AFM 351 Satyam Fraud

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.

As indicated by PCAOB, the written representation cannot be a substitute for substantive procedures. Thus, auditors did not perform adequate procedures to test the management’s estimates. What’s more, inquires were heavily relied on the management’s integrity. Auditors ignored the professional skepticism. Finally, the 30 years and 15 years useful lives, which were adopted previously by Little Drummer, were not appropriately audited. Since the engagement team did not contact the predecessor auditors, the team did not get any audit documents from predecessor auditors regarding the assumptions of 30 years and 15 years. There was no evidence to show the reasonableness of these two assumptions.

3. Substantive tests procedures: The audit team should perform substantive tests on Smackey’s accounting transactions and

Moreover, the auditor should preform test for effectiveness of internal controls. He may interview management by asking questions on the process of the transactions and operational activities. He may discuss with management the process of some transactions from beginning to end and then test it by using sample testing. Also he/she should make sure that there is proper control of activities; policies and procedures for adequate segregation of duties are met.

Stage 2: Test of internal controls - By testing the effectiveness of the internal controls the auditor can determine the control risk that lies within the company. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Best Boy Gourmet dog food, and re-perform the client procedures.

al, 2012, p. 214). Therefore, a material misstatement may not be detected during the audit. In addition, the audit may not detect errors under the materiality level, whether resulting from error, fraud, or misappropriation of assets. Anderson, Olds, and Watershed may decline to express an opinion or issue a report if the firm is unable to complete the audit for any reason.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate (Louwers & Reynolds, 2007). We believe that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for our opinions.

1. There are numerous differences between performing a review and actual audit on the financial statements, but the major one is that the review does not contemplate obtaining an understanding of internal control structure. Also, a review does not assess control risk, tests of accounting records and responses to inquiries by obtaining corroborating evidence through inspection, observation or any other audit procedure. It can point out significant matters of the financial statements but does not provide assurance of their accuracy. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any misstatements on the financial statements. Ernst & Whinney never questioned the internal control, reviewed

● Monitoring — Internal control systems need to be monitored–a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.

Secondly, although the audit might have been in its final stages, the fact that there had already been a sticking point between the auditors and CMD as to the validity and accounting procedures of the companies write-off’s of accounts receivable, once the audit team was made aware of the pending lawsuit of CMD by one of its clients for the exact same reason, they should have reconsidered their position on the evidence (suspension of judgment) and made sure to review that evidence before issuing an opinion.

A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the

Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.

Auditors should always evaluate the design and test the operating effectiveness of a company’s internal control. The key procedures of the evaluation of design are fulfilled by inquires, observations, and inspections. The same procedures can be used to test the operating effectiveness as well.

There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.