In a small group, discuss the views expressed by the following three auditors.
Auditor 1: "Risk analysis is good. But, when all is said and done, it does not add much to the audit. You still need to directly test the account balances with procedures such as confirmations or observation. You can't ever get away from good old-fashioned auditing."
Auditor 2: "The problem with 'good old-fashioned auditing' is that there is a tendency to overaudit. We spend a lot of time on areas in which the likelihood of material misstatement is almost nil. At the same time, we don't spend enough time understanding the company's strategy and the structure of its transactions to determine where the real risk of misstatement may be occurring."
Auditor 3: "I have been trained as an accountant and an auditor. I am prepared to deal with financial statements. I have not been trained to analyze or perform business risk analysis. I have taken financial statement analysis and can perform analytical review to identify trends and potential misstatements, but it is unrealistic to expect me, or my audit firm, to do business risk analysis. It is not part of auditing."
Required
a. Analyze the arguments made by the three auditors. Which has the more persuasive argument? Why is the argument more persuasive?
b. Do auditors need to be trained in risk management-at least to the extent of evaluating whether or not an organization has effective risk management? Explain.
c. The SEC and audit standard setters have implored auditors to implement more of a risk-based approach to auditing. At the same time, it has criticized audit firms that overreacted to companies with good risk management and tried to perform an audit primarily using substantive analytical procedures. Are these two views reconcilable? Explain what is meant by a "risk-based" approach to auditing.
d. Explain how the auditor would adjust audit procedures in relationship to the trend analysis shown in the text where sales has gone up by 118% over the previous year while gross margin has gone up by 132%. You may further assume that the industry as a whole had an increase of 5% on both revenue and gross margin.