Star_Audit

Star Audit 1. Industry knowledge is important because each industry has its own peculiarities that need to be known by auditors of companies of that industry. An auditor fresh out of college may not know what particular items look like during counts or what the production and control process is for particular products. They are more easily tricked by management or other employees who want to fraudulently boost the company’s financials. The high tech industry is one place where industry knowledge is essential as computers are always changing and not an area where most people have great exposure or expertise in, especially during that particular time. Without industry knowledge, an auditor may not know if certain inventory should be written down as obsolete, to count it properly or to even understand common financing plans in the industry that could be potential liabilities. These risk factors could lead to overstatements of assets or understatements of liabilities and cause the financial statements to be extremely inaccurate. With the help of experts, these risks can be minimized. 2. There were dramatic changes in the cost of revenue and research and development costs. These costs were much greater in 1989 than they were in 1988. Thus, the company was no longer profitable in 1989 and the company would probably try to improve its financials by understating expenses or by inflating other aspects of its financial statements. In addition, there were changes in inventory, accounts payable and depreciation, which probably also need closer evaluation. The company should have also looked at the advance to Culler as that appears to be potentially a risky transaction and the acquisition of Graphicon. Furthermore, the company should evaluate what costs were correctly expensed and what expenses were correctly deferred. In addition, there was no net operating loss carry forward present in 1989 that was present in 1988. These changes should have made the audit team focus on research and development and the inventory of assets more when they did their audit planning. The team could have also focused on the changes in accounts receivable, inventory, and accounts payable. These areas have the potential to be greatly modified by the client. 3. The statement of cash flows can show where there are dramatic changes between previous years in where the company is spending cash or making cash. There are great potential to change the cash flows in accounts receivable, inventory, accounts payable, other expenditures, and contract costs. All of these areas seem to be potentially problematic areas for the company. If there are dramatic changes between previous years, then during the audit plan, the manager and partner can decide on those areas where there are dramatic changes to use their staff to evaluate more closely those problematic areas. 4. In SAS 31, there are five assertions concerning the financial statements that management makes. They are 1) existence and occurrence; 2) completeness; 3) rights and obligations; 4) valuation and allocation; and, 5) presentation and disclosure. Star’s management violated many of these assertions in their financial statements . They violated existence or occurrence and completeness assertions by having a mystery asset. They violated the rights and obligation assertion by misreporting the transaction with Culler and its effect on the R&D expense. The firm violated the valuation assertion by inaccurately accounting for its inventory obsolescence by not declaring enough of it obsolete. Finally, the firm violated its presentation and disclosure assertion by not disclosing appropriately the Star-Culler agreement, which detailed Star’s acquisition of Culler. 5. I would say that the waiver was not good enough. The language in the waiver was not strong enough in my opinion by stating it “did not intend to accelerate the loans” I would have looked for stronger language. Moreover, the waiver only was for a five month period. I would have wanted a waiver beyond one year that the bank irrevocably waived its right to seek full payment for the loan despite the violation of the debt covenant for a period of time. 6. The purpose of the review process is to make sure that each step as been reviewed and the firm is giving a reasonable assurance of the financial statements and making an opinion concerning the company. An associate’s work is reviewed by a senior who is reviewed by a manager who is reviewed by a partner. The review process that was employed for Star Corp involved too much negotiation between the firm and the client, which led to the manipulation of the financial statements. In addition, Argy eventually gave up his arguments and conceded to Childers who was wrong for allowing the several material misstatements on the financial statements. Furthermore, there should be adequate work papers and calculations done to make sure that the statements make sense. There were a couple of cases were certain calculations were not made in the work papers despite the requests of the firm’s superiors. These work papers should have always been reviewed by superiors. 7. Disagreements should be handled in a way that resolves them in a way where the audit is not jeopardized. Argy should not have signed off on the audit if he did not believe that the audit was handled appropriately or the firm was taking the right position. He would have been better off resigning from the audit. Argy could have also put a disclaimer in the audit that would have avoided compromising on critical components of the financial statements. The disclaimer could have fenced off several items that Argy could not in good conscious agree with the procedures of Star Corp. Instead, he allowed others to convince him to stop him from continuing to complain. As a result the audit gave the wrong opinion.