Evaluation of Comptronix Corporation: Identifying Inherent Risk and Control Risk Factors Essay

1. Professional lavatoryvassing standards present the scrutiniseed account assay model, which is used to ensconce the nature, timing, and finish of visit procedures. Describe the parts of the model and talk of how changes in each comp nonpareilnt propel the canvasors need for endorse. The audit happen model is used to determine the nature, timing, and intent of substantive audit procedures. The comp wizardnts of audit jeopardize model usu all toldy declargond as fol depleteds DR = AR/(IR x CR)Where DR = undercover work insecurity AR = audit risk IR = natural risk CR = dominate risk Detection jeopardy attendants procedures will lead them to conclude that a fiscal statement assertion is non materially misstated when in fact much(prenominal) misstatement does survive. If auditors want to decrease DR, they had better adopt to a greater end evidence and urinate accepted the validity of evidence. Audit fortune auditors whitethorn unknowingly fail to appropria tely specify their opinion on fiscal statements that atomic number 18 materially misstated. If AR should be hang on in low level, which means the separate risks as well should be low.Inherent adventure The risk of material misstatement of a financial statement assertion, expect in that location were no relate admits. As implicit in(p) risk increases, PDR decreases, which in turn increases the auditors need for stronger evidence. stamp down risk The risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by inhering take for. If the strength of inborn falsify is assessed as decreasing, the auditor should pay more direction to control risks.2. One of the comp wizardnts of the audit risk model is inherent risk. Describe characteristic factors that auditors evaluate when assessing inherent risk. With the benefit of hindsight, what inherent risk factors were present during the audits of the 1989 finished 1 992 Comptronix financial statements? Inherent risk is a greenback of the auditors assessment of the capacity of an assertion to a material misstatement assuming in that respect atomic number 18 no related privileged controls. Some believe that inherent risk would be greater for some(prenominal)(prenominal) assertions and related account based on some conditions as followsComplex calculations earlier than simple calculations.Once the attach to befogged their a key node, Management fix a strong motivation see sales and operating instruction exe contendion to arrive investor expectations because the loss of a key guest put also much coerce on care to meet the contendments of extraneous(a) users. Public Offering of Stock subsequently Comptronix made its public offering of personal line of credit , they gain the crush which push the watchfulness to belie operating executing too meet the expectations from the outer users.Technological emolument Comptronix is a manufacture play along which important products are circuit calling cards and the circuit progresss emergence depend on scientific improvement.The technological improvement has a negative bushel on operating performance. Pressures from a freshly star Compevery By the archetypical year of the fraud (1989), Comptronix became a wise friendship which can employ more than 1,800 employees in less(prenominal) than a ten dollar bill , and at equivalent time, the fellowship grow its the size of the gild in lead unlike locations. The rapid development of compevery made the precaution adjusted their trading operations instead of observe smart set operations. attachment of Accounts The high inherent risk accounts accommodate Accounts receivable/ payable, inventory, and property, plant, and equipment. hardly all the accounts counting is based on estimation which take the numbers are very perfidious and subjective.Cash Flow Pressures Comptronix suffered net losings from 1986. Until the company riveed a venture capitalist, the company was able to generate strong sales and profits. Prior to 1989, Comptronix had generated only two uncoiled years of profit after several years of net losses. cash go down of financial statement cannot cover numerous years of recurring losses. The anxiety has motives to make up operating accounts to look faultless to attract moreinvestors. 3. An early(a)wise component of the audit risk model is control risk. Describe the flipper components of internecine control. What characteristics of Comptronixs midland control increased control risk for the audits of the 1989-1992 year-end financial statements? fiver components of control risk are control environment, risk assessment, control activities, info and communication, and remindering. Control environment set the tone of an musical arrangement by influencing the control consciousness of people. Risk assessment is cares butt against for reporting, analyzi ng, and responding to the risks. Control activities are policies and procedures that help gibe that managements directives are carried out. training is needed at all levels of an system to assist management in meeting the governments objectives.Monitoring of controls is a process to assess the quality of internal control performance over time. The culture and communication is seriously weak in that he one-third executives were able to dedicate the fraud by electrical shunting the existing bill system. They could record the fictitious entries manually and other employees were excluded from the manipulations to minimize the likelihood of the fraud universe discovered.Besides, the weak control activity and monitoring is represented by the fact that Mr. Shifflett or Mr. Medlin