AFM202 Lecture Notes - Lecture 3: Financial Statement

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Amazon.com, Inc.

We have audited Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Amazon.com, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Amazon.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Amazon.com, Inc. and our report dated January 30, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

January 30, 2014

Please answer the following:

review the audit report prepared by the auditors. Let us know the name of the company, the name of the CPA firm that prepared the audit report and tell us the type of opinion that was provided. Also, discuss the role of the audit firm in the audit process.

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

The term "materiality" as used in auditing is best described as the

Prior to accepting an audit client an auditor has a professional obligation to

Which of the following best represents financial statement fraud?

Sampling risk is the risk that

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

The purchasing process consists of each of the following phases except

The following audit report was drafted by a trainee on the audit of Golf (Pty) Ltd (“Golf”), a company which manufactures golf clubs. The trainee was asked to draft the report at the conclusion of the audit for the financial year end 31 March 2017 as part of on-the-job training and you have to evaluate his report. The shareholders of Golf included a clause in the company’s Memorandum of Incorporation which requires that the company’s annual financial statements are extremely audited.

Independent Report To the board of directors. We have evaluated the accompanying financial statements of Golf for fairness based on our annual audit carried out in terms of the Memorandum of Incorporation of the company.

Management is responsible for the preparation of the financial statements and for the prevention of fraud.

The auditor’s responsibility is to perform the audit and in doing do, to detect any fraud which may have material effect on the financial statements not having been prevented by the directors.

We report on the following aspects of the audit: 1. With regard to the detection of fraud, we detected a small wage fraud relating to unauthorized overtime. We reported this to management who subsequently dismissed the guilty persons.

2. An expert was engaged by our firm to assist in the valuation of the work-in-progress. Due to the complexity of the some of the company’s golf clubs, the risk of misstatements in the work-in-progress warranted this.

3. The company is currently being sued by a former employee who suffered personal injury at work whilst testing certain golf clubs during quality control procedures.

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In our opinion, except for the matters raised in 1 to 3 above, there are no outstanding issues arising from the audit which was conducted in terms of the International Standards on Auditing and the International Financial Reporting Standards.
Emphasis of matter There are no matters which require emphasis.

ABD Audit Kings 31 March 2017 Windhoek Namibia

YOU ARE REQUIRED TO:

Detail the errors / deficiencies in the audit report presented to you for evaluation (give explanations where necessary). You are NOT required to redraft the report. (30 marks)


QUESTION 4 (16 marks) According to ISA 240R- The auditors responsibility to consider fraud in an audit of financial statements, the auditor is required to recognize situations which may result in misstatements arising out of the misappropriation of assets. Consider the following. 1. A client company which holds large quantities of inventory does not keep the perpetual inventory records. 2. A company makes all its payments (e.g. wages, salaries, creditors) by electronic funds transfer. 10 employees are provided with the facilities on their computers to effect electronic transfers for their various sections. 3. The company reconciles its creditors ledger with creditors statements only at year – end. 4. The company pays salaries well below the industry norm and adopts the attitude that “if staff don’t like it if they can leave”. 5. Employees caught stealing from the company or making unauthorized use of company assets are dismissed immediately and prosecuted. 6. The company makes a significant number of cash sales. 7. Management and other employees constantly complain about the company (many of the complaints being unfounded). Company morale is low.

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8. There is inadequate authorization of expenditure incurred by management and employees on behalf of the company e.g. salesmen’s expense claims, management travel claims.

ISA 240R classifies the factors which could lead to the risk of misstatement arising from misappropriation as follows:

Classification a – incentive/pressures to misappropriate assets Classification b – opportunities to misappropriate assets Classification c – attitudes/rationalization which suggest the misappropriation may take place.

YOU ARE REQUIRED TO indicate into which classification each of the above risk factors (1 to 8) falls, and give a brief explanation as to why each of the factors increases the risk of misappropriation