage of the audit.

Answer 1

1)	There should be effective harmonization between members of engagement team members so that any important misstatement can be brought to notice of other members having its effect on other affirmation of financial statement. There should also be proper documentation of discussion. Also, when such doubts are brought to the notice, the audit will be conducted more effectively so as to gain more dependence on financial statement
2)	The auditor analyzes important financial statement numbers and ratios at the beginning so they know where the company’s figure should be and to see how good they think they know how the company is doing. These numbers make the auditors focus on key areas of the financial statements where there might be the inaccuracy. The analytical procedures performed near the completion of the audit to see if the results are stable with the auditor expected out of it.
3)	When finding the comparisons of the current years and prior year’s balance to the identified income statement fluctuations it was easier to compare the balance because it is easier to get mistaken of what a ration might mean to what it actually means versus just looking at the balances. Looking at the balances is easier because you can compare them side by side without having to know exactly what the ration was.
4)	The auditor should be concerned the revenue might be materially overstated if the reported depreciation is less than the actual one. Another report that might be materially overstated could be that reported accrued interest from the note payable is less than that was the need to pay for the company.
5)	To obtain sufficient appropriate audit evidence regarding the appropriateness of management's use of the going concern assumption in the preparation of the financial statements; to conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern, and; determine the implications of the auditor's report.