Deboner Hillery Hasiholan (20207263)

Dini Tri Wardani (20207343)

Dini Yartiwulandari (21207266)

Yogi Afrianto (21207194)

Object: Anthony, CPA

Client: Medium-Sized Manufacturing Company

b.

c.   1. Decrease in ARACR                                      = CUER Increase

2. Decrease in Population size                       = CUER Increase

3. Decrease in sample size                               = CUER Increase

4. Decrease in number of exception           = CUER Increase

d. Sample size and Number of exception have the greatest effects on the CUER,

population size has the least effect on the CUER

e. It is necessary to compare the CUER with the TER because the auditor need to analyze

the individual exception to find the weakness of internal control

b. By using attributes sampling from the appropriate part of table 14-8

c.      1. Increase in ARACR                      = Sample Decrease

2. Increase in TER                             = Sample Decrease

3. Increase in EPER                          = Sample Increase

4. Incrase in population size        = Sample Increase

d. because there are differences in ARACR and TER percentage and also there is a huge  differences in population size.

e. ARACR and TER have the greatest effect on the initial sample size and population size has the least effect on the

initial sample size.

f. The initial sample size is called that because the exceptions in the actual sample must be evaluated before it possible

to know whether the sample is sufficiently large to achieve the objectives of the tests.

Answer :

IT governance can be defined as a set of processes to effectively manage all IT   assets, functions, and processes which support business goals and the fusion of business and IT. An enforceable program of IT governance is the key to gaining more value from open source and protecting the interests of your organization.

It is important to understand the context in which FOSS governance fits into your organization’s overall IT governance system. Understanding and targeting open source issues within your organization is the first of many steps in developing and implementing a FOSS governance system. It is crucial to have a full understanding of the impact that using open source has in organization. The following section identifies the areas within an organization’s IT governance structure that are likely to be impacted by the use of FOSS.

2.  The Executive Summary makes five recommendations for management with respect to IT. What are these recommendations?

Answer:

recommendations for management with respect to IT :

Recommendations

• Establish an overall cross-functional compliance team and a dedicated sub team managed by a director level person. The team should be supported by C-level executives and include executive from finance, IT, legal, marketing and affected business units.
• Coordinate IT activities within the scope of an overall security and disaster recovery plan.
• Have Finance or Audit take final responsibility to ensure compliance with SOX. Marketing should take the lead on customer data usage decisions affecting privacy as well as the Do Not Call Registry. IT is one input to the whole process.

1. How would an auditor likely view a company’s IT environment if the organization had implemented the above recommendations?

Answer :

Auditors must understand the various IT support systems, including networks, databases and operating systems, that support the financial reporting process. However, they must first gather information concerning the IT control environment, which is part of the overall control environment discussed in COSO. The company-level control environment is the foundation for a company’s internal controls and includes the integrity and competence of the entity’s people. To assess the control environment, auditors should examine management’s philosophy and operating style, including how it assigns authority and responsibility and how it organizes and develops its people.

The overall company control environment has a pervasive effect on the reliability of financial reporting. An important step in understanding the IT control environment is to examine the IT organizational structure and the IT governance structure. The IT organizational structure outlines the authority and responsibility of IT personnel. This structure should support controls, such as adequate separation of duties, and provide assurance that the IT objectives will be achieved.

Effective IT governance helps ensure that IT supports the organization’s goals, optimizes the organization’s investment in IT and mitigates IT-related risks. The IT governance process includes the information systems’ strategic plan, the IT risk management process, compliance and regulatory management, IT policies, collaboration, information sharing, operating style, and procedures and standards.

Source :

http://www.isaca.org/Template.cfm?Section=Home&CONTENTID=34376&TEMPLATE=/ContentManagement/ContentDisplay.cfm

Answer :

Three Common pitfalls can hinder the effectiveness of the audit team   brainstorming: the domination of groups, “social loafing,” “groupthink” and “groupshift.”
-       The dominance of the group is one of the most corrosive problems. Since the purpose   of the brainstorming session is to have the audit team members to share thoughts and ideas, one or two participants dominating the process can quickly extinguish the creative energies of the group as a whole, reduces the likelihood that the team will identify any actual risk of fraud.
-      Social loafing, also called free-ride, other potential pitfalls of brainstorming activities. This occurs when the participants away from the process, hoping that the other team members will take the slack. Another reason such “lazy” may contain “why bother” feeling that comes from the dominance of the group, the absence of attractive incentives to actively participate in discussions and the failure of an individual is enough to make a personal investment in the task group.
-           Groupthink another trap to avoid. This phenomenon occurs when team members became so concerned with reaching an agreement that they fail to realistically evaluate all ideas or suggestions. Audit team can be very vulnerable to this as the auditor general is very sensitive to time / budget pressures. As such, they can be aligned with the view of fraud risk groups in an attempt to complete the task efficiently. Groupshift is the fourth trap. While the purpose of brainstorming sessions was to assist the audit team collectively came to the conclusion about the risk of fraud, the team leader must be careful to avoid allowing the team to take extreme positions on the risk of fraud.

