Case 1.6 - Emilia Skupiewska-Drozd Accounting 723 Prof...

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Emilia Skupiewska-Drozd Accounting 723 Prof. Dignam Case 1.6 NextCard Inc. Question 1 According to AU 341 auditors are require to determine their client’s ability to continue as a going concern for reasonable time period beyond the date of audited financial statement. Everyone knows that no entity will last forever, in accordance with GAAP the entity will endure long enough to pay its debt, fulfill its commitments and meet its long term goals. Therefore it is very important to evaluate the soundness of a client’s business model. It would help auditors to determine the acceptance or continuance the new clients and establish client’s financial conditions. This would assist the auditor asses the audit risk and develop plan for audit engagement. According to AU 311 the auditor must reach the understanding with the client regarding the services to be performed on an engagement. For that reason the evaluation of client’s soundness would lend a hand to become friendly with client’s environment and overall business matter. Question 2 In my opinion there ate few fraud factors illustrated in this case. Four of them couch my attention, which I would like to discuss in this paper. They are as follow: - Business improvement approach, they promised potential clients that their credit card application online would be process within 30 seconds after submitting the application. This influence improper business manner and recommends that auditor ought to build up a appropriate audit procedures which would focuses on client’s bad debt and allowance account. - Lent and his colleagues sold their ownership interests in the company ”, which would suggest for auditors to pay attention to company financial situation and closely evaluate continue as a going concern for NextCard Inc.
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- Large loss in business operations – which would recommend auditors to keep their mind on financial data and possibility of fraud. Therefore the auditors should access higher audit risk. - NexCard Inc belonged to high risk clients. As a banking industry, the NextCard was part of highly regulated organization. Consequently the auditors had to assume higher risk and known the business of their client’s very well. According to AU 316 “ Consideration of Fraud in Financial Statements ” fraud generally occurs when three conditions are presented: - management or employee have an incentive or are under pressure - circumstances exists that provide an opportunity for fraud to be perpetrated - individuals involved are able to rationalize committing a fraudulent act.
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