Question

1. Discuss information risk and gives examples on how an audit can result in substantial savings in the entity 2. Discuss why a non-public corporation would spend money to have a CPA firm audit its financial statements 3. Contrast the the audit of a corporation and the inspection of a house by a home inspector . Define audit risk and discuss how the auditors report deal with the issue. 5. Discuss two events that caused congress to pass the Sarbanes Oxy! Act 6. What did Sarbanes Oxley Do to alter the view that management is the client?

Answer 1

1. Information Risk: For any entity/ business, the most crucial thing is the flow of information. If that flow is disrupted or the information communicated is inaccurate or modified or missing, then it may result in the disruption of key activities of the entity. Also, every entity has some confidential information, the leakage or destruction of which can result in the decline in goodwill or stealing of trade secrets and even legal liability. Hence information risk is very significant and needs to be assessed by every enterprise. Information risks can be managed by ensuring the following:-

• Confidentiality: It involves ensuring that all the sensitive information can be accessed by authorized persons only and measures to be taken to avoid unauthorized access and modifications.
• Integrity: It involves assuring that the data is accurate, complete and authenticated by the responsible personnel.
• Availability: One of the important issues involved is non- availability of the data when required. So, this involves assurance that authorized people can access the information whenever required.

AUDIT means a systematic examination of all the transactions, processes and books and papers to ensure that the results are free from material misstatements either due to fraud or error.

Audits can result in substantial savings to the entity. Some of the examples are:-

• Audit helps in identifying frauds. An employee embezzling the funds can be caught and hence saving from losses to the company.
• Cost audits involve a detailed examination of the cost structure of the company, hence providing ways for improvement and savings in cost.
• Internal audits also help the entity in identifying errors, duplicating processes, and evaluating the efficiency and effectiveness of all the processes, employees and entity, hence saving the time and cost of material misstatements and corrections.
• The problems that may be avoided by the entity due to various audits are
  • penalties and fees of non-compliance of rules and regulations
  • Loss of goodwill in the market due to no quality checks resulting in financial losses
  • Lack of public trust which increases due to audits
  • Inappropriation of funds and assets due to lack of checks on the employees.

2. Due to the reasons mentioned above, to avoid those problems and save the entity from various losses, a non- public company spends money to hire a CPA firm for auditing its financial statements.

Also, to assure the users of the financial information of the entity that the financial statements give true and fair view and there is no window dressing or material misstatement due to fraud or error, the non- public company hires CPA firm to audit its financial statements.

The intended users are shareholders, investors, creditors, employees, management, government. All of these rely on financial statements for their decision making. And their level of reliance would be high if the financial statements are audited.

3. The main aim of the Home Inspector is to find defects and problems in the home, while that of an auditor is to give his opinion on the financial statements of the Corporation.

The auditor is not a watchdog, his work does not involve searching for issues and misstatements like Home Inspector. His duty is to obtain sufficient and appropriate evidences and to form his opinion based on those audit evidences.

Hence, the approach of auditor is positive one while that of Home Inspector is a Negative one.

4. Audit Risk is the risk that some material misstatements due to fraud or error may not be detected even after exercising due diligence by the auditor and the auditor might issue an inappropriate opinion. This risk is due to inherent risk involved in any audit. Inherent Risk is due to the factors beyond the control of the auditor.

The auditors report deal with this issue by mentioning the following:

"An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial control system over financial reporting and the operating effectiveness of such controls. "

5. The Sarbanes-Oxley Act of 2002 was passed due to the accounting scandals at Enron, WorldCom, Global Crossing, Tyco and Arthur Andersen, that resulted in billions of dollars in corporate and investor losses. These huge losses negatively impacted the financial markets and general investor trust.