Evaluation of Comptronix Corporation

1. Professional auditing criterions present the audit hazard theoretical account. which is used to find the nature. timing. and extent of audit processs. Describe the constituents of the theoretical account and discourse how alterations in each constituent affect the auditor’s need for grounds. The audit hazard theoretical account is used to find the nature. timing. and extent of substantial audit processs. The constituents of audit hazard theoretical account normally stated as follows: DR = AR/ ( IR x CR )

Where: DR = sensing hazard ; AR = audit hazard ; IR = built-in hazard ; CR = control hazard Detection Risk: auditors’ processs will take them to reason that a fiscal statement averment is non materially misstated when in fact such misstatement does be. If hearers want to diminish DR. they had better collect more grounds and do certain the cogency of grounds. Audit Hazard: hearers may unwittingly neglect to suitably modify their sentiment on fiscal statements that are materially misstated. If AR should be keep in low degree. which means the other hazards besides should be low.

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Built-in Hazard: The hazard of material misstatement of a fiscal statement averment. presuming there were no related controls. As built-in hazard additions. PDR decreases. which in bend increases the auditor’s need for stronger grounds. Control hazard: The hazard that a material misstatement that could happen in an history will non be prevented or detected on a timely footing by internal control. If the strength of internal control is assessed as decreasing. the hearer should pay more attending to command hazards.

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2. One of the constituents of the audit hazard theoretical account is built-in hazard. Describe typical factors that hearers evaluate when measuring built-in hazard. With the benefit of hindsight. what built-in hazard factors were present during the audits of the 1989 through 1992 Comptronix fiscal statements? Built-in hazard is a step of the auditor’s appraisal of the susceptibleness of an averment to a material misstatement presuming there are no related internal controls. Some believe that built-in hazard would be greater for some averments and related history based on some conditions as follows: •Complex computations instead than simple computations.

•Non-routine instead than everyday minutess.
•Subjective informations instead than nonsubjective informations.
More significantly is that built-in hazard is ever be effected by external factors as follows: •Changes in economic environment
•Insufficient capital to go on operations
•Technological betterments.
•Transactions with related parties.
•Susceptibility of assets to embezzlement.
The built-in hazard factors present during the 1989 through 1992 fiscal statement audits as follows: •Loss of Key Customer: Comptronix lost a cardinal client to SCI after the public offering of stock. Once the company lost their a cardinal client. Management have a strong motive manipulate gross revenues and runing public presentation to fulfill investor outlooks because the loss of a cardinal client put excessively much force per unit area on direction to run into the demands of external users. •Public Offer of Stock: After Comptronix made its public offering of stock. they have the force per unit area which push the direction to pull strings operating public presentation excessively meet the outlooks from the external users.

•Technological Improvement: Comptronix is a industry company which chief merchandises are circuit boards and the circuit boards’ development depend on technological betterment. The technological betterment has a negative impact on operating public presentation. •Pressures from a new star Company: By the first twelvemonth of the fraud ( 1989 ) . Comptronix became a new company which can use more than 1. 800 employees in less than a decennary. and at same clip. the company expanded its the size of the company in three different locations. The rapid development of company made the direction adjusted their operations alternatively of supervising company operations.

•Estimation of Histories: The high built-in hazard histories include Histories receivable/ collectible. stock list. and belongings. works. and equipment. But all the accounts’ calculation is based on appraisal which led the Numberss are really undependable and subjective. •Cash Flow Pressures: Comptronix suffered net losingss from 1986. Until the company attracted a venture capitalist. the company was able to bring forth strong gross revenues and net incomes. Prior to 1989. Comptronix had generated merely two back-to-back old ages of net income after several old ages of net losingss. hard currency flow of fiscal statement can non cover many old ages of repeating losingss.

The direction has motivations to do up runing histories to look perfect to pull more investors. 3. Another constituent of the audit hazard theoretical account is control hazard. Describe the five constituents of internal control. What features of Comptronix’s internal control increased control hazard for the audits of the 1989-1992 year-end fiscal statements?

Five constituents of control hazard are: control environment. hazard appraisal. control activities. information and communicating. and supervising. Control environment set the tone of an organisation by act uponing the control consciousness of people. Risk appraisal is management’s procedure for placing. analysing. and reacting to the hazards. Control activities are policies and processs that help guarantee that management’s directives are carried out. Information is needed at all degrees of an organisation to help direction in run intoing the organization’s aims.

Monitoring of controls is a procedure to measure the quality of internal control public presentation over clip. The information and communicating is earnestly weak in that he three executives were able to commit the fraud by short-circuiting the bing accounting system. They could enter the fabricated entries manually and other employees were excluded from the uses to minimise the likeliness of the fraud being discovered.

