Case Study: ISA 315

"In applying analytical procedures as risk assessment procedures, the auditor should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that might indicate a material misstatement, including material misstatement due to fraud. Also, when the auditor has performed a review of interim financial information in accordance with AU sec. 722, he or she should take into account the analytical procedures applied in that review when designing and applying analytical procedures as risk assessment procedures."

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

The auditor must identify in the auditor’s report those circumstances in which accounting principles have not been consistently observed in the current period in comparison to the preceding period.

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.

This memo will discuss ways that technology can be used to improve this organization’s performance. Additionally, it will consider the optimal methods for expanding the business’s online presence to include online sales. This will include information on how to incorporate intelligent systems and security features to guarantee that customers’ interaction with the new system will be positive. This memo will also analyze this business’s current and anticipated technology and information systems and provide option for other technologies or information systems that will be beneficial for the company. In discussing these options, information will be included to show how the options will advance or improve the business and enhance our customers’ experience.

Potential for misstatement & fraud: Compliance with the established procedures and controls were found to be ineffective. The fraud reporting process, technically put in place does not serve its intended purpose. The ineffective control environment has created an attitude and tone across the company where errors and inappropriate behavior may be seen as acceptable, thus creating opportunity for concealing fraud and potential misstatements.

B) I think the auditors should have equal responsibility for detecting material misstatements due to error and fraud. It’s their job to make sure the financial statements are as accurate as possible. Although it may be hard to check all the information from a company it’s the responsibility of the auditor to sign off that everything is in check.

The risk that a company is insolvent is a component of audit risk, which should be taken into account by auditors. Audit risk is defined as "the risk that that the auditor will give an inappropriate audit opinion when the financial report is materially misstated". Auditors risk issuing an unqualified audit opinion on financial statements that are materially misstated or omit material transactions; therefore the procedures used in the audit must be planned according to the identified audit risk. The components of audit risk are inherent risk, control risk and detection risk.

The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.

3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?

If a reasonable person would conclude after considering the possibility of further undetected misstatements that the misstatement either individually or when aggregated with other misstatements would clearly be immaterial to the financial statements. If a reasonable person could not reach such a conclusion regarding a particular misstatement, that misstatement is more than inconsequential

Therefore, just because an auditor considered a misstatement to be immaterial in a prior period does not mean that the misstatement can be ignored when evaluating audit findings in a subsequent period (Craig & Carmichael, 1993). “For example, if revenue has been materially overstated, the financial statements as a whole will be materially misstated, even if the effect of the misstatement on earnings is completely offset by an equivalent overstatement of expenses” (Evaluation of Misstatements Identified during the Audit, 2010, p. 92). Errors in an opening balance sheet may have, dollar-for-dollar, just as much of an impact upon the mismeasurement of current-period results as errors in the closing balance sheet (Craig & Carmichael, 1993). Inflated

Following the risk assessment procedures, substantive procedures are designed and conducted to detect material misstatements of relevant assertions. Substantive procedures include analytical procedures and tests of details. Analytical procedures involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. Tests of details may be divided into three types. One test is the test of account balances to address whether there are misstatements in the ending balance of an account. In the case of Crazy Eddie, auditors should have put greater attention to inventory and accounts payable accounts. The second test is a test of classes of transactions to determine whether particular types of transactions have been properly accounted for during the period. Crazy Eddies fraudulently classified these transshipping transactions as retail sales to inflate its sales revenue and continue growth at existing stores. A key ratio for retailers is to compare growth in existing stores to growth from new stores. The third and final test is a test of disclosures to evaluate whether financial statement disclosures are properly presented. Crazy Eddie prepared bogus debit memos of over $20 million to understate accounts payable.

A qualified opinion is given when the auditor concludes that the financial report contains a material (significant) misstatement. The material misstatement is in regards to the valuation of the “Bellinger River Tourist Park” in July 2011. This is a tourist park which is owned by the entity.

The auditor MUST communicate in writing, any discovered significant deficiencies and material weaknesses to management and those charged with governance. (Page 210)