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1. What is the difference between an information technology general computing control and an automated application control? Provide an example of each in your response. An information technology general computing control is used to help control the entire computing environment for an organization. For example, most organizations require password access to log into the computing environment. Information technology general computing controls also include the controls around the: development of new programs within the computing system; changes that are made to existing programs within the computing system; the operations of a computer service area. An automated application control is a computerized control procedure that is explicitly designed to accomplish some type of control objective within a company's overall system of internal control. For example, a company's accounts receivable system may have an application level control that automatically checks a customer's credit limit before a new sales order is approved. In order to function properly, an application level technology control is dependent on effective information technology general computing controls. 2. Consult Paragraphs 36-37 of PCAOB Auditing Standard No. 5. Do you believe that information technology general controls have a pervasive effect on the reliability of financial reporting at an audit client like WMI? Why or why not? Please be specific. Information technology general controls do have a pervasive effect on the reliability of financial reporting because it impacts so many automated application controls and manual controls that are dependent on information generated by the technological infrastructure. For example, information technology general controls over program development, program changes, computer operations, and access to programs and data help ensure that specific automated application controls over the processing of transactions are operating effectively. Stated simply, the proper functioning of automated application controls is dependent on effective ITGCs to provide a secure environment for functioning. Information technology general controls also have a pervasive effect on the reliability of financial reporting as such controls directly impact computerized accounting calculations, and any other control procedures that depend at least in part on information generated from the computerized system. As such, information technology controls would definitely have a pervasive impact on the reliability of financial reporting at WMI. In the case, the successful integration of the billing systems between Waste Management and USA Waste Service is shown to be important to the success of the merger. Several additional information systems were created in order to provide more timely financial statements as well as increase the efficiency and effectiveness of the flow of transactions between information systems. When these systems were not operating effectively, management was unable to access timely financial information to make effective decisions and monitor business operations. 3. Consult Paragraphs B28-B31 (in Appendix B) of PCAOB Auditing Standard No. 5. Define what is meant by a benchmarking strategy. Based on the case information, do you believe that a benchmarking strategy would have been appropriate during the first year audit at WMI? Why or why not? According to paragraph B28, \"Entirely automated application controls are generally not subject to breakdowns due to human failure. This feature allows the auditor to use a "benchmarking" strategy.\" A benchmarking strategy allows the auditor to rely upon the results of testing in a prior year to provide evidence about the effectiveness of an automated application control in the current year. According to paragraph B29, \"If general controls over program changes, access to programs, and computer operations are effective and continue to be tested, and if the auditor verifies that the automated application control has not changed since the auditor established a baseline (i.e., last tested the application control), the auditor may conclude that the automated application control continues to be effective without repeating the prior year's specific tests of the operation of the automated application control.\" Based on the case information, a benchmarking strategy would not likely have been appropriate in the first year audit of WMI because the information technology general controls did not appear to be effective. In addition, it is unlikely that a prior year's baseline could have been established because of the new system conversion. As a result, a benchmarking strategy would not have been applicable on this audit. 4. Consult paragraph A4 (in Appendix A) of PCAOB Auditing Standard No. 5. Given the PCAOB's view, do you believe that the audit firm should be providing assurance on the information contained in public company press releases? Why or why not? Paragraph #A4 (in Appendix A) sets the boundaries for the auditor's evaluation and testing of the internal control system. Specifically, the answer states that the audit of internal control does not need to \"extend to the preparation of MD&A or other similar financial information presented outside a company's GAAP-basis financial statements and notes.\" It is clear that the technical guidance does not require auditors to audit this type of information. According to the SEC, the pro forma information would be considered outside a company's GAAP-basis financial statements and notes and would not be subject to auditor evaluation and testing.1 However, the situation does give rise for an interesting class discussion. Arguments for positive assurance on information contained in public company press releases: 1 Companies are providing information about future earning which would greatly influence a stock holder's financial decision to keep or sell their shares. Thus, assurance should be provided. SEC. (4 February 2003). \"SEC Issues Final Rule on Furnishing Earnings Announcements to the SEC and on Using Pro Forma Information Generally.