Besides. the weak control activity and monitoring is represented by the fact that Mr. Shifflett or Mr. Medlin could O.K. payments based entirely on an bill. Therefore. the fraud squad was able to short-circuit internal controls over hard currency expenses.

Internal controls were besides deficient to observe the use of gross revenues and histories receivable. Mr. Medlin had the ability to entree the transportation section system.

4. The board of managers. and its audit commission. can be an effectual corporate administration mechanism. Discourse the pros and cons of leting inside managers to sere on the board. Describe typical duties of audit commissions. What strengths or failings were present related to Comptronix’s board of managers and audit commission?

As stockholders have limited entree to the sufficient information. they are difficult to supervise the day-to-day minutess and direction. They would depute the duties to the board of managers. Then. board of managers require inside managers to supply sufficient information in order to do determinations those are in the maximal net incomes of stockholders. However. if the interior managers have improper intents. it’s easy to be a use tool for direction.

Audit commission is responsible for guaranting that the company’s fiscal statements and studies are accurate and use just and sensible estimations. More specifically. it is charged with supervising the fiscal coverage and revelation procedure. monitoring pick of accounting policies and rules. supervising engaging. public presentation and independency of the external hearers. inadvertence of regulative conformity. supervising the internal control procedure. supervising the public presentation of the internal audit map. and discoursing hazard direction policies and patterns with direction.

The control environment is significantly influenced by the effectivity of its board of managers or its audit commission. Factors that bear on the effectivity of the board or audit commission include the extent of its independency from direction. the experience and stature of its members. However. among the seven persons in Comptronix board of managers. five members are either inside managers or managers had close associations with direction.

In add-on. the primary duty of the board of managers is to protect the shareholders’ assets and guarantee they receive a nice return on their investing. Board members act as legal guardians of the organization’s assets and must exert due diligence to supervise that the organisation is good managed and that its fiscal state of affairs remains sound. But the composing of Comptronix’s board of managers evidently lacks objectiveness.

A measure uping audit commission should be composed of independent managers who are non officers or employees of the organisation and who do non hold other relationships that impair independency. However. The audit commission of Comptronix is made up two outside managers and one grey manager. which would necessarily impair the independency.

What’s more. to measure up. the commission must be composed of outside manager with at least one modification as a fiscal expert. Nevertheless. for Comptronix Corporation. there is no indicant of whether any of these persons had accounting or fiscal coverage backgrounds. Last. the audit commission met merely twice during 1991. it was non expeditiously and sufficiently to supervise and supervise the fiscal coverage.

5. Public companies must register quarterly fiscal statements in Form 10-Qs. that have been reviewed by the company’s external hearer. Briefly describe the cardinal demands of Auditing Standards ( AU ) Section 722. Interim Fiscal Statements. Why wouldn’t all companies ( public and private ) engage their hearers to execute timely reappraisals of interim fiscal statements?

The term interim fiscal information means fiscal information or statements covering a period less than a full twelvemonth or for a 12-month period stoping on a day of the month other than the entity’s financial twelvemonth terminal.

A reappraisal consists chiefly of executing analytical processs and doing enquiries of individuals responsible for fiscal and accounting affairs. and does non contemplate ( a ) trial of accounting records through review. observation. or verification ; ( B ) trials of controls to measure their effectivity ; ( degree Celsius ) the obtain cyberspace of confirming grounds in response to enquiries ; or ( vitamin D ) the public presentation of certain other processs normally performed in an audit.

The determination to hold a reappraisal battle is a joint determination of the client and hearer. So a reappraisal would be performed when the benefits to the hearer and to the client exceed the costs to both parties. In general. houses with high complexness are more likely to be reviewed than houses with low complexness. Firms with high growing opportunities a less likely to be reviewed than those with low growing chances for they may be associated with higher information and judicial proceeding hazards. And it’s besides about the firms’ audit confidence and insurance demands.

6. Describe whether you think Comptronix’s executive squad was inherently dishonest from the beginning. How is it possible for otherwise honorable people to go involved in frauds like the one at Comptronix?

We don’t believe Comptronix’s executive squad was inherently dishonest from the beginning. In opposite. we think there are two chief grounds for the company committed the fraud.

The first is its weak internal control.

