Company_Analysis__Twd

Running Head: COMPANY ANALYSIS: TWD Company Analysis: TWD University of Phoenix ACC/599 March 1, 2010 Company Analysis: TWD Audit risk is the risk of the auditor providing an inappropriate opinion on the financial statements, particularly when those financial statements contain a material misstatement (Audit Risk). These risks can be a result of a number of factors. In reality, it is impossible to audit 100% of anything 100% of the time. Many users of audited financial statements generally believe that one of the main objectives of audits is fraud detection. Independent auditors know the issue is very complex and they fear the general view that their work should bring out all types of fraud and misstatement in financial statements. The concept of risk exists in any audit and with any client. It is essential for an auditor to know the risk that exists and ways to mitigate the risk (Louwers, p. 69). This is why it is essential that the auditor know the business before starting their audit process. The SAS 99 presents an extensive range of audit responsibilities. The standard requires auditors to understand fraud; assess fraud risks; design audits to provide reasonable assurance of detecting fraud that could have a material effect on financial statements, and report findings (Louwers, p. 70). Risks Associated With Potential Client TWD In examining the profile of Toxic Waste Disposal (TWD), there were a number of potential fraud risks. The first identifiable risk is the fact that the board of directors is controlled by Mead. Mead is the majority stockholder, who is also the chief financial officer. TWD does not have an audit committee. This can be a problem. The internal auditor reports directly to the controller who in turn reports to Mead. A high rate of turnover for personnel in key positions exists. The environment there seems to be unstable. A more recent development is the fact that TWD altered their way of preparing financial statements in 2008 from the cash basis to the accrual basis method. This same year, they sold one-half of its controlling interest in UEL Co. The auditor has its work cut out for them while embarking on this audit. Mitigate TWD Client Risk It is significant to be acquainted with if TWD is really a gainful enterprise on a going basis. TWD is showing overstated profits for the reason that there is no mention of reserves for paying off claims for refund of funding. TWD case shows a number of issues for auditioning like: • High rate of turnover in the accounts department. There may be some fraud or a cover up that has led to employees leaving the company. • The workers are being paid on weekly basis. The repeated payments and the larger number of payments increases the possibility of making misstatements, errors, and frauds. • Change in the accounting method during 2008. There can be inflated income because of changeover from cash basis to GAAP. • There can be exaggerated income because of barter transaction with a municipality and there can be exaggerated income because of the guarantees that it has provided to several municipalities. • The internal auditor reports through the controller to Mead. This situation makes the internal control system unfair. What steps can the internal auditor do if he or she crosses the road to fraud of the Mean who is the CEO and the major stockholder of enterprise in the same time' As Mead is the CEO as well as the major stockholder most of the decisions will favor the shareholder's interest rather than that of prudential shareholdings and the miss stated profit can be used to pay off dividends. • Bond, CPA will need to assess the reasons for the UEL transaction and the financial prudence of leasing disposal equipment from entity owned by Mead's parents. The party-related transaction with the entity owned by Mead's parents should be examined for fraud. • The barter transaction should be re examined for fraud and estimates of revenue. All these red flags need several separate programs of audit. Bond, CPA will need to carry out an audit plan of incurred costs, environmental waste removal service provided, and accounting department turnover. They also will need an audit for purchase existence and consumption and an operations audit program for the management systems. Finally, they will need audits for labor elements, materials and other cost, and an annual program for testing of paid vouchers as well as an audit program for budget, planning system, and internal controls. Mitigating the 15 Audit Risk Factors A list of 15 factors or aspects of TDW were identified that could either pose an increased risk to the audit, decrease the audit risk, or have no effect on the audit risk (Louwers, 2008, p.104). The 15 factors are listed below with the proposed audit risk identified: 1. This was the first year TWD operated at a profit since 2003 because the municipalities received increased federal and state funding for environmental purposes. This could increase the audit risk if TWDs financial statements are not accurate and proper federal and state paperwork is not provided or up-to-date. 2. TWD’s board of directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer. This factor could increase the audit risk as it could lead to a conflict of interest. Fraudulent financial reporting could be the end result if management alters or falsifies financial reporting to enhance a company’s financial environment. 3. The internal auditor reports to the controller, and the controller reports to Mead. This factor could have no effect on the audit or could pose an increased risk to the audit. The controller could be coerced into ensuring the financial documents are favorable to the financial environment of the organization. This could lead to fraudulent financial reporting. 