\" Fenwick & West LLP. http://www.fenwick.com/docstore/publications/corporate/sec/Corp_Sec_02-04-03.pdf. The bottom line is that press releases are utilized by companies to provide information to financial statement users and the public (just like financial statements), therefore assurance should be provided on them. Press releases have a direct effect on a company's future reputation and forecasts Press releases have an impact on financial analysts' recommendations to the marketplace, which influence investors. So, assurance should be provided. Arguments against providing assurance on information contained in public company press releases: Press releases typically only contain information in piecemeal fashion and thus do not provide an overall view of the company's financial position. Thus, assurance is not necessary. Press releases on future earnings and future transactions can not be assured due to unpredictable future events. This would open the door for substantial litigation. Investors and analysts should not be relying on the information provided in the press release because they should know that the information has not been audited. 1. What is the difference between an information technology general computing control and an automated application control? Provide an example of each in your response. An information technology general computing control is a mechanism that is used for controlling the organizational computing environment. This general computing environment controls include the implementation of access controls which will require passwords when the user wants to access and use the system. Implementation of information technology general computing controls can include the following procedures and steps; When the organization decides developing a new computing system within the organization. When the organization makes changes to an existing system. When carrying out functions and operations within the computing service area. On the other hand automated control application is a computerized application that is designed with an aim of accomplishing a specific operation within an organizational internal control. This operation is usually an objective that has a direct impact within the organization. An example of automated control is an account receivable system that is usually designed to help a company or an organization with a single internal control which is the payment of accounts receivables. In order to function properly, an application level technology control is dependent on effective information technology general computing controls. 2. Consult Paragraphs 36-37 of PCAOB Auditing Standard No. 5. Do you believe that information technology general controls have a pervasive effect on the reliability of financial reporting at an audit client like WMI? Why or why not? Please be specific. Information technology general controls have a direct impact on how credible financial reporting because it usually includes many automated application controls and manual controls that is usually in line with information generated by the technological infrastructure. An example of the information technology general controls over programs development program changes, computer operations, and access to programs and data help ensure that specific automated application controls over the processing of transactions are operating effectively. . As such, information technology controls would definitely have a pervasive impact on the reliability of financial reporting at WMI. In the case, the successful integration of the billing systems between Waste Management and USA Waste Service is shown to be important to the success of the merger. Several additional information systems were created in order to provide more timely financial statements as well as increase the efficiency and effectiveness of the flow of transactions between information systems. When these systems were not operating effectively, management was unable to access timely financial information to make effective decisions and monitor business operations. 3. Consult Paragraphs B28-B31 (in Appendix B) of PCAOB Auditing Standard No. 5. Define what is meant by a benchmarking strategy. Based on the case information, do you believe that a benchmarking strategy would have been appropriate during the first year audit at WMI? Why or why not? A benchmarking strategy is usually design with an aim to getting the evidence of how effective systems results are of the prior year compared to the results of the current yerar. This idea is explained in paragraph B28, \"Entirely automated application controls are generally not subject to breakdowns due to human failure. This feature allows the auditor to use a "benchmarking" strategy According to paragraph B29, \"If general controls over program changes, access to programs, and computer operations are effective and continue to be tested, and if the auditor verifies that the automated application control has not changed since the auditor established a baseline, the auditor may conclude that the automated application control continues to be effective without repeating the prior year's specific tests of the operation of the automated application control.\" Based on the paragraph information, a benchmarking strategy cannot be able to provide convincing or rather effective result as compared to prior years. This is caused by the fact that when the results are taken, the general controls may not appear to be more effective at first. In addition, it is unlikely that a prior year's baseline could have been established because of the new system conversion. As a result, a benchmarking strategy would not have been applicable on this audit. 4. Consult paragraph A4 (in Appendix A) of PCAOB Auditing Standard No. 5. Given the PCAOB's view, do you believe that the audit firm should be providing assurance on the information contained in public company press releases? Why or why not? According to the case on paragraph A4, state that the auditor's evaluation should be bond to the testing of the internal control system and the answers of the audit of the internal control should not be extended to the preparation of M & A financial information outside the company. The auditors are not required to audit the pro foma information outside the companies GAAp financial statements and other notes. The following are guidelines to a positive assurance of company's information; The assurance that should be provided is that that provides information about the future earning of the company. Companies should provide press release of financial information to the users and the public Press releases have a direct effect on a company's future reputation and forecasts Press releases have an impact on financial analysts' recommendations My email is myk2030@gmail. Can send me questions directly 1. Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). Define the conservatism constraint and explain why it is important to users of financial statements. According to the conservatism constraint, accountants must take care to not overstate assets or revenues and to not understate liabilitites and expenses. As such, when faced with a choice between two different solutions, accountants should choose the path that is less likely to overstate assets or revenues and/or understate liabilites and expenses. The conservatism constraint is important because users of financial statements can take comfort in knowing that the management team of a company has been prudent in reporting their financial position and results of operations 2. Consider the significant year-end transactions consummated by BFA. Do you believe that the accounting for these transactions violated the conservatism constraint? Why or why not? Please be specific.. Statement of Financial Accounting Standards (SFAS) # 66 establishes five different methods of accounting for sales of real estate - different methods are based on the legal form of the transaction, the type of property sold, the amount of down payment and other factors. Under the full accrual method used by the Foundation Company, the disposition was recorded as a sale, with any profit resulting from the sale recognized in full and the asset resulting from the seller's financing of the transaction reported as a loan. This method may be used when certain conditions have been met; however, the Foundation Company's sale to Dwain Hoover fails to meet several of these conditions, among others, the following requirements: 1) the buyer's initial investment (down payment) and continuing investment (periodic payments) are adequate to demonstrate a commitment to pay for the property; and 2) the receivable is not subject to future subordination. Unfortunately, based on the evidence, both of these requirements fail to be met, as the cash down payment from Hoover to The Foundation Companies was funded by a loan to Hoover by the FMC Holdings, a related party to The Foundation Company Inc. Given that BFA did not meet the criteria to use the Full Accrual Method, they should not have recognized the profit from the sale. Since they did recognize the profit, BFA clearly violated the conservatism constraint. 3. Consult Paragraphs .06-.07 of AU Section 319. Do you believe that BFA had established an effective system of internal control over financial reporting related to its significant year-end transactions? Why or why not? BFA did not have an effective system of internal control over financial reporting related to its significant year-end transactions. Stated simply, BFA's internal control system did not provide reasonable assurance that such transactions were recorded fairly, and in accordance with GAAP. This case illuminates two significant year-end transactions that were made in 1995 by the Baptist Foundation of Arizona with its related parties, ALO and New Church Ventures. In each of the transactions, BFA was able to sell real estate holdings at prices significantly above market value and record the profit in its financial statements. There were no safeguards in the process to prevent or detect this misstatement. Thus, the system of internal control was not effective. 4. Consider the sale of the Santa Fe Trails Ranch II stock by Foundation Investments to Friend. Do you believe that the auditor should have completed any additional testing beyond vouching the payment received from Friend? Provide the rationale for your decision. Yes, Arthur Andersen should have completed additional testing. Stated simply, it seems clear that Andersen did not gather sufficient and competent evidence to conclude on this transaction. Tracing the transaction would have proven the significant involvement of related parties. When considering this, as well as: 1) the timing of the transaction; 2) the financial position before the sale; and 3) the motivation for making such a sale, there is significant potential for this sale to be made on as basis other than \"arm's length\" and additional testing should have been done to ensure the transaction was accounted for in accordance with GAAP. To start, the auditor has a responsibility to fully understanding the economic substance of any transaction being audited. There are absolutely no shortcuts. The only possible way to determine whether an audit client is properly accounting for a transaction is to first understand the transaction in detail. Once the transaction is fully understood, students must seek to fully understand the technical guidance (please see question #3 as well) on the matter and then be unbiased and objective when making judgments about whether the client properly accounted for the transaction. Students need to remember that they have a professional responsibility to maintain an attitude of skepticism throughout the audit process. The bottom line is that given the inherent bias that exists between related parties, the question of economic substance in any transaction between related parties demands special attention by auditors. They need to exhibit this type attitude throughout. And the evidence gathered does not appear to have met this standard. 5. Consult Paragraph 9 of PCAOB Auditing Standard No. 5 and your primary audit text. Based on your understanding of inherent risk assessment, identify three specific factors about BFA that might cause you to elevate inherent risk. Briefly provide your rationale for each factor that you identify. 