Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I need the attached in my own words please. Word count should be less than the attached as long as satisfy the answer enough. I.

I need the attached in my own words please. Word count should be less than the attached as long as satisfy the answer enough.

image text in transcribed I. Assignment Questions & Suggested Answers 1. Consult Paragraphs .07-.08 of AU Section 316. Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (that is, the fraud triangle)? Based on the information provided in the case, which of these three conditions appears to be the most prevalent, and why? According to paragraph #7 of AU Section 316, \"Three conditions generally are present when fraud occurs. First, management or other employees have an incentive or are under pressure, which provides a reason to commit fraud. Second, circumstances existfor example, the absence of controls, ineffective controls, or the ability of management to override controlsthat provide an opportunity for a fraud to be perpetrated. Third, those involved are able to rationalize committing a fraudulent act. Some individuals possess an attitude, character, or set of ethical values that allow them to knowingly and intentionally commit a dishonest act. However, even otherwise honest individuals can commit fraud in an environment that imposes sufficient pressure on them. The greater the incentive or pressure, the more likely an individual will be able to rationalize the acceptability of committing fraud.\" The three conditions that are likely to be present comprise what is commonly referred to as the \"fraud triangle\". The first condition (incentives/pressure) recognizes that an employee or a manager of a company is likely to either have incentives in place (e.g., bonus compensation) or be under significant pressure to achieve meet specific estimates, forecasts, or expectations. The second condition (opportunity) recognizes that in order for a fraud to be perpetrated, the internal control environment must provide an opportunity for an employee or a manager of a company to commit a fraudulent act. In order to have an opportunity to commit fraud, there must be a weakness in the operating effectiveness of a control or a non-existent control. Finally, the third condition (rationalization) recognizes that for an employee or a manager of a company to perpetrate a fraud, the individual (or individuals) must possess an \"attitude\" that allows them to rationalize that they are knowingly committing a crime. Based on the case information presented, pressure appears to be the most prevalent condition at Qwest. It is clear from the facts of the case that Qwest was experiencing significant pressure as a result of increased competition. Regulatory changes impacting the telecommunications industry provided the opportunity for small telecommunications companies to build market share and place competitive pressures upon Qwest's upper management team. In addition, there were pressures from Qwest shareholders. \"During 1999 and 2000, Qwest consistently met its aggressive revenue targets and became a darling to its investors.\" Increased pressure to meet revenue expectations is the type of pressure that can possibly lead to fraudulent revenue schemes. Clearly, Qwest management was under tremendous pressure from increased competition and investors, and therefore, pressure seems to be the most prevalent fraud condition at Qwest. 2. Consult Paragraph 9 of PCAOB Auditing Standard No. 5. Based on your understanding of inherent risk assessment and the case information, identify three specific factors about Qwest's business model that might cause you to elevate inherent risk if you were conducting an audit of internal control over financial reporting at Qwest. At the entity and at the financial statements account level, inherent risk refers to the exposure or susceptibility of an entity's financial statements to a material misstatement, without regard to the system of internal controls. A detailed understanding of an audit client's business model, including their products and services is an essential part of an auditor's inherent risk assessment process at both the entity level and the financial statement account level. Paragraph #9 of PCAOB Auditing Standard No. 5 relates to the planning of the audit of internal control over financial reporting. Specifically, the paragraph says that such audit should be properly planned and assistants, if any, are to be properly supervised. The paragraph then goes on to explicitly identify matters that will impact the auditor's procedures. Several of the relevant factors include: 1) Matters affecting the industry in which the company operates, such as financial reporting practices, economic conditions, laws and regulations, and technological changes; 2) Matters relating to the company's business, including its organization, operating characteristics, and capital structure; 3) Legal or regulatory matters of which the company is aware; and 4) The relative complexity of the company's operations. Importantly, the factors that are likely to impact the audit of internal control over financial reporting mirror the factors that are likely to impact the assessment of inherent risk in a financial statement audit. This is a key learning point for this question. In the case, there were a number of factors that are likely to impact the audit of internal control over financial reporting, including: Changes in the regulatory environment (i.e., local carriers were allowed to compete in the long-distance market and changes in the amount of access charges paid by long-distance carriers) and the competitive pressures that are derived from this regulatory change; Significant merger activity such as the merger agreement with US West which put pressure on Qwest management to meet stock price minimums; and The competitive environment diminished Qwest's expected technological advantage. Qwest had made significant investments in their fiber-optic network construction, and realization of the investment seemed less likely. 