1a) What should the auditor consider when determining whether an account should be considered significant?
ANSWER:
The auditor should consider planning materiality. When a financial statement account exceeds the planning materiality, that account should be considered significant for both the audit of internal control over financial reporting and the financial statement audit. The more the account exceeds planning materiality, the greater it should be considered significant.
1b) What qualitative factors might cause an account that is otherwise relatively small quantitatively to be considered significant?
ANSWER:
AS #5 paragraph 29.
Qualitative factors include: * Size and composition of the account; * Susceptibility to
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Since the risk rating is not identified in the footnote, we assumed high risk due to the fact that the Mexico Finance Director recently resigned and his resignation is directly related to internal controls. The risk is high that there are material weaknesses of internal controls in other geographic regions. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2b) At the consolidated F/S level, are there accounts on Sarbox Scooter’s F/S that are greater than planning materiality that should not be considered significant.
ANSWER:
* Property plant and equipment may present low inherent and fraud risk, if little change from year to year and it has been
Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different
This memo has been constructed for the purpose of reporting information the president of the company in reflection the purchasing of a supplier in the near future. It reflects information concerning Calculate Net Present (NPV), Internal Rate of Return (IRR), along with the payback of the investment opportunity. In this company memo the following information will be discussed:
f) To evaluate the material misstatement in the accounts, I think both of the consolidated income statement and the three financial statements are useful. We need to use the information properly from all the financial statements. However the consolidated income statement is the most useful one. If there is a significant change in an account balance comparing with preceding two years, the auditor will examine whether there a material misstatement exists. For instance, the bad debt expense as a percent of net sales in 2011, 2010 and 2009 are 0.56%, 0.70% and 0.69%, respectively. There should
Evaluating the Reasonableness of the Accounting Estimates, and Determining Misstatements: the auditor shall evaluate, based on the audit evidence, whether the accounting estimates in the financial statements are either
1. Which of these is a decision relevant to the accounting function of an entity?
Again, Coface rated Mexico financial risk as A4 (Coface – Mexico synthesis). This means that even though the risk is not critical, companies can face difficulties within different transactions.
Property, Plant and Equipment in a growing firm is expected to be increasing. Property plant in equipment is increasing but the turnover or the rate at which the assets are being used are decreasing.
a. Which of the following best describes the reason why an independent auditor reports on financial statements?
Previously, the company had a much compartmentalised approach to risk management, with individual departments managing individual risks pertaining to them. For instance, currency risks were hedged using futures contracts and under the supervision of the Financial Risk Management Unit while traditional (hazard) risks were insured by its treasury – Insurance Risk Management Unit. However, this individualistic approach
Previously, the company had a much compartmentalised approach to risk management, with individual departments managing individual risks pertaining to them. For instance, currency risks were hedged using futures contracts and under the supervision of the Financial Risk Management Unit while traditional (hazard) risks were insured by its treasury – Insurance Risk Management Unit. However, this individualistic approach
Oftentimes, auditors look at the financial measures as the basis in detecting the likelihood of fraud in the firms being audited. This strategy has been proven to be effective most of the time. Financial measures primarily are the core features that firms and outside parties (e.g.,
It is important to indicate that a country risk analysis is not static. As factors of the analysis change within the country, the risk of investing in that country also changes. These analyses are fluid and are always fluctuating. Changes can be indicative of deliberate governmental action taken by the country while other times the risks may change because of an action other countries have taken. The purpose of this paper is to create a risk analysis for the Republic of Nicaragua and to explain the
With respect to the field of auditing, materiality is a critically important concept addressing the significance of discrepancies, amounts, and transactions. Specific materiality guidelines are required in accounting practices to avoid judgmental (legal) decisions. Materiality is applied for most, if not all, economic decisions, and the topic of materiality is not a new issue. Disclosures in re financial statements have been emphasized by courts in the United Kingdom since the 1800 's, whereas materiality initially rose to importance in the United States following 1933 's Security act. The significance of the materiality concept and its implications are pertinent to business decisions, as well as for analysis and preparation
Current economic conditions and other internal factors may raise the inherent risks for a particular account. Some transactions that are routine, noncomplex, and systematically processed may have lower inherent risks, while other routine transactions, such as cash transactions, are more susceptible to fraud and, therefore, have greater inherent risk (Clark 2009). Detection risk is the risk that substantive procedures may be ineffective in detecting errors. As your risk of material misstatement increases, an auditor must prepare an audit plan with more effective substantive procedure. By multiplying these risks together you arrive at the audit risk; defined by SAS 107, "Audit Risk and Materiality in Conducting an Audit," as the positive opinion of an auditor of financial statements that are materially misstated and unknowingly failed to be appropriately modified. As stated earlier, audit risks can never be fully eliminated. Normally, the formula is used to solve for detection risk after establishing an acceptable audit risk (usually 5-10%) based on factors surrounding the company, industry, and background of the client. The determination of detection risks ultimately plays a major role in planning the audit and establishing a materiality threshold. The audit opinion is directly influenced by the amount and type of audit evidence
Financial risk is a major concern world-wide and there are numerous studies to support the necessity to investigate it. Lee (2006)