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

1. Professional visiting standards gratuity the analyze hazardiness impersonate, which is used to de endpointine the nature, timing, and goal of canvass procedures. Describe the comp unriv on the wholeednts of the present and discuss how changes in each comp adeptnt affect the hearers take up for evidence. The audit happen model is used to determine the nature, timing, and extent of substantive audit procedures. The components of audit risk model usually state as follows DR = AR/(IR x CR)Where DR = detection risk AR = audit risk IR = native risk CR = fake risk Detection Risk auditors procedures will lead them to conclude that a fiscal statement assertion is non materially misstated when in fact a great deal(prenominal) misstatement does cost. If auditors want to decrease DR, they had better collect more evidence and engage sure the validity of evidence. Audit Risk auditors may unknowingly pass away to appropriately modify their opinion on fiscal statements that atomic number 18 materially misstated. If AR should be keep in low level, which means the different risks also should be low.Inherent Risk The risk of material misstatement of a financial statement assertion, assuming in that respect were no related carrys. As inherent risk increases, PDR decreases, which in turn increases the auditors need for stronger evidence. discover risk The risk that a material misstatement that could top in an account will not be pr level(p)ted or detected on a termly basis by infixed condition. If the strength of inbred control is assessed as decreasing, the auditor should pay more attention to control risks.2. One of the components of the audit risk model is inherent risk. Describe regular(prenominal) 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 by dint of 1992 Comptronix financial statements? Inherent risk is a measure of the auditors assessment of the susceptibility of an assertion to a material misstatement assuming there are no related home(a) controls. Some believe that inherent risk would be greater for some assertions and related account ground on some conditions as followsComplex calculations rather than simple calculations. erst the political party lost their a cardinal client, Management engage a strong motivation manipulate gross revenue and operating exertion to encounter investor expectations because the loss of a key customer put in addition much pressure on anxiety to meet the requirements of orthogonal users. Public go of Stock After Comptronix made its public offering of stock , they bedevil the pressure which push the management to manipulate operating performance too meet the expectations from the external users.Technological Improvement Comptronix is a manufacture alliance which main products are circuit circuit cards and the circuit maturates development depend on te chnological improvement.The technological improvement has a negative impact on operating performance. Pressures from a new star Comp whatever By the outgrowth year of the thespian (1989), Comptronix became a new comp either which can take more than 1,800 employees in less than a decade , and at identical time, the order expanded its the size of the company in three different locations. The rapid development of company made the management adjusted their trading operations instead of supervise company operations. Estimation of Accounts The high inherent risk accounts include Accounts receiv adequate/ payable, inventory, and property, plant, and equipment. But all the accounts computation is ground on estimation which led the numbers are very unreliable and subjective. change Flow Pressures Comptronix suffered mesh losses from 1986. Until the company attracted a gage capitalist, the company was able to generate strong sales and do goods. Prior to 1989, Comptronix had generat ed scarce deuce consecutive old age of profit after several years of net losses. cash flow of financial statement cannot cover many years of recurring losses. The management has motives to make up operating accounts to look perfect(a) to attract moreinvestors. 3. An early(a) component of the audit risk model is control risk. Describe the five components of internal control. What characteristics of Comptronixs internal control increased control risk for the audits of the 1989-1992 year-end financial statements?Five components of control risk are control environment, risk assessment, control activities, learning and communication, and monitoring. Control environment case-hardened the tone of an organization by influencing the control brain of people. Risk assessment is managements process for identifying, analyzing, and responding to the risks. Control activities are policies and procedures that help ensure that managements directives are carried out. Information is inevitable at all levels of an organization to assist management in agitate together the organizations objectives.Monitoring of controls is a process to assess the timberland of internal control performance over time. The information and communication is earnestly worn down in that he three executives were able to perpetrate the artifice by bypassing the existing explanation system. They could record the fictitious entries manually and some opposite employees were excluded from the manipulations to minimize the likelihood of the contrivance being discovered.Besides, the weak control natural process 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.Internal controls were also insufficient to detect the manipulation of sales and accounts receivable. Mr. Medlin had the ability to access the shipping department system.4. The b oard of directors, and its audit committee, can be an effective corporate governance mechanism. Discuss the pros and cons of allowing internal(a) directors to sere on the board. Describe typical responsibilities of audit committees.What strengths or weaknesses were present related to Comptronixs board of directors and audit committee?As shareholders have limited access to the sufficient information, they are hard to monitor the mundane transactions and management. They would delegate the responsibilities to the board of directors. Then, board of directors require inside directors to render sufficient information in order to make decisions those are in the maximum