WORKSHOP 8 STUART CHAPTER 5 (SUGGESTED SOLUTIONS)

Audit Evidence and the Auditors Responsibility for Fraud Detection

DISCUSSION QUESTION
28.
a.

b.

Risk factors (pressure, opportunities, and rationalizations) for a small

independent grocery store might include:
The financial stability of the grocery store might be threatened by
economic conditions, such as competition from a new grocery store in the
area, particularly a discount store.
A small grocery store may have inadequate internal controls.
The personal financial obligations of employees may create pressure on
individuals to steal company assets.
Items in a grocery store are quite susceptible to theft because they are
small in size and have value to the individual stealing them.
Employees in a grocery store may not be well-paid, so they may be able to
rationalize stealing inventory.
A small grocery store probably cant afford detailed theft-prevention
measures.
After identifying the risk factors for the company, the auditor will gather
sufficient appropriate evidence to control risk to an acceptably low level.
Professional skepticism is used to evaluate all the evidence gathered by
the auditor. Professional skepticism includes a questioning mind and a
critical assessment of the evidence.

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REAL-WORLD AUDITING PROBLEMS

34.

WorldCom
a.

Relevant-predict next years net income? Not relevant.would not

correctly predict next years income.
Reliable- verifiable, related to source of the evidence and the nature of the
evidence. Not reliable. Could not be verified. The source of the
information was a manual journal entry reclassifying expenses as assets.

b.

No, the information was biased towards increasing the net income for
WorldCom and misleading outsiders as to their performance.

c.

No, a capitalized asset should have value for several years. Expenses for
the current year do not meet the definition of an asset that provides value
in future years. They were not really assets.

d.

No, shareholders did not have information needed to make good decisions
about the company. Shareholders thought the company was performing
better than it really was, and they made their decisions about the company
based on this information. For example, some shareholders may have sold
their stock had they been aware of the true performance of the company.

e.

Lenders also lacked accurate information to make a good decision about

the company. They thought the company had higher net income than it
really had. As a result of this, they probably underestimated the risk of the
company. This would mean that the loans given to WorldCom did not
carry an interest rate that correctly reflected the risk of the company.

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