During audit planning, an auditor obtained the following information:
1. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist.
2. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
3. The company’s controller works very hard, including evenings and weekends, and has not taken a vacation in two years.
4. The company’s board of directors includes a majority of directors who are independent of management.
5. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate.
6. The company is marginally able to meet exchange listing and debt covenant
requirements.
7. The company’s financial performance is threatened by a high degree of competition
and market saturation.
8. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry.
9. The company has experienced low turnover in management and its internal audit function.
a. Indicate whether the information indicates an increased risk for fraud.
b. If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated.
Based on AICPA question paper, American Institute of Certified Public Accountants.
Assessing the risk of fraud in a financial statement audit is a difficult audit judgment. Auditing standards require the auditor to perform several audit procedures to accumulate information to assess the risk of fraud. You are the in-charge auditor responsible for planning the financial statement audit of Spencer, Inc.
Two new staff auditors are assisting you with the initial audit planning and have asked you
the following questions.
Briefly summarize your response to these staff auditor questions:
a. What is the purpose of the audit team’s brainstorming session?
b. Who should attend the brainstorming session, and when should the session be held?
c. What is the role of the two staff auditors in the brainstorming session?
d. What is the auditor’s responsibility under auditing standards for detecting fraud?
e. What must the auditor document in the working papers related to this brainstorming
session?