profits of shareholders. However, if the inside directors have improper purposes, its easily to be a manipulation tool for management.Audit committee is obligated for ensuring that the companys financial statements and reports are accurate and use average and reasonable estimates. More specifically, it is charged wit h overseeing the financial reporting and disclosure process, monitoring choice of accounting policies and principles, overseeing hiring, performance and liberty 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 authoritatively influenced by the posture of its board of directors or its audit committee. Factors that bear on the effectiveness of the board or audit committee include the extent of its independence from management, the experience and top 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 responsibility of the board of directors is to protect the shareholders assets and ensure they receive a decent return on the ir investment. bill members act as trustees of the organizations assets and must exercise cod diligence to oversee that the organization is well managed and that its financial situation mud sound. But the composition of Comptronixs board of directors obviously lacks objectivity.A liberty chit audit committee should be composed of independent directors who are not officers or employees of the organization and who do not have other relationships that demoralise independence. However, The audit committee of Comptronix is made up two out of doors directors and one gray director, which would inevitably impair the independence. Whats more, to qualify, the committee must be composed of outside director with at least one qualify as a financial expert. Nevertheless, for Comptronix Corporation, there is no indication of whether any of these individuals had accounting or financial reporting backgrounds. Lastly, the audit committee met only twice during 1991, it was not efficiently and s ufficiently to monitor and oversee the financial reporting.5. Public companies must file every quarter financial statements in embodiment 10-Qs, that have been reviewed by the companys external auditor. Briefly suck up the key requirements of Auditing Standards (AU) Section 722, Interim monetary controversys. Why wouldnt all companies (public and private) engage their auditors to perform timely reviews of retardation financial statements?The term interim financial information means financial information or statements covert 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 incorporates principally of perform analytical procedures and making inquiries of persons trusty for financial and accounting matters, and does not conjecture (a) test of accounting records through inspection, observation, or confirmation (b) tests of controls to evaluate their effectiveness (c) the obtain net of corroborating evidenc e in response to inquiries or (d) the performance of certain other procedures ordinarily performed in an audit.The decision to have a review engagement 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 general, firms with high complexity are more credibly to be reviewed than firms with low complexity. Firms with high growth opportunities a less possible 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 redress needs.6. Describe whether you think Comptronixs executive team was inherently corrupt from the beginning. How is it possible for otherwise honest people to become involved in frauds like the one at Comptronix?We dont think Comptronixs executive team was inherently dishonest from the beginning. In opposite, we think there are two main re asons 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, Comptronixs 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 counseling and the other who served as vice president 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 to begin with loaning money to the company, and the third outside director who was president of an transnational 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 relationship 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 manipulate the other years and evidences to hide the manipulation, which created a sinful circle.In conclusion, the weak internal control system forgetd a upright environment for the commission of fraud. The huge pressure of the company brought the motivation of the fraud. two of them played important roles for the honest people to become involved in frauds.7. Auditing Standards (AU) Section 316, Consideration of Fraud in a Financial Statement Audit, notes that three conditions are generally present when fraud occurs. Research the peremptory standards for auditors and provide a brief summary of each of the three fraud conditions. Additionally, provide an example from the Comptronix fraud of each of the three fraud conditions.(1) trey fraud conditionsFirst, management or other em ployees 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 tip over 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.(2) ExamplesThe incentive for top company executive to do fraud is that after the company went public, the company needed an increasing 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 controls 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 fake equipment purchasing preserve.Because Comptronixs quarterly filings were unaudited, the executives were successful in manipulating quarterly financial statements. After they successfully manipulated 1989 year-end sales and receivables, they thought their performance may not be discovered by external auditors and SEC, so they began arrangement 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 knock over 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 handling financial information and making decisions contrary to internal control policy. Managers may think they have the ability to operate outsi de 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. Thus he can enter bogus sales into the accounting system then make fake 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 opportunity to make overstated recording of equipment purchasing.c. Research AU Section 316 to identify the three required auditor responses to further address the risk of management overri de of internal controls. third 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 unusual transactions.