Supernet Ltd. offers public communications network services. For example, it provides electronic data interchange and electronic funds transfer services to its customers. For over ten years, it has had an excellent reputation for offering high-quality, secure, innovative network services primarily aimed at allowing its customers to develop interorganizational information systems.

During the past year, Supernet has become a public company. Previously it was a private company owned entirely by the current president, Margaret Hawkins, the current controller, Tim Fisher, and the current vice president for research, Anthony Browne. The three now own 30 percent of the company. The remainder is owned in equal parts by two venture capital companies. Hawkins, Fisher, and Browne are now multi-millionaires as a result of the sale of their shares to the venture capital firms.

When Supernet became a public company, your firm was appointed to undertake the external audit. As part of the interim audit work, you are currently interviewing Browne about some of the communications controls that supposedly exist to protect the privacy and integrity of customer data being transmitted over data communications lines. All the controls you are investigating were developed and implemented by Browne in the communications software. Browne is regarded as a technical genius. He is a highly skilled system programmer who almost single-handedly developed the products and services that gave Supernet a competitive edge in the marketplace. He is a quiet, reserved person, however, with few marketing, financial, or managerial skills.

When you ask Browne how some of the controls work, he beckons you to sit beside him at his terminal. He uses a software utility to display a section of internal memory in the main communications machine. The display is unintelligible to you. Browne explains, however, that the display shows that part of the communications program containing the controls that are the subject of your inquiries. He also points to two parts of the display that show an input data buffer and an output data buffer. Browne types vigorously at his terminal for several minutes, and then he issues some commands to print a report. When you ask him what he has done, he explains he has deactivated the controls in the communications program and is printing you a report showing the input and output buffers to illustrate what happens when the controls are not functioning.

You are somewhat perturbed by Browne's actions. When you ask him whether the data being processed is "live" customer data, he indicates it is. He says he is not concerned, however, because other controls in the software most likely will pick up any problems with the data that the deactivated controls are no longer identifying. When you ask him how he deactivated the controls, he indicates he used a utility to alter the program's instructions while it was executing in the communication machine's internal memory. You ask him whether any record of his changes would be kept, and he replies there would be no audit trail. You also ask him whether any programmers on staff could alter the communications program in a similar manner, and he indicates he is the only one with the requisite knowledge. When printing of the report is complete, Brown reactivates the controls, again by altering the program's instructions while it is executing in the communication machine's internal memory.

Required. In light of the evidence you have collected from interviewing and observing Browne, what exposures, if any, exist in relation to the accuracy and completeness of data in the financial statements? What modifications, if any, would you recommend to year-end audit work? Briefly justify why you would or would not make alterations to the year-end audit work.