Good Case Study About Financial Statement Audit - Case Study

Question one

According to GAAS, what are the auditor’s responsibilities for detecting fraud?
In accordance with the GAAS, an auditor who is conducting an audit of financial statements is responsible for gathering evidence to obtain a reasonable assurance that the financial statements prepared are free from any material misstatements that can be caused by error or fraud(Omoteso&Obalola, 2014). The auditor can only obtain reasonable assurance and not absolute assurance due to the nature of audit evidence given and gathered. Another possible reason is the nature of fraud. The auditor is required to understand the implications of different risks factors to facilitate the plan of financial audit and determine if a specialist is needed to assist in the review. An auditor is also responsible for identifying and assessing risks of the material misstatements presented in the financial statements due to fraud. The auditor should respond appropriately to the suspected fraud or fraud identified in the audit.

What two types of misstatement due to fraud do the standards specifically cover?

A misstatement in the financial statements arises in either error or fraud. The difference between the error and fraud is under action that results in misstatements of financial statements is intentional or unintentional(Houghton, Jubb & Kend, 2011). The two types of misstatements that are relevant for auditor consideration are:
1. Misstatements arising from the fraudulent financial reporting: these are intentional omissions or misstatements of disclosures in the financial statements that are designed to cuckold financial statements users that results in failure to present financial statements in all material respects, in line with the generally accepted accounting principles (GAAP)(Robinson, Robertson &Curtis, 2012).
2. Misstatements arising from misappropriation of assets: This is referred to as defalcation or theft and involves the stealing of university assets. Such a theft causes financial statements not to be presented, in all material respects in line with the generally accepted accounting principle. Misappropriation of assets occurs in various ways and includes stealing assets, embezzling receipts and causing the university to pay for goods and services that have not been received or rendered. It can also be accompanied by misleading documents and records that are created through circumventing controls.

Question two

Do you think the fraud, in this case, would have been considered material by external auditors?
What responsibilities do auditors have for detecting misstatements arising from fraud that are not material?
The auditors have the responsibility of identifying relevant misstatements by looking closely at the financial statements. They should evaluate assessment of the risks of material misstatements due to fraud and its resulting impact on the timing, nature and extent of audit procedures and respond to the assessed risks.

Question three

What were some of the specific weaknesses in the control structure in the UB Office of Risk Management (ORM)?
The specific weaknesses in the control structures are that Mrs. Spaniol was not supposed to obtain any review from university general counsel or get any approval from supervisors or president. There was also no limit to the amount that she approves for payment. Another weakness was that Mrs. Spaniol was also involved in filing claims for university employees alleged to have committed offenses. She files a claim with her office and approves those claims for settlement. There is also diversion of funds through fictitious claims of disbursements and Mrs. Spaniol wrote checks from the University accounts for all these unauthorized transaction without consulting anyone. She writes personal transactions checks from the university kitty and uses the money to buy real estates, new sports cars and take overseas vacations. Such a loophole exists because she does not require the signature of another superior to authorize transactions and payments.

Categorize each weakness into one of the five components of the control structure.

The assessment of the risks of the material misstatements due to frauds. This arises if the material misstatements are noted during auditing. The risks of unauthorized payments in the university may cause may cause substantial losses if not controlled.
Controls implemented over journal entries and other adjustments. In the university, there are entries by Mrs Spaniol of inexistent of claims of services never received by the University.
The entity’s financial reporting process and the nature of the evidence that can be obtained. The university needs to follow GAAP in reporting their financial records to enable internal controls in the university successful.

The characteristics of fraudulent journal entries and other adjustments done by Mrs Spaniol that are inexistence in the university.

The nature and complexity of the accounts also affect the internal controls and if not well looked at; the external auditors may issue a qualified report on the accounts.

Question four

Assuming the misstatement due to this fraud was material; describe several substantive audit procedures that might have uncovered the irregularities
The auditors perform several substantive audit procedures in their work. The substantive procedures are performed to evaluate whether the assessment of the risks of material misstatements at the assertions level remain appropriate. In determining the trends and relationships auditors can recommend whether risks of material misstatements due to fraud require professional judgments(Kassem & Higson, 2013). Substantive procedures are intended by the auditors to create evidence and assemble support to the assertions that there are no material misstatements in regards to the validity, completeness, accuracy of the financial records. These procedures are done to detect whether there are any material misstatements in the accounting transactions.
Substantive procedures in this case include the following general categories: Testing classes of transactions, disclosures and the account balances. Examining the material journal entries and any other adjustments made in the preparation of financial statements. Some of the unexpected changes may be identified and indicate that there are material misstatements due to fraud since management or employees are unable to manipulate information to create a regular relationship.
The substantive procedures to be carried in this case are: The relationship between the cash flows from operations and the net income to find out if the management records fictitious revenues and receivables since they cannot be able to manipulate cash. Another process is to assess the changes in account payables and inventories from the prior period with the current period to find out if there is inconsistency. If this is the case, it will be a clear indication that the university employees are committing theft since they may not be able to manipulate all the related accounts. There is also need to compare the bad debt write offs to the comparable university data, that employees cannot manipulate to show the possibility of theft of cash receipts.
Then the auditors need to evaluate the risks of material misstatements due to fraud at or near the completion of the fieldwork. If the misstatements are identified, then the auditors should consider if the misstatements are due to frauds. If the auditor found the misstatements are due to fraud, and the effects are not material to the financial statements, they need to evaluate the following implications: misappropriation of cash from small petty cash would have little significance.

References

Houghton, K. A., Jubb, C., & Kend, M. (2011). Materiality in the context of audit: the real expectations gap. Managerial Auditing Journal, 26(6), 482-500.
Kassem, R., & Higson, A. (2013, September). Corruption: Can External Auditors Detect it?. In 2013 BAFA Northern Area Group and Interdisciplinary Perspectives Special Interest Group Annual Conference, Nottingham, UK.
Omoteso, K., & Obalola, M. (2014). The Role of Auditing in the Management of Corporate Fraud. Ethics, Governance and Corporate Crime: Challenges and Consequences (Developments in Corporate Governance and Responsibility, Volume 6) Emerald Group Publishing Limited, 6, 129-151.
Robinson, S. N., Robertson, J. C., & Curtis, M. B. (2012). The effects of contextual and wrongdoing attribute on organizational employees' whistleblowing intentions following fraud. Journal of business ethics, 106(2), 213-227.