Sandy Pitts is auditing Hofmeister Hardware Company, a fast-growing re- tail hardware chain in the Atlanta area. While Pitts has previously worked on this engagement, this is her first year as the audit manager. As she planned the engagement, Pitts identified a number of risk factors (such as strong interest in maintaining the company’s earnings and stock price, unrealistic forecasts, and high dependence on debt financing for expansion) that indicated that fraud might exist.

Required:

a. How should Pitts respond to the possibility of fraud at the planning stage? What is the required documentation for identified risk factors?

b. If Pitts had evidence suggesting that fraud existed, what would be her communication responsibilities to management, the audit committee, and others?. K-9875