Auditing Percedure

Auditing Percedure
The factor of client relationship that creates a power imbalance in favor of the client is money. When partners in the audit firm are compensated according to their number of client, partners are more likely willing to do almost anything to keep their client happy. The independence of auditor is impairing in front of consulting fees, and interpretations of gaap will be push to the limit to satisfy client?s need. Due to this power imbalanced in favor of client, lots of company went in to bankrupt, each in companies where financial statement misrepresentation had taken place, billions of investment and retirement dollars were lost, and the perception that auditors were not independent from their clients were formed. Finally in 2002, congress passed the Sarbanes/Oxley Act in response to massive accounting scandals. In particular to the problem of the unbalanced relationship in favor of the client, Sarbanes requires boards of directors be independent of organization and exercise oversight over management and the audit function. Further, the board of directors through its audit committee is the ?client? of the public accounting firm. The audit committee must have at least one person who is a financial expert, other members must be knowledgeable in financial accounting and control, and must be comprised of ?outside? directors, not members of management or have other relationships with the organization. Meanwhile, they have oversight responsibilities over the internal audit and financial reporting process, be apprised of all significant accounting decisions made by management and changes in accounting systems and system control. On the audit company side, audit engagement partners, as well as other partners and managers with significant roles in the audit, must be rotated off the engagement every five years.
According to the case, the evidence Hope collected that supported USSC?s claim that the cost involved tooling modifications are simply being told by USSC?s officers. ?On May 3, 1982, the ussc officials inform Hope that in early 1981, they had instructed More, the Lacey general manager, to make certain tooling changes that would result in improved efficiency in the production of ussc products. The executives then provided an elaborated and confusing explanation as to why the tooling modifications were charged out on a per unit basis.? However, the audit evidence that supported the position that the costs were generic production expenses rater than non-current asset. According to the generally accepted auditing standards, the key evaluative criteria that auditors should consider when assessing audit evidence has 2 standards, general standard and fieldwork standard. In general standard, the auditor should pass the exam and being adequately trained, auditors must remain an independent mental attitude, and due professional care. Apply the general standard to the case, hope didn?t due professional care. Means when auditing an public company, if the manager provide an elaborated and confusing explanation to a question or an account, auditor should get fully understanding of the answer or call for more experienced auditor for help, not just pretending to understand it and afraid of being embarrassed. In field work standard, auditors should plan the work adequately, get a sufficient understanding of the entity and its environment including its internal control, and obtain sufficient competent audit evidence through audit procedures performed to provide a reasonable basis for an opinion regarding the financial statements under examination. Apply the fieldwork standard to the case, Hope fail to understand the entity and its environment. Because during those years, ussc is trying to kick its major competitor out of the market, so ussc have to look nice on the Financial Statement in order to get more money from stock to expend it?s production. So there?s higher risk that ussc have material misstatement on the Financial Statement due to fraud, and hope should be extra careful when doing the audit. As a result of failing those to standards, Hope was not justified in deciding that the costs were for tooling modifications.

Hope is not satisfactorily investigating the possibility that there are additional suspicious tooling charges being paid and recorded by ussc. According to the case, there are several places should caused Hope to inspect carefully on it. First of all, on the U.S. Surgical Corporation?s Consolidated Income Statements from the year 1979 to 1981, the net sales have dramatically increase from $60,876 in 1979 to $86,214 in 1980 and $111,800 in 1981, each month increase more than one third of original balance, this unusual increase should give Hope big attention to investigate. Secondly, under the consolidated Balance Sheets, ?Molds and Dies? in the property, plant and equipment have also spectacularly more then doubled increase each year. Also, the balance of research and development expense in 1891 compared with previous has more than 50 percent deceased. All of these three points give the Hope, who is the auditor of U.S. Surgical Corporation enough reason to do more investigation.
After find out the unnatural increase in tooling charges, Hope should: first, know and develop the risk. To know how big or small are the risk is, auditor could interview the managers, monitor the environment, and get more understanding about how is manager?s internal control. Once the risk is developed, auditor can continue to the next step, gathering the evidence-auditor should gather the evidences from the unnatural account like tooling charges. Since Hope get noticed that one of the ussc vendor Lacey manufacturing had sale almost 1 million of the ?tooling and modification? to ussc, auditor could review Lacey manufacturing?s purchase order and invoice, Hope also should get to understand the client and industry?s environmental and then to determine how big is the sample size, who and what should be testing to do the direct testing. If needed, Hope could ask for outside auditor to supervisor the questionable tooling problem. After unusual capitalized expense for tooling and modification, Hope should report it to the manager term, and then perform analytical procedures, consider any unusual relationship, review management responses to recommendations for control improvement and then report on internal Control. According to Sarbanes-Oxley Act of 2002, it requires publicly held companies to report on the effectiveness internal controls over financial reporting. Questionable account or unusual balances from client?s financial repots should be solved first then issued an unqualified report.

Auditing Percedure 7.6 of 10 on the basis of 2064 Review.