1.) Sarah Robertson, CPA, had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected in late 2009.
In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad.
Robertson stated that she believed the statements will have to include a going concern explanatory paragraph. Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan.
Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009.
The bank sued Sarah Robertson for fraud.
Required
Indicate whether or not you think the bank will succeed. Support your answer.
I think the bank will be successful in their suit. The minute Sarah discovered the true financial situation of the company she was required to add the going concern to the financial statements. It sounds like she got too involved with her client and lost her independence. The numbers are what they are. She also knew that these statements were going to be used to obtain a bank loan. This is another reason why she needed to add the going concern. Due to the fact that she deliberately lied on the financial statements she is guilty of fraud. The reason for this is because she discussed this with Majestic and still lied. This is a perfect example of why we have auditing standards and guidelines in the first place.
2. You have identified a suspected fraud involving the company's controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing a public company?
According to SAS 99 if an auditor suspects fraud they are required to look into the issue and determine if fraud is happening or not. If your investigation reveals actual fraud then the auditor must bring this issue to the attention of the audit committee and discuss it with them. Depending on who might be involved, the auditor might talk to upper management too.
When it comes to report on internal controls this fraud will defiantly affect the internal controls report. Considering that the controller is involved in the fraud, the amount must be material to the financial statements. Regardless of who is doing the fraud it's pretty obvious that there are some internal controls that are not working, or not being followed. With that being said the auditor will list and discuss this weakness in the financial statements.
3. The following questions address fraud risk factors and the assessment of fraud risk.
a. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of
(1) objective judgment.
(2) independent integrity.
(3) professional skepticism.
(4) impartial conservatism.
b. Which of the following circumstances is most likely to cause an auditor to consider whether material misstatements due to fraud exist in an entity's financial statements?
o (1) Management places little emphasis on meeting earnings projections of external parties.
o (2) The board of directors oversees the financial reporting process and internal control.
o (3) Significant deficiencies in internal control previously communicated to management have been corrected.
o (4) Transactions selected for testing are not supported by proper documentation.
c. Which of the following characteristics is most likely to heighten an auditor's concern about the risk of material misstatements due to fraud in an entity's financial statements?
(1) The entity's industry is experiencing declining customer demand.
(2) Employees who handle cash receipts are not bonded.
(3) Internal auditors have direct access to the board of directors and the entity's management.
(4) The board of directors is active in overseeing the entity's financial reporting policies.
d. Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?
(1) Property and equipment are usually sold at a loss before being fully depreciated.
(2) Unusual discrepancies exist between the entity's records and confirmation replies.
(3) Monthly bank reconciliations usually include several in-transit items.
(4) Clerical errors are listed on a computer-generated exception report.
Academic requirements:
• Your work should be submitted in the formats outlined for each questionin the assignment.