Assume that last year your firm audited the clients who are


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Assume that last year your firm audited the clients who are portrayed in the following two scenarios. Each scenario is independent. Use the information in each scenario to assess whether the identified risk components likely would increase (I), decrease (D), remain unchanged (U), or change but the direction of change cannot be reasonably determined (C). Note that there is not necessarily a “single” correct answer for each scenario. Your answers should be reasonable and internally consistent, and you should be able to provide justification for your assessments. Scenario #1 : During the 4 th quarter last year, the client began implementation of a new and improved information system. The new system is an enterprise-wide system and it is replacing 40 separate older, legacy systems. These older systems worked well in prior years for some purposes, but the different systems lacked the ability to communicate. As a result, to facilitate the preparation of financial statements, the numbers from separate systems were ‘rolled up’ by having accounting personnel at 40 divisions enter their numbers into an Excel spreadsheet. Last year your firm’s own information technology specialists evaluated the security and data integrity facets of the new information system and found it to be of exceptional quality. Throughout the first two quarters of the current year, employees regularly have complained about the new system, saying its interface and pull-down menus are not intuitive. Near the end of the 2 nd quarter your firm’s information specialist consultants facilitated the training of the client’s employees to ensure their familiarity with the new enterprise system. First two Qs of this year Last two Qs of this year Control Risk I D U C I D U C Inherent Risk I D U C I D U C Acceptable Audit Risk I D U C I D U C Planned Evidence I D U C I D U C Auditor Business Risk I D U C I D U C Scenario #2 : About halfway through the year (and the audit), client management unexpectedly notifies you that they plan to recognize revenue with a controversial approach. While the client-preferred method could be construed to be “acceptable” under a liberal interpretation of GAAP, several other, more conservative approaches to recognizing revenue have more conceptual merit. Later, as the 4 th quarter unfolds, it consistently becomes more probable that the client will need to recognize revenue in accordance with the controversial, preferred approach in order to meet analysts’ forecasts of annual earnings per share. Halfway Point 4 th Quarter Control Risk I D U C I D U C Inherent Risk I D U C I D U C Acceptable Audit Risk I D U C I D U C Planned Evidence I D U C I D U C Auditor Business Risk I D U C I D U C LydiaF9
posted a question · Apr 04, 2015 at 3:48pm

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