“Operations Strategy” Please respond to the following: •Choose two service companies that you are familiar with such as Facebook, eBay, and UPS, and apply them to Hill’s Strategy Development Framework…..
Describe Kent’s misconceptions regarding the consideration of fraud in the audit of SCS’s financial -factors that affect the risk of material misstatements in the December 31, 2016, financial statements of Henderson Energy. Indicate whether the factor increases or decreases the risk of material misstatements
Applying the Audit Process (Identifying Risk)
I. Identify factors influencing risk.
Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2016. Henderson Energy is regulated by the state utility commission, and because it is a publicly traded company the audited financial statements must be filed with the Securities and Exchange Commission (SEC).
Henderson Energy is considerably more profitable than many of its competitors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 2016 operations. Additionally, Henderson Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks. Because of the complexities of the underlying accounting associated with these activities, Henderson Energy added several highly experienced accountants within its financial reporting team. Internal audit, which has direct reporting responsibility to the audit committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.
Whitehead’s discussions with the predecessor auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its multiple energy production facilities. During the recent year, Henderson acquired a regional electric company, which expanded the number of energy production facilities.
Whitehead plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. The extent of partner review of key accounts will be extensive.
Based on the above information, identify factors that affect the risk of material misstatements in the December 31, 2016, financial statements of Henderson Energy. Indicate whether the factor increases or decreases the risk of material misstatements. Also, identify which audit risk model component is affected by the factor. Use the format below:
|Factor||Effect on the Risk of Material Misstatement||Audit Risk Model Component|
|Henderson is a new client||Increases||Inherent Risk|
II. Identify and describe fraud risks and response to those risks.
Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2016. On May 6, 2016, Smith, the senior auditor assigned to the engagement, had the following conversation 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 last year is still OK. It has 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. Mint’s employment contract was approved by the board of directors just three months ago. It was passed unanimously.
Smith: I guess so, but Mint told those stock analysts that SCS’s earnings would increase 30 percent next year. Can Mint deliver numbers like that?
Kent: Who knows? We’re auditing the 2016 financial statements, not 2017. 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 the tests. Or maybe we’ll just 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 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 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 material weakness every year and probably will be again this year. But we’re talking 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? It’s more than a rumor. Even the employees know it’s 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 percent earnings increase next year?
- a) Describe the fraud risk factors that are indicated in the dialogue.
- b) Describe Kent’s misconceptions regarding the consideration of fraud in the audit of SCS’s financial statements that are contained in the dialogue and explain why each is a misconception.
- c) Describe an auditor’s audit documentation requirements regarding the assessment of the risk of material misstatement due to fraud.
Complete Part I using Excel or Word.
- • Complete Part II using Word. o Any references used must be cited in-text in APA format with the full reference listed on a separate reference page.