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    Audit Risk, Audit Scope and Audit Program

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    Your firm has been hired as an outside auditor to conduct an audit on a growing software company that is getting ready to go public. The company has been in business for approximately five years, and the Controller position has had three different people in this time period. The main shareholder tells you the first Controller left because he had a problem "keeping his fingers out of the cookie jar." The shareholder doesn't want to elaborate further, saying "it is water under the bridge." The previous audit firm recommended that the shareholder establish policies and procedures to ensure separation of duties. However, the shareholder never had the time to do this. Subsequent Controllers have had too many other fires to put out to be able to develop policies and procedures.

    As part of the initial engagement review, you notice that in the past two years accounts receivable balances have increased 50%, while sales revenues have increased 30% over this same period. The main shareholder doesn't have an explanation for the difference in rates of increase.

    The main shareholder complains of the high cost of compliance needed to go public and the resulting audit and related fees. Additionally, he tells you that because the company has "thousands of individual sales to distributors," you won't have time to look at all of the sales transactions. He has already picked out the sales on which he wants you to concentrate.

    As the Manager for this audit engagement, discuss the following (250 words only):

    a. The risk(s) involved with this audit
    b. How you would develop the audit scope
    c. Specific items you would include in the audit program to address the identified scope and risk

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    Solution Preview

    a. The risk(s) involved with this audit
    There can be serious frauds going on causing the previous auditors to resign. There are control risks; there are not many effective control systems in place: Further, inherent risks: There can be several misstatements in the accounts but they may not be detected. Remember the owner cannot explain why the first controller left the job. High level of Audit risk: There is real risk that there may be serious misstatements but they may not get detected by the audit.

    b. How you would develop the audit scope:
    The audit will provide the owner, the management and ...

    Solution Summary

    This posting discusses the risks involved in a specific audit. .. Then the solution helps develop the audit scope and audit program. . .