Contemporary Auditing

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BDO Seidman’s attorneys pointed out correctly that professional standards do not prohibit auditors and client personnel from being “friends.” Well, such relationships may result in violations of the auditor independence rules and guidelines at some point. For instance, if the relationship has no boundaries, the auditor’s appearance of independence could be put to compromise that may lead to collusion to do fraudulent activities. When people lose confidence in the independence of the auditor, then the audit is destabilized. Such relationships often ignore proper work ethics which should include the independence of the auditor. While offering professional audit service, such relationships should not override matters of the auditor’s independence. A member of the accounting profession is expected to observe independence in dispensing these services. This includes abstaining from any conflicts of interest. It is likely that such close relationships would knowingly misrepresent facts on record and influence the auditor to subordinate the judgment to others. This is completely unacceptable.
For example, if the relationships seem to overshadow the some illegal transactions, then the independence of the auditor has been impacted negatively.  Accounting professionals have in the past asserted that whatever is acquired through deceptive means has no value. Independencehas thus been found the highest measure of a valid process at all levels of work and phases of audit. If the independence is lost, the auditor cannot be in a better position to comprehend the company’s internal controls. Thus, such relationships could have a devastating impact on HMI. The results could be detrimental which can make the auditor not to collect adequate appropriate proof to support a decision pertinent to audit. This may also happen when giving out inappropriate opinion of audit.  Thus, these relationships have been major causes of the violation of one or more GAASby auditors.
There are certain circumstances under which an inventory rollback is typically performed. Basically, an inventory rollback is used by professional accountants as an audit toll during the auditing and measurement of the inventory of a company. General audits offer companies with a third-opinion verdict on their accounting procedures or business. Audits of inventory are thus crucial because many companies use a lot of finances and time on controlling these products. Thus, the validity of rollback procedures is realized by identifying the relationship of the way an auditor conducts sampling, testing and inferences from the information collected during the process of audit. However, its evidence does not yield more valid results than a direct analysis by the auditor.
Sampling in audits involves the selection of a number of documents for review. Inventory rollback audit files and documents basically take place between the end of the fiscal year of a company and the end of the calendar year. This selection is done for testing in the process of audit. The sample process is fully anchored by materiality. Thus, auditors should ensure that the documents that have not been sampled do not give a representation of a material figure; items which have a significant value to the company. The validity of the audit is thus subjected to flaws. In fact, obtaining audit evidence in a direct approach by the auditor can be trusted than an inventory rollback which is audit evidence got through inference or indirectly. Testing includes reviewing invoices pertinent to the products and conducting a physical count of the items. Additional samples may be required where errors emerge. Valuation of inventory would generally culminate the process. This is basically done to ensure what a company like HMI paid for matches the inventory items cost. Thus, evidence provided by an inventory rollback is not as persuasive as it may not fully comply with general standards where sufficient relevant data has been obtained which offers a reasonable basis for all recommendations and conclusions.

“Red flags”

A major focus of the trial in this case was BDO Seidman’s consideration of and response to the “red flags” apparent during the 1995 HMI audit . “Red flags” are basically a set of checks of diagnosis to establish the nature of risk of a client or may be a registrant filing statements of finance. Ideally, red flags are conditions, events, situational pressures, personal characteristics or opportunities that may lead to fraudulent activities on behalf of the larger organization or for individual gain. They draw attention to the Internal Revenue Service and raise questions pertinent to the financial statements. Red flags could be used as an early system of warning by both auditors as well as other stakeholders to evaluate the risk of fraud in financial statements. Red flags are evident in SEC filings which cannot be comprehended. They may also arise when companies give an account of revenue when products are merely shipped.
Red flags may warrant concern even though they may not actually be indicative of fraud presence. In the audit planning phase, auditors consider the presence of red flags in coming up with the planned nature, degree and timing of the tests of audit.  At this planning phase, the red flags will typically lead to a more rigorous and broad tests used by the auditors in the substantive audit testing phase. During the phase of internal control assessment, auditors must make a consideration of whether the red flags have amounted in the internal controls of the client being subverted or emasculated. Eventually, the audit wrap-up phase an engagement audit team should weigh yet another time the probable impact of present red flags on the financial statements of the client. Finally, auditors can move back and look at the “big picture” evaluation of the financial statements of the client.

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