could approve payments based solely on an invoice. Therefore, the fraud team was able to bypass internal controls over cash disbursements. national controls were also insufficient to detect the manipulat ion of sales and accounts receivable. Mr. Medlin had the dexterity to adit the merchant vessels department system.4. The venire of directors, and its audit perpetration, can be an effective corporate formation mechanism. Discuss the pros and cons of standing deep down directors to sere on the board. Describe typical responsibilities of audit missions.What strengths or weaknesses were present related to Comptronixs board of directors and audit committee?As shareholders have limited access to the sufficient schooling, they are hard to monitor the daily legal proceeding and management. They would delegate the responsibilities to the board of directors. Then, board of directors require inside directors to go away sufficient information in golf club to make endings those are in the maximum profits of shareholders. However, if the inside directors have improper purposes, its considerably to be a manipulation shot for management.Audit committee is responsible for ensuring that the companys financial statements and reports are accurate and use fair and agentable estimates. much specifically, it is charged with overseeing the financial inform and apocalypse process, monitoring choice of write up policies and principles, overseeing hiring, performance and independence of the external auditors, oversight of regulatory compliance, monitoring the internal control process, overseeing the performance of the internal audit function, and discussing risk management policies and practices with management.The control environment is solidly influenced by the potency of its board of directors or its audit committee. Factors that bear on the dominance of the board or audit committee allow in the extent of its independence from management, the experience and pinnacle of its members. However, among the seven individuals in Comptronix board of directors, five members are either inside directors or directors had close affiliations with management.In addition, the primary function of the board of directors is to protect the shareholders assets and ensure they receive a decent return on their investment. Board members act as trustees of the organizations assets and must(prenominal) exercise over callable diligence to oversee that the organization is well up managed and that its financial situation remains sound. But the composition of Comptronixs board of directors simply lacks objectivity.A qualifying audit committee should be composed of independent directors who are not officers or employees of the organization and who do not have other kinships that plunder independence. However, The audit committee of Comptronix is made up two removed directors and one grey-headed director, which would inevitably impair the independence. Whats more, to qualify, the committee must be composed of outdoors director with at least one qualifying as a financial expert. Nevertheless, for Comptronix Corporation, there is no indication of whether an y of these individuals had accounting or financial report backgrounds. Lastly, the audit committee met only double during 1991, it was not efficiently and sufficiently to monitor and oversee the financial reporting.5. Public companies must file quarterly financial statements in Form 10-Qs, that have been refreshened by the companys external auditor. Briefly identify the key requirements of Auditing Standards (AU) Section 722, Interim pecuniary Statements. Why wouldnt all companies (public and private) suck up their auditors to perform timely reviews of interim financial statements?The term interim financial information means financial information or statements covering a period less than a full year or for a 12-month period ending on a date other than the entitys fiscal year end.A review lie ins principally of performing analytical procedures and reservation inquiries of persons responsible for financial and accounting matters, and does not contemplate (a) test of accounting r ecords through inspection, observation, or confirmation (b) tests of controls to evaluate their effectiveness (c) the obtain net of corroborating evidence in response to inquiries or (d) the performance of legitimate other procedures ordinarily performed in an audit.The decision to have a review encounter is a joint decision of the client and auditor. So a review would be performed when the benefits to the auditor and to the client exceed the be to both parties. In normal, firms with high complexness are more likely to be reviewed than firms with low complexity. Firms with high growth opportunities a less likely to be reviewed than those with low growth opportunities for they may be associated with high information and litigation risks. And its also about the firms audit assurance and damages needs.6. Describe whether you conceptualize Comptronixs executive team was inherently dishonest from the beginning. How is it attainable for otherwise honest people to get twisting i n frauds like the one at Comptronix?We dont find Comptronixs executive team was inherently dishonest from the beginning. In opposite, we think there are two main reasons for the company committed the fraud.The first is its weak internal control.First comes to the companys board of director. The board of directors is responsible for overseeing the actions of management. Factors that bear on the effectiveness of the board include the extent of its independence from management, the experience and stature of its members, the extent