ACCT 404 Week 6 Group Discussion Board Forum 3 Replies Example

Group Discussion Board Forum 3 Replies: Responding on Fraud Risk

ACCT 404 Assurance and Attestation, Group Discussion Board Forum 3 Replies

Thread by [Student Name]

The classmates and their clients are composites; the textbook and the peer-reviewed research cited are real.

Reply to Owen

Owen, you concluded that revenue at the water utility in your thread carried no fraud risk, because its rates are set by a regulator and its revenue comes from thousands of small residential bills. Those facts do lower the risk of a large fictitious sale, and I think your reasoning about the customer base is sound. The standards, though, start from the other direction. Louwers et al. (2018) explain that auditors begin by presuming revenue recognition is exposed to fraud, and may set that presumption aside only after concluding it does not fit the client and recording the reasons. Your thread would need that documentation. I would also look for the places where judgment still enters a utility's revenue. Unbilled revenue at year-end, for usage between the last meter reading and December 31, is an estimate, and a small change in its assumptions can move revenue by a material amount. Regulatory accounting, such as amounts deferred for future rate recovery, is another area where management judgment matters. I would keep your conclusion that fictitious-sale risk is low, but retain the presumption for the unbilled revenue estimate and plan an analytical test comparing billed usage after year-end with the estimate. That approach would satisfy the standard and focus the work where a utility's revenue could actually be managed. It would also leave the partner a written record of why most revenue was treated as low risk.

Reply to Chloe

Chloe, your thread planned to address the risk of fictitious sales at a software reseller by confirming its largest receivables at year-end, and I agree that confirmations are among the most persuasive evidence for the existence of receivables. Caster et al. (2008) caution, however, that research has found limits on confirmation effectiveness for many assertions, and that enforcement releases describe numerous cases of false and forged confirmations. A customer may sign a confirmation without checking its records, or a dishonest manager may supply an address that routes the request to an accomplice. Those limits suggest two additions to your plan. First, the audit team should control the process completely, verifying customer addresses independently, sending and receiving requests directly and following up on electronic responses through a channel the client cannot alter. Second, confirmations should ask about the terms that matter most for a reseller, including rights of return and side agreements, not just balances, since a customer may truthfully confirm an amount owed while also holding an undisclosed right to return the goods. Louwers et al. (2018) note that confirmations address existence more strongly than valuation, so I would pair them with a review of credit memos and cash collections after year-end. Together, those procedures would make your confirmation evidence much harder to defeat. They add little time to the audit and close the gaps the enforcement cases describe.

References

Caster, P., Elder, R. J., & Janvrin, D. J. (2008). A summary of research and enforcement release evidence on confirmation use and effectiveness. Auditing: A Journal of Practice & Theory, 27(2), 253-279. https://doi.org/10.2308/aud.2008.27.2.253

Louwers, T. J., Blay, A. D., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2018). Auditing & assurance services (7th ed.). McGraw-Hill Education.