Question

2. Identify the fraud risk factors posed by DHB for its independent auditors. Which of these factors, in your opinion, should have been of primary concern to those auditors?

3. During the 2004 DHB audit, the company’s independent auditors had considerable difficulty obtaining reliable audit evidence regarding the $7 million of obsolete vest components that allegedly had been destroyed by a hurricane. What responsibility do auditors have when the client cannot provide the evidence they need to complete one or more audit tests or procedures?

4. What responsibility, if any, do auditors have to search for related-party transactions? If auditors discover that a client has engaged in related-party transactions, what audit procedures should be applied to them?

5. Compare and contrast the internal control reporting responsibilities of the management and independent auditors of public companies.

6. What potential consequences do frequent changes in auditors have for the quality of a given entity’s independent audits? Identify professional standards or other rules and regulations that are intended to discourage auditor changes or provide disclosure of the circumstances surround them.

7. David Brooks apparently made threatening remarks to certain of his company’s independent auditors. What actions should auditors take when they are the target of hostile statements or actions by client executives or employees?

8. Does the SEC have a responsibility to protect the investing public from self-interested corporate executives? Do professional auditing standards or other rules or regulations impose such a responsibility on independent auditors?

9. The audit committee of DHB Industries was criticized for failing to carry out its oversight responsibilities. What are the primary responsibilities of a public company’s audit committee?

Answer 1

2. Fraud risk factors are the indicators of existence of fraud. The identified fraud risk factors for dhb are high degree of competition, decline in customer demand, unusual profitability, lack of internal control and significant related party transactions not in ordinary course of business. Primary control should be of internal controls. When the internal controls are reliable, there will be less chance of fraud to be taken place.

3. When the auditors have difficulty in obtaining audit evidence the need to perform further audit procedures to obtain audit evidence which includes test of controls and substantive procedures. Test of control include inspection of documents, supporting transactions, inquiries and Re-performance of internal control operations.

4.Responsibility of auditor will be to obtain Sufficient Appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework.

The auditor should

• Understand the entity's relationships and transactions.
• Maintaining alertness for related party information for reviewing records for documents.
• Sharing related party information with the team.

5.The internal control reporting responsibilities of the management and independent auditors are as follows:

Devising and installation of internal control is the responsibility of management. It need not report to anyone about the internal control. The management itself is responsible for the proper maintenance of internal control.

While the independent auditor is responsible to see whether the internal controls are working effectively and efficiently. They need to report to the shareholders in the public companies.

6. Frequent change of auditors are always a problem in an entity. The report given by them is not reliable as there are many consequences like lack of clarity on entity transactions and records, no conclusion reached on the entity financial statements, absence of continuation of audit work, etc. Even though all the auditors are professionals , while using the work of another auditor, the auditor should follow some procedures. As there is frequent change in auditors it becomes complicated for an auditor to performance the procedures as there is need to gather information from all the previous auditors.

7. The auditor should report to Those charge with governance or other personnel regarding the threatens made by them. He may in his report can also include these statements. He may provide a qualified opinion.

8. Yes the responsibility lies with the auditors to protect public in taking righteous decisions. The financial statements provided should have true and fair as the general public takes decisions based on those. So the responsibility of the auditor is to see whether the financial statements are prepared and presented in all material aspects in accordance with the rules and regulations.

9. Primary responsibility of a public company's audit Committee is to provide oversight of the financial reporting process, audit process and the company's system of internal control and compliance with the laws and regulations and to protect interest of shareholders and members of the company.