Question

Prepare a broad audit plan of Amazon Company
a)	What material types of transactions and transaction cycles are involved?
b)	What are the high-risk areas?
c)	What are the low-risk areas?
d)	If management faced tremendous pressure regarding the entity's financial
	performance, what opportunities might exist for them to engage in
	fraudulent financial reporting?
e)	To what extent do you believe it will be appropriate to reduce assessed
	control risk
f)	How will audit effort be allocated among geographical areas?
g)	What form of auditors' report do you expect will be issued; what does it mean?

Answer 1

a. Financial Cycle -

Knowing how to determine the starting point and interaction of one cycle to the next is a critical step in understanding the workflow operations. Once each step is identified, management can assess the effectiveness of each cycle. The starting point for each business is the financial cycle, which consists of how the business obtains the initial capital for funding operations. The capital may come from the owner, venture capitalists or through a bank loan. The amount of start-up capital is usually based on financial projections relating to needs of the business, such as buildings, equipment, licenses and inventory.

Expenditure Cycle - Based on the projections from the financial cycle, businesses begin spending their budget on materials needed for inventory. Goods may be raw materials for manufacturing, food products for a restaurant, tools for repair personnel or vehicles for a delivery service.

Payroll Cycle - The payroll cycle is the process of hiring personnel to conduct the daily operations of the business. Most businesses have several layers of personnel, from frontline service workers, shift management, secretarial staff, accountants and executive management. Each class of workers may have different pay scales and bonus levels, creating unique accounting needs for the payroll cycle.

Conversion Cycle - The conversion cycle is the crux of each business; daily transactions from normal operations include pieces from the expenditure and payroll cycle to make up the conversion process. The goods purchased for the business are used by the personnel from payroll to earn the business cash. A large portion of accounting transactions will occur in this phase because of the repetitious conversion activities of business operations.

Revenue Cycle - A large amount of accounting transactions also will occur in the revenue cycle. This cycle includes the transactions relating to the sales of goods and services to customers and any expenses related to those revenues. Revenues can only be generated once the conversion cycle is complete; unfinished goods or services are not reported in the revenue cycle until the completion of the previous cycle.

Accounting Transaction Cycle - Inside each previous transaction cycle are more detailed and specific information: the accounting transactions. These transactions consist of the daily paperwork generated by the individual activities of each previous cycle. Purchase orders, payroll checks, job tickets and sales invoices are found in each step of the accounting cycles. Paperwork generated from each cycle must be analyzed for validity before being entered in the accounting information system. After the numbers are verified and entered in the system, trial balance reports and financial statements are generated to determine the company’s profitability.

b.High risk areas

Auditors should focus their attentions on internal controls, accounting estimates and complex accounting calculations including revenue recognition, pension and benefit calculations, and fair value measurements. Internal controls include segregations of duties, management attitudes and complexity of cost centers and the organization as a whole.

Is there any other areas that could potentially be considered as high-risks (being exposed to negligence and liabilities)

(c) Low risk areas

Risk is specific to the entity you're auditing. Fixed assets may be low risk if the entity has just a few tables and chairs, and computers. They would be high risk if comprising oil rigs in the North Sea.

Having said that, simplistically speaking, low risk audit areas would usually include cash, fixed assets and payables. From the income statement, revenue is unlikely to be low risk. Low risk expense items would include rental expense (and any other expense which can be verified to agreements, e.g., insurance policies), and those charged by government agencies, e.g. oil and gas, electricity, etc. Interest can be low risk if there are statements of account from the lender of the instrument giving rise to the interest.

d.Faced with changes in business ethics and environments, auditors are being called upon to step up to a new standard of fraud detection. One way to facilitate discussions and communications in this area is to use the 3Cs model. The 3Cs represent broad categories of reasons why fraudulent financial reporting occurs.

• Conditions. Conditions are the motivations and pressures to engage in financial statement fraud. In recent accounting scandals, these conditions have included pressures on corporations to meet analysts' earnings forecasts. Executives committed illegal actions to mislead users of financial statements about poor or less-than-favorable financial performance.
• Corporate structure. An organization's corporate structure can create an environment that increases the likelihood that fraudulent financial reporting will occur. Attributes of the corporate structure most likely to be associated with financial statement fraud are aggressiveness, arrogance, cohesiveness, loyalty, blind trust, control ineffectiveness, and gamesmanship.
• Choice. Management is more likely to choose to engage in financial statement fraud when: 1) its personal wealth is closely tied to the company's performance through pay-for-performance plans, 2) management is willing to take personal risks, including the risks of civil or criminal penalties, for corporate benefit, 3) there are opportunities to commit financial statement fraud, 4) there is substantial internal and external pressure to create or maximize shareholder value, and 5) the probability of the fraud being detected is perceived to be very low.