1). Your long-time client, Central Office Supply, has been rapidly expanding and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a public company have increased significantly as a result of the Sarbanes-Oxley Act. Puckett is particularly concerned with reports that audit fees have doubled because of internal control provisions of the Public Company Accounting Oversight Board's (PCAOB) Auditing Standard No. 5. Puckett has asked you to explain the possible effects on the audit of complying with the requirements of Sarbanes Oxley.

Required:

Referencing this week's lecture, draft a letter to Puckett outlining the changes in the company's responsibilities for internal control and in the audit due to Sarbanes-Oxley and PCAOB Auditing Standard No. 5.

WEEKS LECTURE:

This week's reading includes Chapter 5 Risk Assessment: Internal Control Evaluation and Chapter 6 Employee Fraud and the Audit of Cash.
Our first discussion focuses in on the Sarbanes Oxley Act (SOX). This act was the most important piece of legislation in the accounting profession since the 1933 Securities Exchange Act.

Here is a site with the full Auditing Standard No.5: http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_5.aspx. Understanding SOX and particularly the auditor's responsibilities with regard to SOX is critical to being successful in the field.

Our second discussion question comes from Chapter 6 and how we might deal with potential employee fraud.

Our textbook on pages 226 -228 does a great job in explaining the fraud triangle which is widely used to help explain why fraud exists. The triangle is comprised of motivation, opportunity, and rationalization. We might think of fraud as isolated or occurring in rare cases. However, it is widespread and very costly. Here are some current statistics dealing with employee theft:

Obtained from: http://www.statisticbrain.com/employee-theft-statistics/

More interesting facts and breakdowns can be found at: http://www.statisticbrain.com/employee-theft-statistics/. Many fraud experts believe that fraud stats are severely understated as this is reported fraud and many fraudulent activities go undetected and unreported.

While we often hear about large company thefts in the news, there are actually many more thefts happening in small businesses. However, the amounts are small so it is not so newsworthy. Small businesses often lack key controls as the owners are not fully aware of the importance of a strong control environment. Some even suggest that employee theft is out of control in small businesses. Read here for more details: http://www.smallbusinesstheft.com/employee-theft-statistics/.

Our textbook gives a considerable amount of information on how to prevent frauds and how to implement key controls. Obviously this is quite important as prevention would be the ideal solution. However, sometimes theft does occur and we need to understand how to investigate a fraud. Here is a list of sites that provide additional information beyond our textbook in how to actually investigate a fraud:

SAME LECTUIRE FOR QUESTION 2 AS QUESTION 1

2). Suppose you are auditing cash disbursements and discover several payments to a company you are unfamiliar with and cannot find information about the company on the Internet or in the local telephone directory. The invoices from this company have numbers very close to each other in the sequence, there is no phone number on the invoice, and each bill is a for a dollar amount just under the amount that would require additional approvals before payment. Based on this information, you now suspect this may be a fraud.

Required:

Based on your suspicions, how would you change the audit procedures you would perform and how might you change the evidence you gather? Reference this week's lecture to inform your post.

3). L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally accepted auditing procedure.

Referencing this week's lecture, please answer the following questions:

• Under what circumstances could King justify omitting the confirmation of Cycle's accounts receivable?
• In designing confirmation request, what factors are likely to affect King's assessment of the reliability of confirmations that King sends?
• What alternative procedures could King consider performing when replies to positive confirmation requests are not received?

WEEKS LECTUR: FOR QUESTION 3 AND 4

We have a busy Week 4 in reading two chapters, Chapter 7 Revenue and Collection Cycle and Chapter 8 Acquisition and Expenditure Cycle. Additionally, we need to read Module H Auditing and Information Technology.

Our first discussion question deals with proper auditing procedures around accounts receivables. Outside confirmation is necessary to ensure first the validity of these receivables, as well as the outstanding amount. Companies have been known to overstate their accounts receivable, making their balance sheet and ratios look better than the actual numbers. So, auditors need to pay particular attention to validating and verifying all assets. There are two types of account receivable confirmations used: positive confirmation and negative confirmation. In a positive confirmation the customer is asked to respond. In a negative confirmation the customer is asked only to respond if there is something wrong with the balance. Positive confirmations are most often used as these provide more assurance. Guidance to the entire confirmation process is given through AU Section 330, see: http://pcaobus.org/Standards/Auditing/Pages/AU330.aspx.

There are a lot of details to the confirmation process and our book gives good general information on this process. In addition, here is a detailed site on the entire process dealing with timing as well as non-confirmation: http://accounting-financial-tax.com/2010/01/audit-accounts-receivable-confirmation-application-techniques/.

Our second discussion question has us dealing with a process that all companies have, and that is payroll. Details to this important process can be found in Chapter 8 in Appendix 8C.

Payroll is normally a large expense for a typical company, so this is an area the auditors always test and pay close attention to. An auditor will often think through a process, looking for ways that fraud may be performed. In other words, an auditor needs to think like a fraudster. This allows the auditor to better understand where controls should be implemented. Our textbook lists some common payroll fraud scenarios. Here is a site that has a more comprehensive list: http://www.squidoo.com/10-types-of-payroll-fraud.

Forbes has a very interesting article on fraud along with a couple of real life cases, please read: http://www.forbes.com/sites/matthewgarrett/2013/09/10/payroll-fraud-a-big-threat-and-how-to-avoid-it/. The article along with the actual cases clearly shows why auditors need to review payroll and use their professional skepticism.

Nearly all payroll processes are automated in companies, so auditors need to be savvy not only about general controls, but also system controls. There need to be verifications and controls built into the actual payroll systems. For further information on controls please read: http://www.accountingtools.com/payroll-internal-controls.

SAME LECTURE AS QUESTION 3 USE FOR QUESTION 4 ALSO

4). Two accountants were discussing control activities and test of controls for payroll systems. The senior accountant in charge of the engagement said, "It is impossible to determine who authorizes transactions when the payroll account is computerized."

Referencing this week's lecture, evaluate the senior accountant's statement about control in a computerized payroll system. List the points in the flow of payroll information where authorization takes place.