Brainstorming team leader can avoid the pitfalls described above by following these guidelines:
- Assign homework. Discussion leader must notify participants well before the scheduled meeting that they would discuss the risk of fraud so that each team member can focus on ideas about how and where the entity vulnerable.
- Distribute the agenda of the meeting (see example) also would provide greater context for participants to think about the possible risks of fraud and will further inform them of what will happen during the brainstorming session.
- Leaders should encourage team members to use the experience and knowledge gained during previous audits and the recent interaction with the client. In addition, he must emphasize that the task should not be too long; members can formulate ideas when they run day-to-day tasks.
- The leaders should ask people to come to a meeting with a list of their ideas

2. What are three important techniques to improve the effectiveness of a brainstorming session?

Answer :

1. Open brainstorming is a structured technique that auditors can not use where very little discussion followed the rules and procedures. In this type of brainstorming, individuals share ideas when they come to mind in such a free-for-all. Although this approach is often used, it is wrong to assume that the only form groups to share ideas is all one needs to generate a large number of high-quality ideas about the risk of fraud. Even if the basics of brainstorming discussed above are ignored, open brainstorming unstructured environment can lead to degeneration process in which only one or a few individuals to participate
2. Round-robin brainstorming is a structured technique session marked by starting with a period not speak for the team members involved in the silent “self-brainstorming,” or “brainwriting,” to shape their ideas. Team, information about the issues, whether given homework before the meeting and know they have to make a list of their ideas in order of priority, will be more responsive to share with the group. After brainwriting stage, each individual presents his ideas. One way to do this is to have members post their lists on the wall or a bulletin board for all to see. This can be very useful if people are reluctant to speak. And, it is efficient because all the participants took part in the process.
3. Electronic brainstorming is an increasingly popular technique that combines an open brainstorming software technology. Electronic brainstorming meeting times are generally shorter, improving idea generation and reduce the possibility of personalizing the idea for an idea of the author remains anonymous. Group size ceases to be a limiting factor as well. Today’s technology eliminates many problems of coordination and communication, which allows a large enough group to a virtual meeting in which participants may or may not be in the same location as long as there is access to appropriate software. Thus, this technique can be a tool for large, multinational clients involvement in which the audit team members spread out globally.

Source :

www.aicpa.org/pubs/jofa/dec2003/beasley.html

Answer :

Tri – Valley Corporation (TVC), 10-K Report, Year ended 12/31/2006.

http://www.sec.gov/Archives/edgar/data/22551/000002255107000009/tvc123106-10k.htm

Monarch Staffing Inc. 10-KBS Report, Year ended 12/31/2006.

http://www.sec.gov/Archives/edgar/data/1177326/000114037707000054/0001140377-07-000054-index.htm

2. Did either company report material weaknesses in ICFR? If so, what were the weaknesses?

Yes, Both companies reported material weaknesses in ICFR for the year ended 12-31-06. TVC reported deficiencies “related to controls over the accounting for complex transactions to Ensure such transactions are recorded as necessary to permit preparation of financial statements and Disclosures in accordance with generally accepted accounting principles. Such transactions included: TVC reported deficiencies “related to the control of the complex accounting for the transaction to ensure that transactions are recorded as necessary to permit preparation of financial statements and disclosure in accordance with accounting principles generally accepted. The transaction includes:

♣   Proved and unproved properties

• Loans guaranteed with restricted common stock, loans secured by restricted common stock,
• Deferred income taxes, deferred income taxes,
• Discontinued operations from the sale of our interest in Tri-Western Resources, and Stop operation from the sale of our interest in Tri-West, and
• Share-based payment arrangements, “Share-based payment arrangements”Monarch Staffing deficiencies reported as follows: Monarch Staffing shortages

reported as follows:

