The Prefab Sprout Company is a construction company which develops and constructs modular home enclosures in South Florida. Though being listed on the New York Stock Exchange (NYSE), it is still a family-run business with about 40% of the shares resting with the Warner family. This working paper provides a thorough analysis of Prefab’s internal structure and its external business relations from an auditor’s viewpoint. In particular, the potential business and audit risks that could possibly evolve from an audit engagement are central to this study.
Before coming to a decision whether or not accepting an audit engagement at Prefab Sprout Company, the auditor should obtain business-related background information and evaluate the risk
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At Prefab however, the audit committee is composed of the vice-president, the treasurer and a local college professor. Thus, only one member can be regarded as not being directly associated with the company. This situation is a serious weakness in Prefab’s accounting and internal control system, thereby increasing the risk of fraudulent activities in regard of the financial statements.
A similar problem arises with the compensation committee, which comprises Prefab’s lawyer and an employee who is selected on a rotating basis. As there are no explicit conditions for compensation committee membership, Prefab does not infringe upon any law. However, it is commonly agreed that the compensation committee should be representative of the company’s shareholders. Even if the Warner family still has a 40% stake in Prefab, it is problematic that the top executive is part of the committee. Moreover, the lawyer and the employee can be expected to be biased in their decisions as both are financially dependent on the company. Neither of them would probably risk their financial stakes by for instance lowering top management’s salaries.
Auditors that are new to an engagement are obliged by law to get in touch with the predecessor auditor of the prospective client. This regulation facilitates the information gathering process of new auditors and can already
With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.
The audit planning is designed to allow the auditor to evaluate and conduct the business risks, develop specific audit program and scope to test in the audit process (KosmalaMacLullich, 2003). The auditors with a good audit planning will generate more efficient audits, it can help them to maintain the competitive and their clients because the efficient audits can increase the competence and the audit quality. If the auditor with a poor audit planning, will generate a poor allocation of work, the auditor will inadequate attention to high risk areas, they will difficult to find the material misstatements, it will make a loss of their competence and get a poor audit quality. (2)
2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit
“.06 An auditor ordinarily does not possess legal skills and, therefore, cannot make legal judgments concerning information coming to his attention. Accordingly, the auditor should request the client 's management to send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
A predecessor auditor is an auditor who has reported on the most recent audited financial statements or was engaged to perform but did not complete an audit of the financial statements, and has resigned, declined to stand for reappointment, or been notified that his or her services have been, or may be, terminated. The successor auditor is an auditor who is considering accepting or has already accepted an engagement to audit financial statements, but has not been in communication with the predecessor auditor. Communication between the predecessor and successor auditor is very important as it can yield important information as to whether or not the successor auditor should accept the engagement. There are many possible reasons why the predecessor auditor is no longer serving the client. Whether it was a disagreement on accounting principle, audit procedures, adequate disclosures, limiting the audit scope, or a multitude of other reasons, the successor auditor will need this information
In a highly competitive industry there can be many inherent risk factors embedded in a company. Two factors that would affect audit planning decisions could be complex valuation issues and related party transactions. Valuation issues may lead the audit team to request more
The analyzed case study refers to the Hollate Manufacturing company, which belonged to the home construction industry since 1950s. The company operated in the United States and Canada with 14 divisions spread throughout the countries. Hollate’s performance was significantly better than its peers, resulting in $1 billion sales. The company maintained its growth over the years due to growth-through-acquisition strategy. However, the home construction industry suffered downturn in recent years. Hollate manufacturing faced a problem with audit as far as with personnel. Four suggestions are given along with answer to the question how to avoid alike situations.
A company’s board of directors, specifically its compensation committee, is responsible for determining executive compensation. Much of that power is subjective, and various studies have shown that the compensation justification is both fair at times or unfair at other times.
The goal of any publicly traded company is to make a profit. Many factors come contribute to the equation to achieve this goal. The most important factor is compliance with the Accounting governing bodies, such as GAAP (Generally Accepted Accounting Principles). As an accounting firm it is essential to review your financial statements for consistency regarding the accounting treatment of share-based payment and accounting
.07 Inquiry of the predecessor auditor is a necessary procedure because the predecessor auditor may be able to provide information that will assist the successor auditor in determining whether to accept the engagement. The successor auditor should bear in mind that, among other things, the predecessor auditor and the client may have disagreed about accounting principles, auditing procedures, or similarly significant matters. .08 The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor prior to final acceptance of the engagement. Except as permitted by the Rules of the Code of Professional Conduct, an auditor is precluded from disclosing confidential information obtained in the course of an engagement unless the client specifically consents. Thus, the successor auditor should ask the prospective client to authorize the predecessor auditor to respond fully to the successor auditor 's inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement. .09 The successor auditor should make specific
- This case shows a range of breach of fiduciary duties; acting in good faith for a proper purpose in the best interest of the company; conflict of interest and making secret profits. It also showed the inability of the directors to understand the concept of conflict of interest.(Lipton, P.,2003, p.275)
perception that the management is the key decision maker and attempt to meet and fit to the management needs and try to get ahead on the courtship phase (p.878). Fiolleau et al. indicated that the incumbent auditor on this study perceived that the management’s decision to switch audit firm has been done and the motivation of the issuance of RFP possibly because of the incumbent auditor’s has more local long term relationship with the board and the audit committee than the management (p.878). Fiolleau et al. observed that auditors going in for client acquisition as a business activity, instead of an expert service one and that auditor is determined to winning the client and has the perseverance to get the business now and any concern is for later (p.886).
Massive number of corporate scandals that began in late 2001 brought into review the functioning of public company boards and brought under scrutiny the potential flaws in their executive compensation practices. Now a common consensus exists that a majority of boards have adapted compensation arrangements that does not abode well with the views of shareholders. There still exists a major disagreement about the scope and source of such problems and the ways and means of tackling them.
Audit planning is a process that entails designing a road map to be followed when conducting an audit. It also extends to identifying the specific guidelines to be adhered to direct the audit direction in the most professionally way. It can be established that are various guidelines that guide the audit depending on whether it is internal or external. Notably, external audit is guided by various standards, which require financial information to be prepared in a specific way as stipulated by various standard setting bodies. Therefore, in audit planning each body has distinct guidelines to be followed in accordance to the jurisdiction’s accepted accounting principles. An analysis of three audit-planning standards: AICPA (American Institute of Certified Public Accountants), PCAOB (Public Company Accounting Oversight Board) and IAASB (International Auditing and Assurance Standards Board)reveals characteristic similarities and differences, which have an overall impact on the performance of the audit.
You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who