9-56 Kent, CPA, is the engagement partner on the financial statement audit of Super Computer

9-56
Kent, CPA, is the engagement partner on the financial statement audit
of Super Computer Services Co. (SCS) for the next year ended April 30,
2009. On May 6, 2009, Smith, the senior auditor assigned to the
engagement, had the following conversations with Kent concerning the
planning phase of the audit:

Kent: Do you have all the audit programs updated yet for the SCS engagement?

Smith: Mostly. I still have work to do on the fraud risk assessment.

Kent:
why? Our “errors and irregularities” program from the last year is
still OK. It’s passed peer review several times. Besides, we don’t have
specific duties regarding fraud. If we find it, we’ll deal with it then.

Smith: I don’t think so. That new CEO, Mint, has almost no salary, mostly bonuses and stock options. Doesn’t that concern you?

Kent: No. The board of directors approved Mint’s employment contract just three months ago. It was passed unanimously.

Smith:
I guess so, but Mint told those stock analysts that SCS’s earnings
would increase by 30% next year. Can Mint deliver numbers like that?

Kent:
Who knows? We’re auditing the 2008 finanical statements, not 2009. Mint
will probably amend that forecast every month between now and next May.

Smith: Sure, but all this may change our other audit programs.

Kent:
No, it won’t. the programs are fine as is. If you find fraud in any of
your tests, just let me know. Maybe we’ll have to extend our tests. Or
maybe we’ll just have to report it to the audit committee.

Smith:
What would they do? Green is the audit committee’s chair, and remember
Green hired Mint. They’ve been best friends for years. Besides, Mint is
calling all the shots now. Brown, the old CEO is still on the board, but
Brown’s never around. Brown’s even been skipping the board meetings.
Nobody in management or on the board would even stand up to Mint.

Kent:
That’s nothing new. Brown was like that years ago. Brown caused
frequent disputes with Jones CPA, the predecessor auditor. Three years
ago, Jones told Brown how ineffective the internal audit department was
then. Next thing you know, Jones is out and I’m in. Why bother? I’m Just
as happy that those understaffed internal auditors don’t get in our
way. Just remember the bottom line is… are the financial statements
fairly presented? And they always have been. We don’t provide any
assurances about the fraud. That’s management’s job.

Smith: but
what about the lack of segregation of duties in the cash disbursements
department? That clerk could write a check for anything.

Kent:
sure. That’s a reportable internal control deficiency every year and
probably will be again this year. But we’re talking about
cost-effectiveness here, not fraud. We just have to do lots of testing
on cash disbursements and report it again.

Smith: What about the
big layoffs coming up next month. Its more than a rumor. Even the
employees know its going to happen, and they’re real uptight about it.

Kent:
I know; it’s the worst-kept secret at SCS, but we don’t have to
consider that now. Even if it happens, it will only improve next year’s
financial results. Brown should have let these people go years ago.
Let’s face it, how else can Mint even come close to the 30% earnings
increase next year?

Require:
a. describe the fraud risk factors that are indicated in the dialog.
b.
describe Kent’s misconceptions regarding the consideration of fraud in
the audit of SCS’s financial statements that is mentioned in the
dialogue. Explain why each is a misconception.
c. If you were
performing “brainstorming” as part of the audit plan for SCS, what would
be the biggest factors you would identify for audit consideration?