“We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. generally accepted accounting principles commensurate with our existing financial reporting requirements and the requirements we face as a public company. “We do not maintain a sufficient complement of personnel with the appropriate level of accounting knowledge, experience and training in the application of U.S. accounting principles generally accepted requirements commensurate with the existing financial reporting and the requirements we face as a public company. Accordingly, management has concluded that this control deficiency constitutes a material weakness, and that it contributed to the following material weakness. Therefore, management has concluded that this control deficiency is a material weakness, and that contributed to the following material weaknesses.
We did not maintain effective controls with respect to reviewing and authorizing related party transactions. We did not maintain effective controls in relation to the review and authorization of related-party transactions. Specifically, our control procedures did not prevent the Company from making payments on behalf of other related parties. Accordingly, management has concluded that this control deficiency constitutes a material weakness. “Particularly, our monitoring procedures did not prevent the Company made payments on behalf of related parties other. Therefore, management has concluded that this control deficiency is a material weakness. “

Source :

• http://www.sec.gov/
• http://www.sec.gov/Archives/edgar/data/22551/000002255107000009/tvc123106-10k.htm
• http://www.sec.gov/Archives/edgar/data/1177326/000114037707000054/0001140377-07-000054-index.htm

1. Imagine that you are employed as an auditor in a CPA firm that performs the audit of Microsoft. Your firm’s materiality guidelines indicate that overall engagement materiality should be set at an amount between five and ten percent of income before taxes.

a.  Apply your firm’s guidelines to Microsoft’s 2003 financial statements. What percentage of income before taxes do you believe is appropriate? Why? What do you believe overall engagement materiality should have been for 2003?

Answer :

1. Step in determining materiality in the implementation of the company:

- Determine the initial consideration of the materiality
- Allocate initial consideration of materiality to the segment
- Estimated total errors in the segment
- Estimate the combined error
- Compare the estimate with the combined initial consideration of the materiality

Selected materiality level of 5% -10%, because every company is different in determining the level of misstatement. An auditor should consider from the beginning. If the misstatement rate is less than the materiality level is considered reasonable profit company.

b. Given Microsoft’s 2003 balance sheet, what asset line items would be allocated the highest amount of tolerable misstatement? Why?

Answer :

BALANCE SHEETS

Asset trade receivables and inventory into assets with one item that can be tolerated is very high. Misstatement that could be tolerated because the estimates of high and reap the audit require extensive testing

The vignette at the beginning of Chapter 6 in the text contains a brief description of the ZZZZ Best fraud. One area where the auditors were particularly criticized in that audit had to do with the auditors’ lack of industry knowledge. With hindsight it appeared that the fraud should have been easily detected because ZZZZ Bests’ large restoration contracts were in excess of $7 million while the largest restoration jobs on record in the insurance restoration industry were less than $3 million.

You have been approached by On the Sunny Side, a team sports uniform designer and manufacturer for women, about performing the company’s financial statement audit. The company began operations eight years ago and has experienced strong growth in the last several years. Teri Kloth, the chief executive officer, has told you that her company expects production in 2004 to be 450,000 units. She also provided summary historical financial and operating data regarding unit sales. In   2002 and 2003, the company reported sales of 365,000 and 402,000 units, respectively.
Are On the Sunny Side’s 2002 and 2003 unit sales reasonable? Why or why not? (Hint: Visit the U.S. Census Bureau’s web site. Once you are at the site, go to the “Business” section and then to the “Manufacturing” sector-specific data section. Once you are there, locate the Current Industrial Reports. Next search the CIRs by Subject Title for Apparel. Data about women’s team sports uniforms can be found by search for “Apparel.” Use the most current annual report for your analysis.

Answer :

My analysis about the sunny side’s 2002 and 2003 unit sales is reasonable because according the result from most current annual report show significant increase in every year.

Internet Problem 8-2 (Obtain Client Background Information)

Planning is one of the most demanding and important aspects of an audit. A carefully planned audit increases auditor efficiency and provides greater assurance that the audit team addresses the critical issues. Auditors frequently prepare audit planning documents that provide client and industry background information and discuss important accounting and auditing issues related to the client’s financial statements.

Your assignment is to find and document information for inclusion in the audit planning memorandum. You should obtain the necessary information by downloading a public company’s most recent annual report from its web site (your instructor will give you the company’s name). You may also use other sources of information such as recent 10-K filings to find additional information. You should address the following matters in four brief bulleted responses:

• Brief company history.
• Description of the company’s business (for example, related companies and competitors).
• Key accounting issues identified from a review of the company’s most recent annual report. (Note: Do not concentrate solely on the company’s basic financial statements. Careful attention should be given to Management’s Discussion and Analysis as well as the Footnotes.)
• Necessary experience levels (that is, years of experience and industry experience) required of the auditors to be involved in the audit.

