HOMEWORK:Week1 (Apple and Brent Dorsey)
NAME: Kwartemaa Asante-Yeboah
COURSE TITLE:Issues in Auditing and Assurance Services
COURSE NUMBER:MAC 7300
Case 2.2 –Apple (Question 2)
a What is the auditor’s objective for understanding an entity’s business environment?
The auditor must obtain an understanding of the entity and its environment to assess the risk of material misstatement and to design the nature, timing and extent of further audit procedures to perform. This is one of the main objectives of the auditor in audit work. The purpose of this however is:
It helps to undertake effective and efficient audit, by tailoring audit procedures to suit individual facts and circumstance of each client, to commence the audit procedure and to evaluate the audit in an up to date manner.
It also helps to develop and retain a positive professional relationship with the client.
It also assists in risk valuation procedures and the sources of information about the entity including internal controls.
Communication with those charged with management and governance.
Observation of activities and operations.Inspection of records and documents.Analytical procedures, which takes into consideration financial and non-financial data.Regulatory, industry and other external factors including the appropriate financial framework such as leasing companies, textile industry, insurance companies, banking companies.
b Why does an auditor not have responsibility to identify or assess all business risks?
Not all business risks give rise to risks of material misstatement. The auditor needs to consider those business risks that could result in a material misstatement at either the financial statement level or assertion level to classes of transactions, account balances and disclosures.
In addition, business risk is a wider risk than material misstatement of the financial statement though it contains the latter. Business risk also arises due to the complexity or change, which may arise from a failed product due to insufficient market, from flaws resulting in liabilities and reputational risk. The complexities may also lead to risks related to price, design, costing, control and performance.
Therefore, the auditor does not have responsibility to identify all these risks.
c Provide some examples of business risks associated with an entity that an auditor should consider when performing an audit.
Some examples provided are:
Operations in regions considered economically unstable. Example is countries with significant currency devaluation or highly inflationary economies.
The specific accounts, supporting information and related accounting in the financial statements that are used to record, initiate, report and process transactions; it contains how information is posted in the general ledger and correction of incorrect information. The records may be in electronic or manual for.
High degree of complex regulation.Marginally achieving explicitly stated strategic objectives.
Constraints on the availability of capital and credit.Changes in the industry in which the entity operates.Changes in the supply chain.Developing or offering new products or services, or moving into new lines of business
Expanding into new locations
Case 3.1-Brent Dorsey
1 What could John Peters and the other auditors do to better handle the demands of career and family life?
John peters is the in charge of northwest audit, which is very important to the firm. He is being evaluated based on his and his team’s performance. He has to complete the project within the budgeted hours so that he can be promoted without being transferred. Therefore, John Peters and the other auditors should do the following to handle efficiently the demands of career and family life.
John is creating an ambience, which is disturbing the motivation among the employees. Rather than developing this unethical work behavior, John should encourage and motivate his team members to complete the work in budgeted time.
John is placing a lot of pressure on his team at one point they decided to reduce the quality of the work in order to balance their personal and professional lives. John should give his team certain period of break from the project, so they can balance their career and marriage.
The budgeted hours are reduced from yearly, which increases the burden of the employee. John has reduced the budgeted years only for his promotion which is his personal gain, but his team members are suffering with his decision. Therefore, John should change his attitude, he should stop acting for his personal gain and should lead and play for the team, so that both quality of the work and personal lives will be balanced without disturbance.
Brent, Megan and Scott are experiencing that many face in the workplace. New professionals trying to adjust to work place pressures should try to find ways to balance the challenging demands of time and energy. They also need to ensure they are devoting ample time every week to other sectors of their lives they consider important, such as marriage and family.
In the long term, when there are no workable alternatives, honesty and ethical behavior comprise the best alternative
2 What alternatives are available to Brent in regards to the audit of the payables? What are the pros and cons of each alternative?
a. Cut the number of invoices from 30 to 20 in order to save time.
Pros- Brent and Scott would be able to audit the payables in the allotted 35 hours. This would allow both of them to enjoy their personal time with their family for the weekend and maintain their work-life balance. John would be happy because he would have succeeded in his goal to finish the audit early as well as come under budget.
