Wiley Practitioner's Guide to GAAS 2017. Flood Joanne M.

Does the account consist of transactions that are complex or unusual in nature?

      ● Does the account contain significant estimates and period-end adjustments?

      ● Has the account been prone to errors in the past?

      ● Has the account not been regularly reconciled on a timely basis?

      ● Does the account contain unreconciled differences?

      ● Does the account contain intercompany transactions?

      ● Is the account otherwise associated with an identified risk of material misstatement due to fraud?

      Illustration 4. List of Circumstances That May Indicate the Possibility of Fraud (from AU-C 240 Appendix C)

      Conditions may be identified during fieldwork that change or support a judgment regarding the assessment of the risks, such as the following:

      ● Discrepancies in the accounting records, including:

      ● Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy.

      ● Unsupported or unauthorized balances or transactions.

      ● Last-minute adjustments that significantly affect financial results.

      ● Evidence of employees' access to systems and records inconsistent with that necessary to perform their authorized duties.

      ● Tips or complaints to the auditor about alleged fraud.

      ● Conflicting or missing evidential matter, including:

      ● Missing documents.

      ● Documents that appear to have been altered.

      ● Unavailability of other than photocopies or electronically transmitted documents when documents in original form are expected to exist.

      ● Significant unexplained items on reconciliations.

      ● Unusual balance sheet changes, or changes in trends or important financial statement ratios or relationships; for example, receivables growing faster than revenues.

      ● Inconsistent, vague, or implausible responses from management or employees arising from inquiries procedures.

      ● Unusual discrepancies between the entity's records and confirmation replies.

      ● Large numbers of credit entries and other adjustments made to accounts receivable records.

      ● Unexplained or inadequately explained differences between the accounts receivable subledger and the control account, or between the customer statements and the accounts receivable subledger.

      ● Missing inventory or physical assets of significant magnitude.

      ● Unavailable or missing electronic evidence, inconsistent with the entity's record retention practices or policies.

      ● Fewer responses to confirmations than anticipated or a greater number of responses than anticipated.

      ● Inability to produce evidence of key systems development and program change testing and implementation activities for current-year system changes and deployments.

      ● Problematic or unusual relationships between the auditor and management, including:

      ● Denial of access to records, facilities, certain employees, customers, vendors, or others from whom audit evidence might be sought.

      ● Undue time pressures imposed by management to resolve complex or contentious issues.

      ● Complaints by management about the conduct of the audit or management intimidation of audit team members, particularly in connection with the auditor's critical assessment of audit evidence or in the resolution of potential disagreements with management.

      ● Unusual delays by the entity in providing requested information.

      ● Unwillingness to facilitate auditor access to key electronic files for testing through the use of computer-assisted audit techniques.

      ● Denial of access to key IT operations staff and facilities, including security, operations, and systems development personnel.

      ● An unwillingness to add or revise disclosures in the financial statements to make them more complete and transparent.

      ● An unwillingness to address identified deficiencies in internal control on a timely basis.

      Illustration 5. Example Program for Management Override of Internal Control

      AU-C 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS

      AU-C Original Pronouncement

      AU-C 250 Definition of Term

       Source: AU-C 250.11

      Noncompliance. Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity or on its behalf by those charged with governance, management, or employees. Noncompliance does not include personal misconduct (unrelated to the business activities of the entity) by those charged with governance, management, or employees of the entity.

      Objectives of AU Section 250

      AU-C Section 250.10 states that:

      …the objectives of the auditor are to

      a. obtain sufficient appropriate audit evidence regarding material amounts and disclosures in the financial statements that are determined by the provisions of those laws and regulations generally recognized to have a direct effect on their determination (see paragraph .06a),

      b. perform specified audit procedures that may identify instances of noncompliance with other laws and regulations that may have a material effect on the financial statements (see paragraph .06b), and

      c. respond appropriately to noncompliance or suspected noncompliance with laws and regulations identified during the audit.

      Requirements

      Auditor's Responsibilities

      Noncompliance with laws and regulations is so diverse that articulating the auditor's responsibility for their detection and reporting has proven to be very complex. Some laws and regulations, such as the Internal Revenue Code regulations concerning income tax expense, clearly fall within the auditor's expertise, and the audit of financial statements normally includes testing compliance with such laws and regulations. Other laws and regulations, such as those on occupational safety and health or food and drug administration, are clearly outside the auditor's expertise and are not susceptible to testing by customary auditing procedures.

      Categories of Laws and Regulations

      AU-C 250 makes a distinction in the auditor's responsibility between two categories of laws and regulations:

      1. Those that have a direct effect on the determination of financial statement amounts – for example, pension and tax laws and regulations. (AU-C 250.6a)

      2. Those that do not have a direct effect but compliance may be fundamental to operating and continuing the business, and which may carry material penalties for noncompliance – for example, operating licenses and environmental regulation. (AU-C 250.06b)

      AU-C Section 250 requires the performance of procedures to identify material misstatements resulting from noncompliance with laws and regulations. The auditor is not expected to detect noncompliance with all laws and regulations. (AU-C 250.04) Because of the inherent limitations of an audit, some material misstatements in the financial statements may not be detected even when the audit is properly planned and performed in