Eliot Rey, the owner of a publicly held technology company, asked Mary Messup, C

Question

Eliot Rey, the owner of a publicly held technology company, asked Mary Messup, CPA, to conduct an audit of the company's records. The financial statements to be audited covered a two-year period. The statements needed to be ready to submit to the SEC by September 30, 2017. Rey also needed to provide the audited financial statements to their bank as part of a large loan application. Messup immediately accepted the engagement and agreed to provide an auditor's report within one month. Rey agreed to pay Messup her normal audit fee plus a percentage of the loan if it was approved. Messup hired two Sac State accounting graduates (both graduated in May 2017) to conduct the audit. She spent several hours going over what they needed to do. She told the new hires not to spend any time reviewing the client's system of internal control but to concentrate on checking the mathematical accuracy of the general ledger and summarizing the data in the accounting records that supported Rey's financial statements. The new hires followed Messup' instructions. They competed the audit procedures in two days. They did notice that the company failed to include the terms of a large note payable in the footnotes, but they were nervous about talking to Mr. Rey about that. They did talk to Mr. Rey about the fact that although 25% of the accounts receivable were over 120 days old there was no allowance for doubtful accounts included. Mr. Rey said they shouldn't be concerned about that. They made a note of his response in the workpapers. They turned over the workpapers to Messup along with the financial statements prepared by the client. Messup gave an unmodified (clean) opinion on the financials. REQUIRED: For each of the auditing principles listed, identify the action(s) taken (or not taken) by Messup or her assistants that support(s) their compliance with the requirement.

Explanation / Answer

This principle forms part of sec 315 which states that it is an auditors responsibility to identify and assess the risk of material mistatement by understanding the entity and its environment , including entity's internal control.

The auditor should have an understanding of the following about the entity:

- its ownership

- its operations

- the types of investments the entity is making

- the way entity is structured and how it is financed

The auditor should obtain an understanding of the entity Internal Control. Mostly all controls relevant to the audit are likely to relate to financial reporting, not all controls related to financial reporting are relevant to audit. So, it is completely a proffessional judgement of the auditor to evaluate.

When obtaining an understanding of controls that are relevant to the audit, the auditor should evaluate the designs of those controls and determine, whether they have been implemented by performing procedures in addition to inquiry of the entity's personnel.

The auditor shall also have an understanding of the Controlled environment and Risk assessment procedures.

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