Question

Silvah Leasing Ltd. (SLL) is a private company founded over 20 years ago. Its main business is providing lease financing to small to medium-size local businesses for financing their operating equipment, store fixtures, and so on.

SLL’s business is direct lease financing, and the company never takes ownership of any of the leased assets. Leasing is popular with smaller businesses since the economy has been in a recession, and leasing assets rather than buying conserves cash. Many larger financial institutions have become more active in selling leases to the smaller customers that have been

SSL’s main source of business, to increase their own revenues during the recessionary times. Equipment vendors are also increasingly providing financing with equipment sales to increase their own business.

D. Silvah owns the majority of the common shares and runs the business with three employees. There are two minority shareholders who are family members, M. Silvah and J. Silvah. Your firm has audited SLL for several years. The company’s bank demands annual audited financial statements because of SLL’s large outstanding bank loan.

How does management’s integrity impact the auditor’s risk assessment process?

Answer 1

Management integrity (i.e., “tone at the top”) is a key determinant of the client’s risk structure and provides the foundation of internal control. As a result, it is important that auditors incorporate this risk component into their audit judgments. Furthermore, auditors rely on management to provide a great deal of audit evidence. Thus, auditors must carefully evaluate management integrity to assess the credibility of management-supplied evidence. To determine the extent to which auditor judgments are influenced by perceptions of management’s integrity, this study examines the effect of auditor-assessed management integrity on three aspects of the audit: (1) auditors’ assessments of risk of material misstatement (RMM), (2) audit planning, and (3) audit outcomes (i.e., identification of misstatements).

Hence Auditor can:

(I) Inquire Management  within the entity for information in assisting identifying the risk of material misstatement due to fraud or error.

(ii) Use Analytical procedure.

(iii) Observation and inspection of entity’s operations, documents and reports.