First comes to the company’s board of manager. The board of managers is responsible for supervising the actions of direction. Factors that bear on the effectivity of the board include the extent of its independency from direction. the experience and stature of its members. the extent to which it raises and pursues hard inquiries with direction. and its interaction with the internal and external hearers.

the audit commission of the board of managers should be composed of independent managers who are non officers or employees of the organisation and who do non hold other relationships that impair independency. In add-on. the audit commission should hold one or more members who have fiscal coverage expertness.

However. Comptronix’s board of managers consist of the CEO and the COO of the company. And two of the other five managers who had close associations with direction. one served as the company’s outside general legal advocate and the other who served as frailty president of fabrication for a important client of Comptronix. and one of the staying outside managers who was a spouse in the venture capital house that owned 574. 978 portions ( 5. 3 % ) of Comptronix’s common stock. the 2nd outside manager who was the frailty president and CEO of the local bank originally lending money to the company. and the 3rd outside manager who was president of an international constituents provider based in Taiwan.

And there was no indicant of whether any of these persons had accounting or fiscal coverage backgrounds. 28. 6 % of the board consisted of inside managers. And even all of the board of managers disobey the independency and effectivity of the formation of the board of managers. The involvement relationship with the company increased the possible hazard for the direction to perpetrate fraud.

The 2nd ground is the immense force per unit area of rough competition for the companies in the industry. The fraud was motivated by the loss of a cardinal client in 1989 to the three executives’ former employer. SCI. Since the first use of the fiscal statement. they were forced to pull strings the other old ages and groundss to conceal the use. which created a barbarous circle.

In decision. the weak internal control system provided a good environment for the committee of fraud. The immense force per unit area of the company brought the motive of the fraud. Both of them played of import functions for the honest people to go involved in frauds.

7. Auditing Standards ( AU ) Section 316. Consideration of Fraud in a Financial Statement Audit. notes that three conditions are by and large present when fraud occurs. Research the important criterions for hearers and supply a brief sum-up of each of the three fraud conditions. Additionally. supply an illustration from the Comptronix fraud of each of the three fraud conditions.

( 1 ) Three fraud conditions

First. direction or other employees have an inducement or are under force per unit area. which provides a ground to perpetrate fraud. Second. fortunes exist—for illustration. the absence of controls. uneffective controls. or the ability of direction to overrule controls—that provide an chance for a fraud to be perpetrated. Third. those involved are able to apologize perpetrating a deceitful act. Some persons possess an attitude. character. or set of ethical values that allow them to knowingly and deliberately perpetrate a dishonest act.

( 2 ) Examples

The inducement for top company executive to make fraud is that after the company went public. the company needed an increasing figure for net income on the income statement. to pull more investors and do the stock monetary value higher and higher.

One of the chances for fraud perpetrated in Comptronix is that their internal controls were so deficient. The three executives had so many governments to acquire entree to assorted histories. They can acquire control of both cheques and histories collectible. which enable them to do bogus equipment buying recording.

Because Comptronix`s quarterly filings were unaudited. the executives were successful in pull stringsing quarterly fiscal statements. After they successfully manipulated 1989 year-end gross revenues and receivables. they thought their public presentation may non be discovered by external hearers and SEC. so they began entering fabricated quarterly gross revenues often.

8. Auditing Standards Section 316. Consideration of Fraud in a Financial Statement Audit. notes that there is a possibility that direction override of controls could happen in every audit and consequently. the hearer should include audit processs in every audit to turn to that hazard.

a. What do you believe is meant by the term “management override” ?

Management override of internal controls is the intercession by directors in managing fiscal information and devising determinations contrary to internal control policy. Directors may believe they have the ability to run outside of the internal controls. but this is non true.

b. provide two illustrations of where direction override of controls occurred in the Comptronix fraud.

For illustration. Mr. Medilin. as accountant and financial officer. has the mandate to pull strings both gross revenues paperss and histories receivable paperss. Therefore he can come in fake gross revenues into the accounting system so do bogus histories receivable to exaggerate the company`s net incomes.

Furthermore. in order to exaggerate the equipment and histories collectible. the three company executives cut bogus cheques to the fake histories collectible sellers associated with the bogus purchases of equipment. However. the cheque preparing and recording of equipment purchases occupations should be distributed to different staff. Managing these two occupations at the same clip by same executives provide them chance to do exaggerated recording of equipment buying.

c. Research AU Section 316 to place the three required hearer responses to farther reference the hazard of direction override of internal controls.

Three required hearer responses to farther reference the hazard of direction override: ( 1 ) Examining journal entries and other accommodations for grounds of possible stuff misstatement due to fraud. ( 2 ) Reviewing accounting estimations for prejudices that could ensue in stuff misstatement due to fraud. ( 3 ) Measuring the concern principle for important unusual minutess.

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