8.1 case - Kelly Legner Case 8.1 1 Some examples of...

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Kelly Legner Case 8.1 1. Some examples of inherent risk that can exist in the entertainment industry are: lack of management integrity lack of management competence. o Management competence refers to the competence of directors and other senior management personnel. It includes matters such as their: industry experience, knowledge of the entity's business, commercial skills, common sense, knowledge of good corporate governance, and communication and judgment ability. unusual pressures on management. o Unusual pressures include pressures that may predispose management to either intentionally or unintentionally misstate the financial statements. For example, the auditor considers whether: the client lacks sufficient capital to continue operations or there is a downward trend in the current ratio. there has been an unexpected loss or downturn in profits. the client is a newcomer to the industry. the potential exists for going concern problems [ fn ] . any of the above, combined with the need to comply with debt covenants. there is a need to fulfill public expectations, such as forecast results. there is a need to fulfill internal expectations, such as performance measures, management targets and budgets. the industry is subject to fierce competition or is in decline. the client has unresolved disagreements with the audit firm. the client is contemplating a new equity issue. the equity market has expectations of improved performance by the client. the presence of certain factors relating to the nature of the entity's business. o The nature of the business of an entity has a bearing on the risk of a material misstatement occurring in the unaudited financial statements. For example, its products and services, capital structure, related parties, locations, and management compensation methods may be such as to increase the risk of a material misstatement in the unaudited financial statements. For example, the presence of the following factors may indicate a high inherent risk:
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senior levels of management are remunerated based on results [ fn ] . This may motivate such executives to deliberately misstate values of account balances (for example, inventory, accounts receivable, accounts payable), and is one of the most common forms of fraud . the client has an unnecessarily complex corporate or financial structure . The less transparent the entity's corporate or financial structure, the more conducive is the environment for fraud and/or financial manipulation. there is a significant equity holding, or options over equity holdings, by senior management. the client is easily distinguished from the industry. e.g. different return on investment, growth, performance, leverage, accounting policies than others in the same industry. the quality of earnings is debatable.
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This note was uploaded on 05/23/2011 for the course ACCT 842 taught by Professor Shekib during the Spring '11 term at Governors State University.

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8.1 case - Kelly Legner Case 8.1 1 Some examples of...

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