Auditing Group Project Requirements

Auditing Group Project Requirements and Figure 6

Spring 2016

Part I

Required

1. Based on the information provided about Signal in the case and additional external research on the telecommunications industry, document issues that increase the risk of fraud at Signal. Consider how reporting requirements for a regulated industry might affect fraud risk. These are issues that you will make sure are discussed during the initial audit team fraud risk meeting (that is required by SAS No. 99, AU Sec. 316; AU-C 240).

Issues that might increase the risk of fraud at Signal include the fact that they are in a highly competitive market. The new changes that came to be because of Sarbanes Oxley. The past financial statements might not live up to the new requirements  which could affect the future financial statements. The fact that signal is very well-rounded in the town’s different industries. Also, we must be aware of the fact that they chose our firm because we are friends. Another thing that might raise a red flag is the friendship/ family ties amongst the Board of Directors.

1. For each of the three dimensions of fraud (a.k.a. the fraud triangle)-incentives/pressures, opportunities, and attitudes/rationalizations-document what you believe to be factors that increase the risk of fraud at Signal.

Incentives/ pressures might include the competitive industry. They want to be the best and maintain their monopoly. Another incentive to commit fraud might be the fact that it is a family business. Their mentality might be that everyone will benefit from any good and suffer tremendously if their business took a bad turn.

Opportunities shine through in the fact that they know everyone in the town. They are friends with their banker who could help them. They can easily hide any amount of fraud they might want to commit.

Rationalization might be that they think that they are helping others in the community by providing more jobs the better their business does.

1. Identify the appropriate authoritative and nonauthoritative guidance on revenue recognition. Based on your initial understanding of the entity and its environment, what issues suggest that revenue could be misstated due to fraud?

Authoritative guidance on revenue recognition includes accounting standard update number 2014-09 Topic 606. This states that that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A nonauthoritative guidance might be that the company wants to show lower revenue to avoid paying high franchise fee to local governments.