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: Under William Crotts' leadership, the foundation engaged in a major strategic shift in its business operations. It is not clear whether BFA had the requisite expertise to conduct business operations in the new areas of strategic focus; BFA began to invest heavily in the Arizona real estate market; BFA accelerated its efforts to sell investment agreements and mortgage-backed securities to church members; Arizona real estate prices declined substantially in 1989; management decided to establish a number of related affiliates that were each controlled by an individual with close ties to BFA; BFA gained approval to operate a trust department that would serve as a nonbank passive trustee for individual retirement accounts (IRAs). Thus, BFA now had to meet certain regulatory requirements, which included minimum net worth guidelines; BFA is engaging in activities that are normally highly regulated, but is being shielded by its status as a religious organization; and BFA's affiliates owe the organization a large amount of money, and combined, there is a large net worth deficit. 6. Consult Paragraphs .04-.06 of AU Section 334. Comment on why the existence of related parties (such as ALO and New Church Ventures) present additional risks to an auditor. Do you believe that related party transactions deserve special attention from auditors? Why or why not? The auditing standards make clear that auditors need to pay special attention to transactions with related parties. According to paragraph # 4 of AU Section 334, \"the auditor should be aware of the possible existence of material related party transactions that could affect the financial statements.\" Moreover, paragraph #5 of AU Section 334 states that \"in determining the scope of work to be performed with respect to possible transactions with related parties, the auditor should obtain an understanding of management responsibilities and the relationship of each component to the total entity. He should consider controls over management activities, and he should consider the business purpose served by the various components of the entity.\" Stated simply, the existence of related parties does cause concern for auditors because of the possibility that related party transactions are consummated on a basis other than an arm's length basis. An arm's length transaction is one that is consummated in the normal course of business operations in an objective and unbiased manner between unrelated parties. Specifically, that the parties are dealing from equal bargaining positions, neither party is subject to the other party's control or influence, and that the transaction is consummated with fairness, integrity and legality. Given the inherent bias that exists in relationships between related parties, auditors must be skeptical about the true economic substance in all related party transactions. The simple fact is that the relationship between the parties could be (and has been) used to help perpetrate fraudulent transactions (e.g., by enabling the recording of an overstated gain on a sales transaction). 7. Assume you are an investor in BFA. As an investor, what type of information would you be interested in reviewing before making an investment in BFA? Do you believe that BFA should have been exempt from Arizona banking laws? Why or why not? An investor in BFA is likely to be interested in reviewing the same type of information that he or she would want to review before investing in a for-profit organization. As such, he or she would be interested in reviewing all pertinent financial statement information and any other information that would allow a thorough assessment of the capabilities of the management team and the financial position of the organization. Interestingly, as noted in the case, because of its status as a religious organization, BFA's product offerings were not subject to the same regulatory scrutiny as a bank's products. However, since the economic substance of BFA's operations was essentially the same as those of a bank, it should also be subjected to the same stringent banking regulations. While it is a religious organization, some of its activities are not in that capacity, and regardless of its nonprofit status, it competes with banks, engages in the same activities, and is subject to the same risks regarding interest rates and liquidity. Not requiring BFA to be subject to the same regulations enables BFA to act in ways that are potentially harmless to investors and defies the purpose of why the laws were enacted to begin with. Additionally, it puts those that are subject to and in compliance with the regulations at a disadvantage simply by not being categorized as a religious organization, when they essentially have the same functions and activities. 8. Consider the planning phase for the audit of BFA's trust department operations. As an auditor, what type of evidence would you want to collect and examine to determine whether BFA was meeting the U.S. Treasury regulations for nonbank passive trustees of IRA accounts? An auditor would need to gather sufficient and competent evidence to ascertain whether BFA was meeting the treasury regulations for nonbank passive trustees of IRA accounts. When planning the nature, timing, and extent of the substantive tests to be used to gather evidence to determine whether BFA was meeting the U.S. Treasury regulation, the auditor must consider the inherent risks related to the client. Any audit areas that have an elevated level of inherent risk must be subject to additional audit attention. BFA, because of its bank-like operations and products faced several risks related to interest rate risk and liquidity risk. As a result of this elevated inherent risk, the auditor must offer additional audit attention to the regulations that pertain to BFA's ability to sever as a nonblank passive trustee of IRA accounts. One of these regulations was the regulation that includes a minimum net worth requirement. This area is of particular concern during an audit of BFA. The auditor, when gathering sufficient, competent evidence, must carefully consider the valuation assertion for invested assets. BFA has additional risk because of the related party transactions (with New Church Venture for example) that were being used to avoid massive write-downs on the valuation of the real estate holdings. The auditor should have obtained additional evidence related to the transactions between BFA and ALO and New Church Venture to be sure that the asset valuation of BFA's balance sheet was presented fairly. In addition, BFA had to conduct its affairs as a fiduciary, that is, it could not manage or direct the investment of IRA funds. It would be critical for the auditor to commit audit attention to gathering evidential matter that would support the assertion of management that BFA was not managing or directing the investment of IRA funds. 