3. Consult Paragraphs .03-.06 of AU Section 311. Comment on how your understanding of the inherent risks identified at Qwest (in Question 2) would influence the nature, timing, and extent of your audit work at Qwest. According to paragraph #5 of AU Section 311 \"In planning the audit, the auditor should consider the nature, extent, and timing of work to be performed and should prepare a written audit program (or set of written audit programs) for every audit. The audit program should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. The form of the audit program and the extent of its detail will vary with the circumstances. In developing the program, the auditor should be guided by the results of the planning considerations and procedures. As the audit progresses, changed conditions may make it necessary to modify planned audit procedures.\" As a general rule, the lower the risk of material misstatement, the less audit attention is needed during the audit. It therefore follows that the higher the risk of material misstatement; the more audit attention is needed during the audit. Although this is somewhat obvious, it is a basic point that needs to be driven home to students. Clearly the nature, timing and extent of audit work should change as a result of the auditor's risk assessment. Specifically, \"if the risk is lower, the persuasiveness of the evidence that the auditor needs to obtain also decreases.\" On the other hand, as the risk increases, the persuasiveness of the evidence that the auditor needs to obtain also increases. Regarding the timing of testing for controls, \"as the risk associated with the control being tested decreases, the testing may be performed farther from the as-of date; on the other hand, as the risk associated with the control increases, the testing should be performed closer to the as-of date.\" Finally, regarding extent of testing for controls, \"as the risk associated with a control decreases, the extensiveness of the auditor's testing should decrease; as the risk associated with a control increases, the extensiveness of the auditor's testing also should increase.\" This relationship is particularly salient to the areas where inherent risk has been elevated for Qwest. For example, one area of elevated inherent risk was the evolving competitive environment. As the industry became more competitive, Qwest began to lose their technological advantage. Qwest relied heavily upon their investments in the fiber optic network. However, new technologies developed by competitors jeopardized the valuation of Qwest's fiber optic network. As a result of the increased competition and new technology development, there is an inherent risk that the value of fiber optic assets was materially overstated. The auditor is required to understand this inherent risk faced by Qwest and must alter the nature, timing, and extent of their internal control work related to the valuation assertion. 4. Consult Paragraphs 29 and 32 of PCAOB Auditing Standard No. 5. Next consider revenue earned in the construction services and the communication services businesses. Do you believe that any of the different types of revenue earned by Qwest might be subject to significantly differing levels of inherent risk? Why or why not? Paragraph #29 of PCAOB Auditing Standard No. 5 clearly states that \"to identify significant accounts and disclosures and their relevant assertions, the auditor should evaluate the qualitative and quantitative risk factors related to the financial statement line items and disclosures.\" There are several specific risk factors identified including 1) Size and composition of the account; 2) Susceptibility to misstatement due to errors or fraud; 3) Volume of activity, complexity, and homogeneity of the individual transactions processed through the account or reflected in the disclosure; 4) Nature of the account or disclosure; 5) Accounting and reporting complexities associated with the account or disclosure; 6) Exposure to losses in the account; 7) Possibility of significant contingent liabilities arising from the activities reflected in the account or disclosure; 8) Existence of related party transactions in the account; and 9) Changes from the prior period in account or disclosure characteristics. Although paragraph #29 clearly lays the ground work to answer this question, paragraph #32 recognizes that there may be different components of a particular significant account or disclosure. And, that these components may be subject to different levels of inherent risk. As a result, the standard suggests that \"different controls might be necessary to adequately address\" the differing risks. Qwest earns revenues primarily from the construction services and the communication services businesses. The revenue from construction services is likely to be more nonroutine, while the revenue from the communication services is likely to be more routine in nature. Thus, on this dimension, the revenue types are likely to have differing levels of inherent risk. It is likely that nonroutine transactions will have a higher level of inherent risk because the subjective decisions that are required to be made within this process are less familiar to Qwest management, therefore resulting in increased inherent risk

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Accounting

Authors: Debra JeterJames Reeve, Jonathan Duchac, Horace Brock, Paul Chaney

4th Edition

0470506989, 978-0470506981

More Books

Students also viewed these Accounting questions

Question

Determine miller indices of plane A Z a/2 X a/2 a/2 Y

Answered: 1 week ago

Question

8. What are the costs of collecting the information?

Answered: 1 week ago