Answer :

ExxonMobil CORP-XOM

Filed : Febuary27,2009 ( period : December,31,2008)

Brief company history

Exxon Mobile Corporation was incorporated in the State of New Jersey in 1882. Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum product and transportation and sale of crude oil,natural gas and petroleum product. Exxon Mobil is major manufacturer and marketer of petrochemichals,including olefins, aromatics, polypropylene plastics and a wide variety of speciality product. ExxonMobil also has interest in electric power generation facilities.

Description of the company’s business

Business Model

ExxonMobil has a consistent and straightforward business model that combines our long-term perspective, disciplined approach to capital investment, and focus on operational excellence to grow shareholder value. They are identify,develop,and execute projects using best practices that ensure project returns will be resilient over a range of economic scenarios. They are operate facilities using proven management systems to achieve operational excellence. As a result, They are able to generate more income from a highly efficient capital base, as demonstrated by our superior return on capital employed. They are successful execution of this model delivers industry-leading financial and operating result that grow shareholder value.

Key accounting issues identified from a review of the company’s most recent annual report.

ExxonMobil’s long-term outlook continues to be that refining margins will generally decline as refineries continue to improve efficiency and, in the near term, new capacity additions outpace the growth in global demand.

In the retail fuels marketing business, ongoing intense competition continues to drive down inflation-adjusted margins by about 3 percent per year. In 2008, ExxonMobil announced its intention to transition out of the direct served (i.e.,dealer, company-operated) retail business in U.S market and to convert a majority of markets to a branded distributor model. This transition will be multiyear process.

ExxonMobil’s Downstream capital expenditures remain focused on selective and resilient investment.These investment capitalize on the corporation’s world class scale and integration, industry-leading efficiency,leading-edge technology and respected brands,enabling ExxonMobil to take advantages of attractive emerging-growth opportunities around the globe.

Source :

http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irolSEC&control_selectgroup=Annual%20Filings

Answer :

For fraud detection:

With ACL, you have a powerful fraud solution to create and run comprehensive tests designed to detect indicators of a wide range of fraud, for limitless volumes  of transactions and from virtually any data source.

ACL technology helps detect and prevent fraud by allowing organizations to:

• Test 100 percent of transactions
• Quickly access data from any source
• Flag all suspicious activity
• Automate testing to free up resources for more strategic investigations
• Summarize fraud risks for management review

2. How might ACL be used by a company to comply with the requirements related to internal control over financial reporting? Hint: Take a look at ACL’s Continuous Controls Monitoring software.

Answer :

Continuous Monitoring is the method that a business process owner or management uses to ensure that internal controls related to business activities      and       financial reporting are working as intended. By providing perpetual       assessment of   key controls and insight into transactions, continuous      monitoring can help organizations quickly identify issues that significantly   impact the bottom line.

ACL offers another continuous monitoring product for organizations      interested in continuously monitoring specific business areas. Our CCM product is designed with the following plug and play modules:

• CCM Purchase to Payment Module
• CCM Purchasing Card Module
• CCM Travel & Entertainment Module
• CCM General Ledger Module
• CCM Payroll Module
• CCM Order to Cash Cycle Module

Source :

http://www.acl.com/

Answer :

Because those auditors have instead used a one-size-fits-all audit plan

driven by standardized checklists that may have little to do with the unique issues

and risks of the particular client’s financial reporting processes. This is a

disappointing development indicative of poor training and audit planning.

2. Why do you think firms had such difficulty in applying the concept of reasonable assurance during the first year of implementation of Section 404?

Answer :

I think the firms had such difficulty in applying the concept of reasonable

assurance during the first year of implementation of Section 404 Because

development of poor training and audit planning.Not only do audit fees increase

when, for example, an audit plan calls for less experienced auditors on the

engagement team to devote endless hours to process-level control testing, but

audit quality also decreases, because such a plan contributes little to the search

for material weaknesses in internal control that  could identify a financial

reporting problem.and they have a difficulty in applying the standard to audit

clients in different industries and different size of company. They also have a

difficulty  to focus their work on areas that pose  higher risks of misstatement,

due either to errors and fraud.

Source :

www.pcaobus.org/Rules/Docket_008/2005-05-16_Release_2005-009.pdf

http://www.sec.gov/news/press/2005-74.htm