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Yanjie Hou ACCT4420 Assignment 2 Neccard, Inc, May-24-2012 1. Should auditors evaluate the soundness of a clients business model?

Defend your answer. No, a professional auditor should not evaluate the soundness of a client's business model. Because the responsibilities of auditor describe in textbook is: "Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit", which is not evaluate the soundness of a client's business model. 2. Identify and briefly describe the specific fraud risk factors present during the 2000 NextCard audit. How should these factors have affected the planning and execution of that engagement? Those three components of the fraud risk triangle are: attitude, pressure or incentive, and opportunities. Attitude is that the Nextcard Inc, did not honest report the 2000 workpapers but altered and revised it and the management want keep the top profit at credit service business; Pressure or incentive means that Nextcard Inc, the had bad operating losses in 2000 year, meanwhile, the internet bubble is break also; Opportunities means "when the Flanagan enter in E&Y, the internet bubble had created a huge demond for the services of public accounting firms. E&Y in San Francisco has the great need for auditors." The poor internal control is an opportunity of the fraud also. These three factors has affect that auditors do the auditing engagement. First, it will effect that the auditors misunderstood "what are they doing", they will loss basic ethical standard as a auditor. Second, as the professional auditor, before they start auditor process, they need research the risk and figure out how those risk can affect the company. With appropriate research and analysis, the whole auditing process can be more successful and prevent the fraud. 4. Identify the generally accepted auditing standards violated by the E&Y auditors in this case. Briefly explain how each standard was violated. A: General standard, "General standard is talk about applicable to the

auditor and audit firm". Flanagen just had only a few years of auditing experience. He can not stand so much responsibility about the auditing. And any infringement of the GAAS can see as the violate the general standard. B: Fieldwork Standards: "Fieldwork standards is talk about applicable to the conduct of the audit". Obviously that Trauger and Flanagan hasn't successfully supervised the accounting transaction. And the internal control did not done well. They also did not has the sufficient appropriate audit evidence then provide the auditing opinion on NextCards 2000 financial statements. C: Reporting Standards: Reporting standards means that applicable to communicating the auditors opinion. Apparently, the auditor in Nextcard is not to "state explicitly the financial statements are fairly presented". Meanwhile, E&Y did not express the appropriate opinion but provide a bad opinion to fail the auditing service. 5. When he became a member of the NextCard audit engagement team, Oliver Flanagan hoped that Robert Trauger would serve as his mentor. What responsibility, if any do senior personnel have to serve as mentors for their subordinates? A mentor is a job that "1). a wise and trusted counselor or teacher, 2). an influential senior sponsor or supporter". Robert Trauger was asked by Oliver Flanagan to be his mentor because that Flanagan is an auditor who has a few years experience. Trauger's position is take a responsibility to instruct and supervise his student-Flanagan; Likewise, Trauger as a partner of E&Y, he should supervise and make the ethical and right decision of the whole engagement of the auditing. But not gather members to alter or revise the financial statement to destroyed the engagement of auditing. 6. Assume the role of Oliver Flanagan in this case. What would you have done when Robert Trauger asked you to help him alter the 2000 NextCard audit workpapers? In answering this question, identify the alternative courses of action available to you. Also identify the individuals who may be affected by your decision and briefly describe how they may be affected. If Robert Trauger asked me to help him alter the 2000 Nextcard audit workpapers. I think I will redo the whole engagement of the auditing, but not alter the 2000 NextCard audit workpapers. I will use the ethical and professional knowledge to finish this job, which apply the AICPA ten standard-general, framework and reporting. If my mentor

still insist to alter the 2000 NextCard audit workpapers, I think I will report to higher management-Michael Mullen this behaviour and ask him to figure out how can I handle it. Because the auditor did not belong to any company or organization, it service to public. The whole firm is affected by the bad auditing engagement, because it will damage the image of the company, no matter E&Y or Nextcard, Inc.

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