Assessing audit risk correctly and completely is important to the beginning of a successful audit. Not only should an auditor have an understanding of the individual risk factors of the company itself, but also how those risk factors are affected by external influences. A crucial external influence affecting audit risk is the state of the economy. When an economy enters a recession or an economy bubble bursts, there is a greater likelihood that inherent risk and control risk will increase. These increases are mainly driven by the sudden pressure placed on employees and management to keep the appearance of a positive financial status, which sometimes leads to fraudulent activity. The affects of a declining economy predominantly affect inherent risk of the audit risk model because of the attraction to either inflate revenues or under report expenses to keep the company in a positive financial standing. Many high-tech related company’s experienced a devastating blow to their financials after the technology bubble burst of 2000, which was marked by two large fraud scandals. First, was Lucent Technologies Inc, a communication equipment provider, which began to inflate revenue of $1.2 billion after management became overwhelmed from the significant decrease in telecommunication equipment spending (Belson, 2004 para. 1). Included in the scheme was $125 of false sales to Winstar Communication (Belson, 2004 para. 1). Second, was MCI WorldCom, a long distance phone company, whose executives under reported its expenses between 2000 and 2002. The executives hid expenses by booking operating costs as capital investments, causing their cash flow to be overstated by over $3.8 billion (Romero & Berenson, 2002 para. 7). Another factor incre... ... middle of paper ... ...lthy and still thriving in difficult economic times. These pressures generate an increase in inherent risk and control risk, which results in an increase in audit risk. Auditors should always be aware of how the economy has affected a client and keep an attitude of professional skepticism at all times in order to plan an audit to detect the heightened risk of fraudulent activity occurring. Works Cited Belson, K. (2004, 18 May). Technologies; Lucent fined $25 million by S.E.C in fraud case. The New York Times. Retrieved from http://www.nytimes.com. Bilski, J. (2009, 17 July). Workers gone wild: 7 outrageous cases of employee fraud. CFO Daily News. Retrieved from http://www.cfodailynews.com Romero, S., & Berenson, A. (2002, June 26). WorldCom says it hid expenses, inflating cash flow from $3.8 billion. The New York Times. Retrieved from http://www.nytimes.com
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
The risk that the auditor or audit firm will suffer harm after the audit is completed, even though the audit report was correct,
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
This channel has been doing well financially and this may make the reporting of statements of finance at Disney to be overstated so as to attract more investors than the competitor (Mertz, 1999).
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
As with all industries and audits there is audit risk and inherent risks, although GD has potential risks, these risks seem to be mitigated due to GD’s industry performance.
Audit quality is often defined as the probability that auditors will detect and report misstatements or unintentional measurement errors in the financial statements (DeAngelo 1981). This stems from an auditor’s competence and independence, in both how they are perceived and in actuality (Watkins et al 2004). This is of vital importance to analysts because financial statements form the basis of forecast inputs. The outcome of a financial analysis model can only be as accurate as the values used to create said model. As such, if input values are inaccurate, the output (forecasts) would no doubt also be erroneous. Dang (2004) argues that by limiting errors in the historical data used to formulate forecasts, high quality audits will improve the
Auditing is an area that has evolved a lot and of recent it has become indispensible. This is because there is a completely new dimension presented by this practice. Initially, auditing used to concentrate mostly on corporate compliance plus institution of strong financial controls. However, the modern businesses in United Arab Emirates do not have much worry with financial controls or compliance but rather are concerned with risk assessment and mitigation. For any listed company, auditing play a key role in risk assessment aspect. It mainly acts as the watchdog to the shareholders of the company and gives assessment to impending risks.
Auditing plays a vital role in business, government and economy. The key value of auditing is its ability to provide an independent assurance on the integrity and fairness of financial information produced by companies and other entities. An auditor is under a statutory duty to report to members on the company’s financial statements for an accounting period and on the accounting records relating to those financial statements (s.308). Auditors are required to provide an auditor’s report to the members (i.e. shareholders with voting rights) of the company concerning the financial statement audit. The auditor must express an opinion on whether the financial statements are in accordance with the Corporations Act, comply with accounting standards (s.296) and give a true and fair view (s. 297).
Audit is a process to evaluate and review the accounts and financial statement objectively. We can divide it into internal auditors and external auditors. Internal auditors have a inner knowledge of business process. Auditor has access to the much confidential information and all levels of management. But they may lose their judgement and they are not acceptable by the shareholder. “The overall objective of the external auditors is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in acco...
Woolworths LTD has commissioned EA partners for auditing their supermarkets chains. Therefore it is important to prepare a risk analysis report to be added in the audit plan in order to identify and analyze possible events that could have an impact in achieving the company’s objectives. The element of risk is embedded in every business, the risk of not achieving the company objective. Risk assessment is important to the effective operations of the company. Risk Assessment is increasingly in demand today because of the increase demand in transparency that revolves around risks. The business is under continuous scrutiny of whether the correct mechanism was in place at the time of the crisis or whether the correct information was delivered and so on. This is why risk assessment has become a part of the business auditing today.
Risk-based auditing focus more on high risk aspects and less on low risk aspects. To have a more accurate risk assessment, auditors need to have clear understanding of the company, the environment of the company and the industry, internal control systems, attitude of management response towards risk (Holm and Laursen, 2007). So, external auditors help shareholders to have a better knowledge about the
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
As an emerging high-tech and wide applied industry, IT industry has relatively high inherent risks even effected by other industries. In the process of development, managers and auditors keep seeking effective and efficient internal controls to reduce the risks as possible. When audit a company operating in IT industry, auditors need to consider the size and complexity, especially the technical risks.
Audit Risk is the risk that an auditor has stated an incorrect audit opinion on the financial statements. It may cause the auditors fail to alter the opinion when the financial statements contain material misstatement. The auditor should perform the audit to lower the audit risk to a sufficiently low level. In the auditor’s professional judgement, the auditor should appropriately state a correct opinion on the financial statement