Auditing

Auditing

Name:

Institution:

Auditing

Question One

Existence or Occurrence

This management assertion is an accounting tool used to ensure periodic liability by uncovering errors and frauds. It identifies misstated, duplicated or fictitious transaction records in the financial statements. This assertion indicates the existence of an asset or liability at a particular point in time. It also indicates the transaction that took place during a financial period and records to prove its occurrence. For example, financial statement users would want assurance that the material debts and accrued interests recorded in the balance sheet exist as at a given date. Furthermore, they may want assurance that the recorded debts and accrued interests occurred during the stated period.

Rights and Obligations

This assertion addresses whether the management has ownership rights to the claimed assets and as a result, are obligated to service the liabilities arising from the entity. It ensures that the management does not report assets and liabilities that do not belong to the company. For example, financial statement users would want assurance that royalties paid by the managements are for assets leased by the company.

Completeness

This management assertion ensures that all assets, liabilities and transactions undertaken during a particular period, are recorded in the financial statements. Apart from identifying omissions, the completeness management assertion also ensure that the records are reflected in proper accounting periods, correct amounts and all liability obligations accumulated during the period are recorded properly in the financial statements. For example, the management asserts that all accounts payable have been recorded and included in the balance sheet.

Valuation or Allocation

This management assertion ensures that all assets, liabilities and transactions are recorded at proper and accurate amounts. It identifies over-stated or under-stated records in the financial statements. For example, shareholders would want assurance that the company’s stocks are not overvalued or undervalued.

Presentation and Disclosure

This management assertion ensures that all assets, liabilities and transactions are disclosed in the financial statements and presented in a manner that can be clearly understood by the users. For example, investors, especially creditors, would use financial disclosures to compare the company’s financial ratios to those of similar organizations. They might want assurance that the amounts are reliable and correctly presented in the financial statements.

Question Two

Hurtt skepticism score was 140.

Professional skepticism refers to an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement, and a critical assessment of audit evidence. Auditors must have the ability to validate information through probing questions, obtain strong evidence and assess it critically, and finally identify any inconsistencies in the financial statements. Professional skepticism is critical in audit quality and an integral skill for professional auditors. As an auditor’s professional skepticism improves overtime, their audit quality also develops because of enhanced professional judgment. Developments in an auditor’s professional skepticism also reduce the possibility of misinterpreting results, overlooking unusual circumstances, selecting and misplaying inappropriate audit procedures. Furthermore, it enhances an auditor’s ability to evaluate management’s judgments, gather sufficient evidence and arrive at substantive conclusions based on the gathered evidence. Since professional skepticism developed overtime, auditors tend to score higher than students because of the numerous and extensive practical experiences in the auditing field.

Question Three

            For many years, HealthSouth has been the leading and largest healthcare service provider in the United States.. For more than a decade, the company’s Chief Executive Officer (CEO) instructed the company’s employees to inflate the annual revenues and net income. The consistent misstatements of financial performance attracted many investors to venture into the company’s stocks. Since investors relied upon the financial results being that released to the public, the CEO took advantage of the situation to provide the market with false information to lure potential investors into purchasing the company’s stock. The Milgram experiment explains how the false information provided by the CEO to inflate market values, attracted unsuspecting capital investors. Trading in the stock market is solely dependent on speculation and risk taking by the investors. Despite the unbelievable financial performances, skeptical investors were still willing to purchase the company’s stocks. They relied upon the information provided by the CEO whom they saw as the authority figure.

Question Four

HealthSouth inflated their annual financial performance figures for many years. Their net income constantly increased as compared to prior years. The use of hyper-inflated income was more important to the company in creating the impression of high growth, innovation and impressive financial performances. The company’s CEO promoted income as the most important measure of financial performance with the aim of achieving the company’s vision to become the world’s leading healthcare provider. By the time the fraud was detected, HealthSouth had already used the inaccurate income figures to be recognized as the leading healthcare service providers in the United States. The company used legal and illegal bewildering, fraudulent and deceptive accounting practices to alter its financial statements. Instead of using the ‘agent model’ as a revenue recognition tool, the company adopted the ‘merchant model.’ This method of reporting has been adopted by many companies to record hyper-inflated revenues in an attempt to remain competitive in the market.