Comprehensive Problem 1

QUESTIONS
1. What are the auditor's primary objectives when he or she observes the client's annual
physical inventory? Identify the key audit procedures that an auditor would typically perform
during and after the client's physical inventory.
The things that should be established by an auditor when observing the client's annual physical
inventory are the existence of the inventory items recorded on the client’s books, the rights and
accuracy of the recorded amounts, including their measurements and the realizable value of
each items recorded.
The key audit procedures an auditor would typically perform during and after the client's
physical inventory would typically include:
* Observing the client's inventory-taking procedures. If a periodic inventory system was used by
the audit client, the physical inventory count determines the inventory accounts balance which
will most likely take place on the balance sheet date. If a perpetual inventory system was used
by the client, the physical inventory count will take place at any point during the accounting
period. The auditor is expected to observe while the count occurs, tracing the inventory items
from the client’s record documents to the warehouse floor and vice-versa either the client is
using periodic or perpetual inventory system.
* When the beginning balances has not audited by the auditing company, the auditors must
reassure themselves as to the appropriateness of the beginning balances if they are correct
with regards to the current balances. They can use analytical procedures, analyze prior
inventory count records, and test inventory transactions and documents to accomplish this.
* Obtain written confirmation directly from the warehouse. Since the inventory is important in
our case, the auditor should evaluate the client's processes for investigating and assessing the
warehouse by acquiring a report on internal controls from the warehouse's auditor while
observing the warehouse's physical counts to assess the effectiveness of the client's counting
methods and also examine the inventory's quality and condition (consider obsolescence).
* Assess the client's implementation of their inventory valuation system (FIFO, LIFO) and the
lower-of-cost-or-market rule and test the cost accumulation process for it relates to the
valuation of ending inventories and cost of goods sold. Lastly, follow up on any inconsistencies
found by other auditors on the team as well as supervisors within the company.

2. What audit procedure or procedures might have prevented Nashwinter from successfully
overstating the 1980 year-end inventory of the Gravins Division? What audit procedure or
procedures might have prevented Nashwinter from overstating the division's 1981 year-end
inventory?
Returning to number 1, the general procedures that would prevent Nashwinter from
overstating the year-end inventory in 1980 are: When the beginning balances has not audited
by the auditing company, the auditors must reassure themselves as to the appropriateness of
the beginning balances if they are correct with regards to the current balances. They can use
analytical procedures, analyze prior inventory count records, and test inventory transactions
and documents to accomplish this. Checking also the cost accumulation process of the
company for it relates to the valuation of ending inventories and COGS. The auditor can also
pick a random selection of inventory items from the warehouse floor, count them, and
compare the quantity to the client count records and vice-versa. Lastly, evaluate the client's
processes for investigating and assessing the warehouse.

For the year 1981, the procedures that will be useful are: Acquiring a report on internal controls
from the warehouse's auditor and choosing a random sample of inventory items from the
perpetual inventory data and trace them back to the client count documents and vice-versa,
comparing the physical counts with the latest computer system records. The auditor can also
follow up on any inconsistencies found by other auditors on the team as well as supervisors
within the company.

3. In 1981, Gravins' inventory turnover was approximately one-half that of comparable divisions
within the firm. How should this fact have affected the planning for the 1981 audit of
Doughtie's? What audit procedures should Wilson and Pollard have performed to investigate
Gravins' unusually low inventory turnover rate?
Gravins' inventory turnover was about half of that of comparable divisions within the company
in year 1981. When a particular ratio is very different from the expected number (in this case,
comparable divisions within the firm) during the initial analytical review (during planning
phase), are considered a "signal of risks." Obviously, in this case, the size of inventory (largest
asset of approximately 40 %) would have also "flagged" the account as worthy of greater
inspection than normal. What effect could this have had on the audit plan? With these “signal
of risks” present, the auditor should strengthen and increase audit procedures in that field to
determine if the deviation from expectation is due to a valid business cause or an error or
irregularity (misdeed). As a result, the auditor should have enhanced attention in the inventory
and cost of goods areas (the two items that make up the inventory turnover ratio) during the
planning phase.
The audit procedures that should have been carried out by the auditor are: The auditor should
have carefully counted the inventory (including item’s unit of measure) and compared those
counts to the company’s recorded inventory data. The key here was to refuse "additional
forgotten count sheets" from the client and to be precise enough to note units of measurement
for this had tainted the count, which would have exposed an inflated inventory otherwise. A
"roll forward" technique is of another procedure for high-risk inventory. This is a schedule that
demonstrates inventory activity. You take the beginning inventory, add the purchases, subtract
COGS, and prove the ending inventory. In this case, there were no "purchase" transactions for
the fictitious items and units of measurement, so the missing purchase transactions would have
revealed the fictitious quantities as well. When the "missing count sheets" were given as a way
to validate certain sheets, this should have been done.

