ACW3620 Auditing and Assurance Services

The assigned task demonstrates the ACW3620 unit learning outcomes from (1) to (4)

• The two [2] pages do not include references and appendices.
• You are required to keep a hard copy of this assignment until all results are finalized at the end of
• the semester.
• You should not exceed two [2] pages for the assignment.
• Learning Outcomes to be achieved from the individual assignment task

1. To be able to identify the key audit assertions in a financial report audit.
2. To be able to evaluate the persuasiveness of audit evidence.
3. To be able to assess how the client's information technology influences audit risk.
4. To assess how disruptive technologies influence the demand for audit and assurance engagements.

1. (a)First, read the assignment question individually on your own. The case study is found on pages 3 to 5.

2. Auditing and Assurance standards

Though the case is US based, you can answer using Australian Auditing Standards, Malaysian Auditing Standards, or the International Auditing Standards. Please make references to the auditing standards used in the assessment tasks.

You need to beware of the latest amendments to'Identifying and Assessing the RisksofMaterial Misstatement'located at:https://www.ifac.org/system/files/publications/files/ISA-315-Full-Standard-and- Conforming-Amendments-2019-.pdf

3. Higher thinking order activities

(a). Read the article,'Data aggregation's new frontier,'by Wisniewski, M. (2017), which canbe assessed through the library. The article's hyperlink is currently not valid.

(b). To encourage the development of higher thinking skills, you should reflect on the effect technological innovation is having on the auditing profession, financial statement auditing concepts such as audit evidence, financial statement assertions, blockchain, automation, and data analytics. Read the journal articles by Aldhizer (2017) and Jagst (2016) to obtain background on disruptive technologies' influence on auditing and financial accounting. Both the articles are in the references list of your assessment task. The articles can be assessed through the library.

(c). Once tasks under (4) above are completed, evaluate the differences between the traditional credit approval process in banking, and compareto 'Kabbage's credit approval process in thecase study.

(d). Kabbage incorporates applicants' social media activity, a form of qualitative data, into theirlending decisions. Evaluate the application of social media and other qualitative data sources as evidence on financial audits.

CASE STUDY [100 marks]

Disruptive technology, new business ventures, and increased availability of data are quickly changing how financial information is communicated to users and how assurance is provided on that information. Innovations are creating both challenges and opportunities, and future auditors need to understand how the profession is evolving to be able to adopt new technology and capitalize on emerging opportunities.

To understand the effects that disruptive technology will have on the auditing profession, one should consider how the banking industry has been disrupted by Kabbage, a fully automated online lending platform that provides financing to non-traditional and small businesses. Banks have always been reluctant to lend money to non-traditional and small businesses (especially those that do not prepare financial statements) because it can be difficult to assess their financial performance and creditworthiness. Recognizing the challenges that non-traditional and small businesses have with securing loans, three entrepreneurs recently started a company that offers an innovative, digital twist on lending. Rob Frohwein, Marc Gorlin, and Kathryn Petralia founded Kabbage, a novel lending platform named after a slang term that they, as friends, frequently used for money. By specializing in lending to often overlooked businesses, Kabbage quickly disrupted traditional lending processes (Credeur 2013; Max 2012).

One of themost innovative aspects of Kabbage's business model is that applicants do not prepareand submit financial statements as part of their loan application. Instead, they simply provide Kabbage with direct digital access to their underlying transactional data. Kabbage then aggregates the relevant information to construct a financial profile of the potential borrower to assess their creditworthiness (Wisniewski 2017). Quantitative data sources, which provide Kabbage with objective evidence, include bank account activity, eBay transaction history, PayPal and/or Venmo activity, and UPS/FedEx/USPS shipping records (Mitroff 2012; Dahl 2015). Kabbage can also incorporate quantitative data directlyfrom an applicant's accounting information systems such as Intuit, QuickBooks, and Sage (Reader 2015).

Likewise, Kabbage can incorporate applicants' social media activity, a form of qualitative data, intoits lending decisions. Examples include relevant Twitter feeds, Facebook likes and comments, and various forms of online reviews. Applicants who provide access to qualitative data sources typically have higher loan approval rates and lower borrowing costs (Dahl 2015; Farr 2013), and those who demonstrate consistently positive interactions with customers tend to have better financial performance and lower default rates (Credeur 2013; Fest 2013).