4. The accounting department has experienced a high rate of turnover of key personnel. This factor has little effect on the audit risk. Turnover is present within any organization. Ensuring accounting policies and practices have been upheld during the turnover period would further support its irrelevance increasing audit risk. 5. TWD’s bank has a loan officer who meets regularly with TWD’s CEO and controller to monitor TWD’s financial performance. This factor should not increase the audit risk; however, if the bank loan officer is subject to coercion by deceptive management members then this could lead to audit risk. Here, the audit team would need to better understand the nature of these meetings and what the objective of these meetings have in maintaining the company’s financial statements. 6. TWD’s employees are paid biweekly. This has no effect on the audit risk. 7. Bond has audited TWD for five years. This should not increase audit risk in the current year. However, it would be recommended that Bond not partake in the auditing practices moving forward. 8. During 2008, TWD changed its method of preparing its financial statements from the cash basis to the accrual basis under generally accepted accounting principles. This should not increase the audit risk levels as long as GAAP was followed and incorporated into their recording keeping practices since the accrual basis inception. 9. During 2008, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL. This would increase the levels of audit risk as this could lead to a conflict of interest and lead to fraudulent financial reporting. 10. During 2008, litigation filed against TWD in 2006 alleging that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years’ financial statements are being removed for the 2008 financial statements. This should not increase the audit risk levels if these items were noted accurately and appropriately into the company’s financial statements. 11. During December 2008, TWD signed a contract to lease disposal equipment from an entity owned by Mead’s parents. This related-party transaction is not disclosed in TWD’s notes to its 2008 financial statements. This could lead to increased risk levels as these transactions would need to be noted accurately and appropriately into the company’s financial records and statements. 12. During December 2008, TWD completed a barter transaction with a municipality. TWD removed waste from a municipally owned site and acquired title to another contaminated site at below-market price. TWD intends to service this new site in 2009. This could increase the audit risk levels unless all transactions were noted accurately and appropriately by both TWD and the municipality. 13. During December 2008, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost. This should not increase the risk levels if there financial reports are in order and note precisely the nature of each transaction under the new financial treatment. 14. Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 2008 disclosed a new policy. TWD guaranteed several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails federal or state site cleanup inspection in 2009. This should not pose an audit risk for the 2008 audit. This will however play a significant role in gathering adequate documentation from those companies that failed in the 2009 audit. 15. An initial public offering of TWD’s stock is planned for late 2009. This could pose an increase in the audit risk of the organization as they will need to provide further documentation on the company’s financial environment in addition to full disclosure of all financial reporting. However, in light of the 2008 audit, this should not prose an increase in risk. The audit team will need to take into consideration those factors that could lead to increasing the levels of audit risk. If TDW can ensure they have the proper financial documentation and management is willing to cooperate in providing additional information then the audit team should be able to control these risk levels. Audit Planning Process for TDW Audit planning is an important step to conducting any audit. As with the audit itself, the planning process has several steps which must be considered. During the audit planning process, several things will be discussed with TDW. The first thing which must be done is contacting and notifying the client of the audit. When this is done, the auditor will inquire about several aspects of the business such as “the scope and objectives of the examination in a formal meeting with organization management, gather information on important processes, evaluate existing controls, and plan the remaining audit steps” (Audit Net, 2005, p. 3). Because the audit will be conducted by an outside source, it will be important for TDW to comply and participate as much as possible. The company has several issues that will need to be audited and it may come down to auditing each individual issue separately. For this audit to be successful, the auditors will need to know what needs to be achieved, which type of procedures should be followed during the audit, and select the right resources to get the audit done. It is clear that TDW needs to have an audit done, and it will be important that it is done correctly. Conclusion Toxic Waste Disposal has many fraud risk factors that could cause the company some serious problems down the line. Auditing is something that has not been occurring within the company and this element is crucial to prevent fraud from taking place within the company. Because of the high number of turnovers as well as the accounting method changing midyear, there is a good possibility of fraud occurring. Bringing in an outside firm to conduct the audit will benefit TWD a great deal. This firm must learn as much as possible about the company to conduct a thorough audit of the business. Once this audit is complete, TWD should be able to continue with internal audits and maintain better records to prevent any further fraud risks. References Audit Net. (2005). Audit process. Retrieved on February 28, 2010 from http://www.auditnet.org/process.htm Audit Risks. Retrieved on February 28, 2010, from www.ffiec.gov/.../audit/audit_03_risk%20ass_rb_audit.html Louwers, T.J., Ramsay, R.J., Sinason, D.H., & Stawser, J.R., (2008). Auditing and Assurance Services, (3e). New York: McGraw-Hill Companies.