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Auditor Responsibilities and Risks in Audit

The document discusses the 2000 audit of NextCard that resulted in several risk factors including lack of internal audit, related party transactions, unusual growth and profits, and questionable accounting techniques. When NextCard continued to not make profits during the internet bubble burst, they underestimated credit losses and falsely reported their financial position. The auditors failed to exercise due professional care, obtain sufficient understanding of NextCard, and maintain independence. Audit workpapers are used to prove the audit opinion and link the work to the final report. A senior auditor has indirect responsibility to mentor other auditors, and if asked to improperly adjust prior workpapers, the situation should be reported to superiors and potentially the SEC.

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401 views2 pages

Auditor Responsibilities and Risks in Audit

The document discusses the 2000 audit of NextCard that resulted in several risk factors including lack of internal audit, related party transactions, unusual growth and profits, and questionable accounting techniques. When NextCard continued to not make profits during the internet bubble burst, they underestimated credit losses and falsely reported their financial position. The auditors failed to exercise due professional care, obtain sufficient understanding of NextCard, and maintain independence. Audit workpapers are used to prove the audit opinion and link the work to the final report. A senior auditor has indirect responsibility to mentor other auditors, and if asked to improperly adjust prior workpapers, the situation should be reported to superiors and potentially the SEC.

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jntoomer
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Case 1.

6
1. No, an auditor should not evaluate the soundness of a clients business model. It is
recommended that the auditor understand the clients business in order to better
perform the audit. Auditors are responsible for having appropriate competence and
capabilities to perform the audit, comply with relevant ethical requirements, maintain
professional skepticism and exercise professional judgment throughout the planning
and performance of the audit.
2. The 2000 NextCard audit produced several risk factors including the lack of an internal
audit team, related-party transactions, unusual growths in profit, and managements
accounting techniques. NextCard extended large amounts of credit to customers while
experiencing extreme losses. Executives continued to promise profits but could not
escape the Internet bubble burst. When they continued to not make a profit, they
underestimated the allowance for credit losses and falsely reported the companys true
financial position. These factors would have given the auditors clues about the existence
of fraud. They would have recognized the high risk transactions and could have better
executed the audit.
3. Audit workpapers are the evidence used to prove a submitted opinion. They are the
backbone to the audit and are used as a link between what was performed and the final
report.
4. The auditors failed to exercise due professional care in the performance of the audit,
the auditor failed to obtain a sufficient understanding of the entity and its environment,
and the auditor failed to keep independence while performing the audit.
5. I think that the senior audit manager does have an indirect responsibility to serve as a
mentor for Oliver Flanagan. The audit is performed by a team. It should be in
everybodys best interest to make sure everyone understands the audit and stays on the
same page.
6. If my senior manager asked me to adjust the workpapers of a prior audit, I would first go
to his superior and explain the situation. If that wasnt an option, I would then seek to
notify the SEC. This would have a direct negative effect on the senior manager along
with the client but in turn would have an extremely positive effect on the shareholders.

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