9. Consult Paragraph 25 of PCAOB Auditing Standard No. 5. Define what is meant by control environment. Based on the information provided in the case, explain why the control environment is so important to effective internal control over financial reporting at an audit client like BFA? Paragraph #25 of Auditing Standard No. 5 outlines the auditor's responsibilities to understand the control environment. Indeed, \"because of its importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company.\" The control environment is influenced heavily by a company's management team and is therefore often referred to as \"the tone at the top\". With respect to the control environment, the absolute key for management is to try and impact the attitudes towards internal controls throughout the organization by setting the proper example for the organization to follow. According to paragraph #25, \"As part of evaluating the control environment, the auditor should assess - Whether management's philosophy and operating style promote effective internal control over financial reporting; Whether sound integrity and ethical values, particularly of top management, are developed and understood; and Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control. The control environment is so important to internal control over financial reporting at a client like BFA because it impacts ALL other components of an organization's internal control system. The lack of an appropriate control environment sends a message to all employees that management does not believe internal controls are important for efficiency and effectiveness of financial reporting. While we do not have enough information that would allow for a complete evaluation of the integrity of BFA's management, their competence, their leadership style, or their perceived honesty from the case materials, students should point out that BFA's establishment of related party affiliates that are run by former directors should be a cause for concern, as the organizational structure provided the opportunity for a fraud to be perpetrated. In addition, the management team's lack of response to employee concerns about BFA's financial viability was also a major concern. 10. Consult Paragraph 69 of PCAOB Auditing Standard No. 5 and Sections 204 and 301 of SARBOX. What is the role of the audit committee in the financial reporting process? Can you provide an example of how the audit committee might have been helpful in the BFA situation? It is important to note that paragraph #69 of Auditing Standard No. 5 explicitly notes that \"ineffective oversight of the company's external financial reporting and internal control over financial reporting by the company's audit committee\" is an indicator of a material weakness in internal control over financial reporting. This of course has elevated the importance of the audit committee. In addition, the audit committee plays an important role as a liaison with a company's auditor. According to Section 301 of SOX, the \"audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer.\" Moreover, according to Section 204, the auditing firm must report all \"critical accounting policies and practices\" and \"all alternative treatments of financial information within [GAAP] that have been discussed with management\" as well as the \"ramifications of the use of such alternative disclosures and treatments, and the treatment preferred\" by the auditing firm. This is an important component of the oversight role played by the audit committee. For BFA, the audit committee can absolutely be effective in helping to insure fair and accurate financial reporting. Specifically, the audit committee can help to insure that an organization's tone at the top is properly established. In addition, an audit committee can also have an important role in a whistleblower program. Indeed, all employee concerns should at least be brought to the attention of the audit committee, as opposed to management. There is little doubt that if BFA's employee concerns were brought to the attention of the audit committee, it is likely to have had an impact on the financial reporting process at BFA. 11. What is meant by the term whistleblower within the context of the financial reporting process? Do you think that all whistleblower complaints should go directly to the audit committee? Why or why not? Do you think that a whistleblower program would have been helpful at BFA? Why or why not? A whistleblower is the term used to describe an employee of an organization who brings information forward that the organization is involved in some type of corrupt, illegal, fraudulent, or harmful activities to the public at large. Of course, this would apply when a company is involved in fraudulent financial reporting process or some type of misappropriation of assets has occurred. In general, for a whistleblower program to be effective, the information needs to be reported beyond management. In addition, a whistleblower program also needs to be designed in a way where employees can report their concerns and/or issues without fear of losing their job. As a result, an effective whistleblower program will often be anonymous and all information should ultimately be brought to the attention of the audit committee. In general, it is important for the audit committee to hear all complaints so they can make the determination if the information is pertinent to the financial statements or other aspects of the business. Had a whistleblower program been in existence in BFA, employees such as Karen Paetz may have been able to come forward with the information sooner and under more comfortable circumstances (i.e., without having to first resign her position). This may have reduced the adverse impact of the fraud to investors. However, it is important to note that such a program will only be effective if the audit committee takes the appropriate actions after being informed of the fraud or other questionable activity. 