Cons- Brent and Scott could be fired for not following the procedures they were given. This is skipping crucial audit steps, which may lead to inaccurate information and decisions. Northwest could also make fraudulent reporting in their account payables from the information received. If the firm does not notice the material misstatement, it may lead to inaccurate audit opinion.
b. Eat the time: which is to work as many hours as needed to audit the payables correctly, then report 35 hours.
Pros- John would be happy because they would come in under budget. This would help them in a performance review if everyone thinks they were able to do the audit of payables in less time than was budgeted and less time than ever done. This will also make Brent appear competent and efficient.
Cons- This will cause production reports to be incorrect and suggest that in future the firm will possibly perform the audit on a tighter schedule.
c. Not concerning about the budget, the task should be done quickly in the correct form and the duration of time taken in hours should be recorded.
Pros- Since Brent does not take any short cuts while performing the tasks, he is able to build a good reputation. This implies that this alternative gets the task done.
Cons- John may evaluate Brent’s performance as poor if he does not finish the task in budgeted time. Thus, Brent can come over budget while using this alternative.
d. The concerns and issues over the matter should be discussed with John.
Pros- When Brent goes for discussion with John, he makes sure that no misunderstandings are created and he can well express and explain his concerns which will enable Brent to receive advice from John as to how to carry the task ahead.
Cons- If John sees that Brent is taking interest in work then he may fear of losing his position, so he can give poor evaluation to Brent.
e. The matter should also be discussed with the supervisor of John or the manager who takes the charge of the activities and seek their advice.
Pros- Brent receives feedback not only from John but also from the other top level management. This may boost his morale and better way to solve the issues.
Cons- John may give poor evaluation to Brent if he does not like Brent asking advices from John’s supervisors. John may also think that Brent is not capable enough to handle the task and take decisions.
3 What consequences for Brent, the auditing firm, and others involved, may arise from “eating time,” as Han suggested? Similarly, what consequences for Brent, the auditing firm, and others involved, may arise from not completing audit procedures, as Megan suggested?
a. Consequences arising from eating time:
Brent could be stetting himself up for disciplinary action from management if they find out that he is practicing this procedure. This will also signal management that he is not a viable candidate for promotion or at worse be fired. The auditing firm and the others involved could look bad in the eyes of the public because eating time is frowned upon in the industry. Other points are:
Imprecise budgeting for upcoming audits can occur because of eating time. Previous years’ audits are used as guidance by the managers to prepare the audit budget.
There will be pressure on staff accountants assigned to upcoming audits to finish the review segments in less time than is practical, which can become a cycle that would make every year’s budget tighter and less practical. This can lead to reduce the stress and inconvenience for upcoming staff accountants.
Lastly, eating time is deceitful as it intentionally misleads the users of the time- financial plan report. Serious consequences can occur if audit steps are skipped.
b. Consequences due to non-completion of the audit procedures:
Incompletion of the review steps may cause material misstatements to slip past the auditors.
An improper audit opinion may be issued by the auditors, which can be extremely expensive.
4 In your opinion, which of Brent’s alternative courses of action would provide the best outcome and why? What should Brent do? How would you handle the ethical issues involved in this situation?
Brent should be able to audit the 30 invoices ad prescribed in the procedures and do his best to meet the 35-hour budget. Though this might not be easy coupled with the possibility of not meeting the budget, Brent has a duty as an auditor to do his absolute best to ensure the quality of the audit. The only to do this is to follow the procedure and work as hard and quick as possible to meet deadlines. In addition do these:
Alternative course of action providing best results:
Brent should first try talking to John openly about his concerns.
There may be some things that John could do to ease the budget stress.Let us consider the example where Megan suggests that payables are a low-risk area. A review approach that depends more on analytics and less on comprehensive tests may be acceptable.
The decision of retiring from the review program is neither within Megan’s nor Brent’s authority.
Brent’s course of action:
If John is incapable of or reluctant to give any sort of helpful advice, Brent should think about discussing the matter with a manager who has more authority than John.
Whatever it takes, Brent should do his best to complete the work within the budgeted time, and he should never unreasonably cut corners.
If he happens to come in over-budget, he should have a clear conscience and know that whatever he did was right.
Handling the ethical issues:
People who show ethical behavior are rewarded by many firms, and employees are looked at negatively for premature signoffs and eating time.
Compromising ethical principles may seem to bring short-term benefits but in the long term, they do not pay.