Sidhu, a public accountant, is planning the first audit of Microservices Ltd., a local retailer of computers and related products. Microservices is a new company, and this is the client’s first fiscal year of operations. The owner has explained to Sidhu that she wants an audit from the beginning of the fiscal year and for the next several years so that she can build a credible financial track record. She then plans to make a public offering of shares, when market conditions are favourable. Because the company is small and has few employees, Sidhu decides to ignore the company’s internal controls and rely solely on substantive procedures in this first audit engagement. Sidhu believes that this approach will allow him to perform an audit at minimum cost, and hence charge a minimum audit fee. In later years, as the client’s systems become better developed, Sidhu plans to modify his audit approach to incorporate some reliance on the client’s internal controls and thereby reduce his level of substantive testing. Before beginning the audit, Sidhu discusses this audit plan with the owner, who fully agrees with Sidhu that this is the most efficient way to proceed, given the circumstances. Do you think Sidhu’s decision to rely solely upon substantive procedures is appropriate? Why or why not? What judgment traps do you think Sidhu fell into? What recommendations can you make so that Sidhu can improve the quality of his judgments and decisions?
Sidhu, a public accountant, is planning the first audit of Microservices Ltd., a local retailer of computers
and related products. Microservices is a new company, and this is the client’s first fiscal year of operations. The owner has explained to Sidhu that she wants an audit from the beginning of the fiscal year and for the next several years so that she can build a credible financial track record. She then plans to make a public offering of shares, when market conditions are favourable. Because the company is small and has few employees, Sidhu decides to ignore the company’s internal controls and rely solely on substantive procedures in this first audit engagement. Sidhu believes that this approach will allow him to perform an audit at minimum cost, and hence charge a minimum audit fee. In later years, as the client’s systems become better developed, Sidhu plans to modify his audit approach to incorporate some reliance on the client’s internal controls and thereby reduce his level of substantive testing. Before beginning the audit, Sidhu discusses this audit plan with the owner, who fully agrees with Sidhu that this is the most efficient way to proceed, given the circumstances. Do you think Sidhu’s decision to rely solely upon substantive procedures is appropriate? Why or why not? What judgment traps do you think Sidhu fell into? What recommendations can you make so that Sidhu can improve the quality of his judgments and decisions?
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