12. Do you believe the Arthur Andersen auditors responded appropriately to the information received from BFA's former accountant, Karen Paetz? Why or why not? Absolutely not! At a minimum, an auditor should bring all such concerns to the audit committee. It is absolutely astounding that Andersen chose to completely ignore this individual's warning. Karen Paetz was employed by BFA for seven years. Indeed, this was a credible individual with much knowledge of the accounting infrastructure at BFA. During Paetz's employment at BRA, she interacted frequently with Arthur Andersen's auditors on each audit engagement. The fact that she first resigned and then set up a lunch meeting with McGrath to voice her concerns ALO's deficit (in excess of $100 million) and ALO's monthly losses (approximately $2.5 million) underscored the importance of taking her concerns seriously. 13. Consult Section 401 of SARBOX. How would Section 401 apply to the BFA audit? Do you believe that Section 401 would have improved the presentation of BFA's financial statements? Section 401 of SOX explicitly requires that each set of required financial statements (and related disclosures),in accordance with U.S. GAAP, shall disclose all material \"offbalance sheet transactions\" and \"other relationships\" with \"unconsolidated entities\" that may have a \"material current or future effect on the financial condition of the issuer.\" There is no doubt that Section 401 would have improved the presentation of BFA's financial statements. Although BFA was classified as a religious organization, due to the nature of its transactions, it should have been subject to these rules just as any other organization. Had Section 401 existed at the time and had BFA been required to comply with it, BFA would have been required to disclose its relationships with ALO and New Church Ventures. It is likely that under these circumstances, the financial situation of the related organizations would have been discovered and acted upon much sooner. Therefore, had Section 401 in its current form been applied, it would have improved the reliability of the BFA's financial statements and could have reduced the losses suffered by investors. 14. Define what is meant by a transaction being executed on an arm'- length basis. Explain why gains recorded on transactions with related parties would have greater inherent risk of being overstated. An arm's length transaction is one that is consummated in the normal course of business operations in an objective and unbiased manner between unrelated parties. Specifically, that the parties are dealing from equal bargaining positions, neither party is subject to the other party's control or influence, and that the transaction is consummated with fairness, integrity and legality. Given the inherent bias that exists in relationships between related parties, auditors must be skeptical about the true economic substance in all related party transactions. Stated simply, the relationship between the parties could be used to help perpetrate a fraudulent transaction (e.g., by enabling the recording of an overstated gain on a sales transaction). 15. Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. What is the most relevant financial statement assertion about the related party transaction activity at BFA? Why? Among other matters, paragraphs #28-30 of PCAOB Auditing Standard No. 5 focuses the auditor's attention on the importance of identifying each of the relevant financial statement assertions related to significant accounts and disclosures. Indeed, the identification of relevant assertions is a critical component of the audit of internal control over financial reporting. Specifically, according to Paragraph # 28, \"relevant assertions are those financial statement assertions that have a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated.\" In paragraph #30, auditors might \"determine the likely sources of potential misstatements by asking himself or herself \"what could go wrong?\" within a given significant account or disclosure.\" It is clear that certain financial statement assertions are \"more\" relevant than others for a particular set of financial statements. The most relevant financial statement assertion related to the related party activity at BFA is presentation and disclosure. Because of the potential for bias in any economic transaction consummated with a related party, it is absolutely essential that management fully and appropriately disclose the impact of related party transactions on the financial statements and the related notes. It is important that these disclosures are fair, accurate, and clear to all the external users of the financial statements. 16. Consult Paragraph .71 of AU Section 319. For the assertion identified in Question 15, identify a specific internal control activity that would help to prevent or detect a misstatement related to the related party transaction activity at BFA The auditor should clearly link individual controls with the significant accounts and assertions to which they relate. Clearly, there are a number of possible answers to this question. It is critical however that an understanding of the relationship between internal control activities and the financial statement assertions that they support exists In the situation described in question #16, a process that required a disclosure committee (comprised of a subset of the board of directors) to review all transactions with related parties on a quarterly basis to determine what should be included in the notes to the financial statements is likely to be an effective mechanism to ensure proper disclosure. A disclosure committee would be an effective internal control for the assertion of presentation and disclosure because the committee would hopefully be comprised of financial experts who possess the technical knowledge required to fairly present information with the disclosures and notes to the financial statements. In addition, the committee (comprised of a subset of the board of directors) must be independent from the company. Since the committee would be independent, they will serve as an intermediary between management and investors in order to assure that all information within the disclosures are presented fairly to users of the financial statements. SEND ME THE QUESTION TO MY EMAIL DIRECTLY Myk2030@gmail.com