Kabbage's approach and its ability to quickly incorporate both quantitative and qualitative data enable it to develop a deeper understanding of an applicant's financial position and default risk. In many instances, the provided data enable Kabbage to calculate revenue, identify sales trends, understand thecustomer and product mix, determine trends in cash collection, etc. Kabbage's co-founder, Kathryn Petralia, highlighted the value of combining financial and non-financial data when she stated, ''Weprobably know more about any given business than any other company has known about a smallbusiness, ever'' (Mitroff 2012).

Kabbage's fully automated loan evaluation process providesa lower cost structure relative to traditional lenders, which empowers Kabbage to profitably underwrite small, short-term loans that would typically generate losses for traditional banks (Wendel 2015). Kabbage evaluates loan applications in approximately six minutes, whereas traditional banks take three or more weeks (Dahl 2015). Kabbage approves approximately 80 percent of its loan applications, and its default rate is five percent, which is substantially less than the eight percent default rate for traditional lenders (Credeur

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2013; Max 2012). Customers who return to Kabbage for additional financing can merely provide the additional transactional data that occurred since their previous loan, and applicants with a history of consistently paying on time are often granted lower fees and higher borrowing limits (Dahl 2015).

In the same manner that Uber, Airbnb, and PayPal are disrupting their respective industries, Kabbage is similarly using technology to reshape the lending industry. Rather than asking potential borrowers to incur the costs of preparing financial statements, Kabbage prepares its financial analysis using data obtained directly from applicants and independent third parties. In doing so, Kabbage has established a novel approach for reducing the information risk associated with evaluating loan applications.

While the innovative process of obtaining a loan from Kabbage seems straightforward and user- friendly, potential users of Kabbage also need to acknowledge possible drawbacks. For example, onlinecustomer reviews of Kabbage's services are somewhat inconsistent. While the Better Business Bureauand Trustpilot generally present positive assessments, outlets such as Sitejabber, Consumer Affairs, and Credit Karma typically have unfavourable reviews. Similar to the way that Kabbage uses data from social media in its loan evaluation process, potential borrowers should also consider the feedback thatKabbage's customers provide before deciding whether Kabbage can best meet their financing needs.

Applicants should also be aware of the potential costs of using Kabbage as a source of financing. Recent analyses suggest that the mean annual percentage rate (APR) for Kabbage is 40 percent and can range anywhere from 20 percent to 80 percent. While it is typical for online and alternative lenders to charge rates in the range of 13 percent to 71 percent, the rates that Kabbage charges are considerably higher than the rates charged by traditional banks, which typically range from 4 percent to 13 percent (ValuePenguin 2019; Prakash 2019). Nevertheless, small business owners who use Kabbage for their financing have likely exhausted their options for other, less expensive funding sources. However, as these businesses grow, they may eventually have access to other lenders that offer lower borrowing costs. These lenders may require the preparation of financial statements that are accompanied by some form of assurance, and these additional costs will partially offset the savings from lower interest rates. The applicants will need to compare (1) the relative costs and benefits of preparing financial reports while obtaining less expensive funding from traditional lenders, and (2) the higher borrowing costs associated with online lenders.

Implications for the Financial Reporting Process and the Auditing Profession

The innovations enabling Kabbage to disrupt the lending industry can provide valuable insight into thechanges occurring within the auditing profession. Kabbage's data aggregation process reduces the needfor small businesses to prepare financial statements, obtain assurance, and communicate the results to lenders. Similarly, future accountants and auditors need to recognize how new technology (for example, blockchain) can be expected to disrupt the financial reporting and assurance process. Despite this disruption, the financial reporting process will continue to provide valuable information to aid external stakeholders with decisions about resource allocations (FASB 2018). Furthermore, audits will still be needed to reduce information risk and provide assurance that financial statements fairly present the operations and financial position of the audited companies (AICPA 2015c). However, the ways that financial statements are prepared and audited will undoubtedly change. By anticipating the future and developing the skills that are required to fully embrace the forthcoming changes, the next generation of auditors will be poised to turn the challenges created by disruptive technology into opportunities that will redefine the profession.

Required

During the risk response phase of the audit, auditors will design and perform audit procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions that form the basis of their auditopinion (AICPA 2015a). Discuss how 'Kabbage' can be used byauditorsto evaluate the existence and completeness assertions of an applicant's revenue

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transactions. Your answers should refer to the learning activities from (1) to (4) as well as to the traditional audit procedures for testing revenue transactions for the completion and existence assertions.