4. Nashwinter was under considerable pressure to improve his division's operating results.
Discuss how this fact, if known to the auditors of Doughtie's, should have affected their
assessment of audit risk for this client.
During the planning phase, auditors evaluate and assess inherent risk and control risk. High
pressure to reach expectations increases the inherent risk of an audit because management has
the significant ability to bypass controls (such as fabricating a count sheet) in order to achieve
extreme performance. In addition, during the audit preparation phase, the fraud risk
brainstorming session, would have addressed the question of "pressure" to reach goals.
Pressure on managers raises the risk of fraud, because pressure is one of the three components
of the fraud triangle (pressure, opportunity and rationalization). When under duress, the
probability of fraud attempts skyrockets. As a result, during audit preparation, the auditor
should have increased their evaluation of both fraud risk and inherent risk, both of which would
cause increased scrutiny on the audit conducted.

Comprehensive Problem 2
1) Discuss the above case by relating to the auditor’s duties and responsibilities in financial
reporting as stated in the standards.
Duties and responsibilities of auditors in financial reporting according to the standards states
that Ardisco & Associates as professionals, their responsibility is not exclusive to protect the
interest of their clients or employees, instead, the interest of the public must always be their
paramount concern. In order to maintain public trust and confidence, professionals must
adhere to the standards of ethical conduct: standards of conduct that embody and
demonstrate integrity, objectivity, confidentiality, competence and due care, and concern for
the public rather than self-interest. The primary duties and responsibilities of an auditor
includes obtaining reasonable assurance that the financial statements are free of material
misstatements, as well as examine and form an opinion whether the financial statements
provide a true and fair representation of the company’s transactions and records. Thus, Ardisco
& Associates, as an auditor of the Group, has a right to access the company's financial and other
accounting documents (including registers) at all appropriate times, and is authorized to
request such information from any officer of the company and any auditor of a related
company and ask for any clarifications as they see fit for audit purposes. An auditor of a holding
company for which consolidated accounts are required has the right to access the accounting
and other financial records (including registers) of any subsidiary at all appropriate times, and is
entitled to demand from any officer or auditor of any subsidiary, such details and clarification
about the holding company, provided at the expense of the holding company, the auditor
needs to know about the subsidiary's affairs for the purpose of reporting on the consolidated
accounts of the group. According to the standards, an auditor must carry out his or her duties
with dignity and integrity.

2) Explain the Group’s management responsibilities in preparing financial statements.

3) Decide whether the auditor is guilty or not guilty for giving out confidential information to
others without the Group’s consent. Support your answer with the right provision/section in
the standards.
According to the facts of the case, Ardisco & Associates has the authority to search for the
trading account from Fiona Party Holding Bhd's account groups, finding documents as evidence
of the recorded amounts in the financial statements. As stated in number 1, the primary duties
and responsibilities of an auditor includes obtaining reasonable assurance that the financial
statements are free of material misstatements, as well as examine and form an opinion
whether the financial statements provide a true and fair representation of the company’s
transactions and records. Furthermore, Ardisco & Associates demonstrated their competence
and integrity in defining the auditor duties and responsibilities by doing an audit with an
attitude of professional skepticism. However, informing the appropriate authorities about the
concealment of financial information from the audit without the client’s consent is a not
allowed for according to the ethical standards that govern the accountant’s practice of public
service, an auditor should respect the confidentiality of information acquired during the course
of performing professional services and should not use or disclose any such information
without proper and specific authority or unless there is a legal or professional right or duty to
disclose. According to this case, the auditor, Ardisco & Associates, is guilty for disclosing
confidential information to relevant authorities without the consent of the Group, which is the
audit client, and they are just suspecting of there is something wrong in the Group’s account
and it is not proven yet to be true that this exist. Yes, the auditors must exercise their duties
and responsibilities and must show competence in carrying out those duties and
responsibilities, as well as expertise, care and confidentiality, for according to the standards, an
auditor must carry out his or her duties with dignity and concern for the public.