to which it raises and pursues difficult questions with management, and its interaction with the internal and external auditors. the audit committee of the board of directors should be composed of independent directors who are not officers or employees of the organization and who do not have other relationships that impair independence. In addition, the audit committee should have one or more members who have financial reporting expertise.However, Comptroni xs board of directors consist of the CEO and the COO of the company, And two of the other five directors who had close affiliations with management, one served as the companys outside general legal counsel and the other who served as vice prexy of manufacturing for a significant customer of Comptronix, and one of the remaining outside directors who was a partner in the venture capital firm that owned 574,978 shares (5.3%) of Comptronixs common stock, the second outside director who was the vice chairman and CEO of the local bank originally loaning property to the company, and the third outside director who was president of an international components supplier based in Taiwan.And there was no indication of whether any of these individuals had accounting or financial reporting backgrounds. 28.6% of the board consisted of inside directors. And even all of the board of directors disobey the independence and effectiveness of the formation of the board of directors. The interest relati onship with the company increased the potential risk for the management to commit fraud.The second reason is the huge pressure of harsh tilt for the companies in the industry. The fraud was motivated by the loss of a key customer in 1989 to the three executives former employer, SCI. Since the first manipulation of the financial statement, they were forced to manage the other years and evidences to hide the manipulation, which created a vicious circle.In conclusion, the weak internal control system returnd a honorable environment for the commission of fraud. The huge pressure of the company brought the motivation of the fraud. Both of them compete important roles for the honest people to live on involved in frauds.7. Auditing Standards (AU) Section 316, amity of Fraud in a fiscal Statement Audit, notes that three conditions are broadly present when fraud occurs. Research the dogmatic standards for auditors and go away a brief drumhead of each of the three fraud conditions. Additionally, provide an example from the Comptronix fraud of each of the three fraud conditions.(1) Three fraud conditionsFirst, management or other employees have an inducement 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 bowl over controlsthat provide an probability 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.(2) ExamplesThe incentive for top company executive to do fraud is that after the company went public, the company needed an increase number for profit on the income statement, to attract more investors and make the stock price higher and higher.One of the opportunities for fraud perpetrated in Comptronix is that their internal cont rols were so insufficient. The three executives had so many authorities to get access to various accounts. They can get control of both checks and accounts payable, which enable them to make pull strings equipment purchasing transcription.Because Comptronixs quarterly filings were unaudited, the executives were roaring in manipulating quarterly financial statements. later they successfully manipulated 1989 year-end sales and receivables, they purpose their performance may not be discovered by external auditors and SEC, so they began recording fictitious quarterly sales frequently.8. Auditing Standards Section 316, Consideration of Fraud in a Financial Statement Audit, notes that there is a possibility that management annul of controls could occur in every audit and accordingly, the auditor should include audit procedures in every audit to address that risk.a. What do you think is meant by the term management override?Management override of internal controls is the intervention by managers in intervention financial information and making decisions opposite to internal control policy. Managers may think they have the ability to operate outside of the internal controls, but this is not true.b. provide two examples of where management override of controls occurred in the Comptronix fraud.For example, Mr. Medilin, as controller and treasurer, has the authorization to manipulate both sales documents and accounts receivable documents. gum olibanum he can enter simulated sales into the accounting system thusly make put off accounts receivable to mislead the companys earnings. Moreover, in order to overstate the equipment and accounts payable, the three company executives cut fake checks to the bogus accounts payable vendors associated with the fake purchases of equipment. However, the check preparing and recording of equipment purchases jobs should be distributed to different staff. Handling these two jobs at the same time by same executives provide them o pportunity to make overstated recording of equipment purchasing.c. Research AU Section 316 to identify the three required auditor responses to win address the risk of management override of internal controls.Three required auditor responses to further address the risk of management override (1) Examining journal entries and other adjustments for evidence of possible material misstatement due to fraud. (2) Reviewing accounting estimates for biases that could result in material misstatement due to fraud. (3) Evaluating the business rationale for significant unique transactions.