Reference no: EM132605747

Kailash an auditor, is the engagement partner on the financial statement audit of Super Computer Services Bhd (SCS) for the year ended 30 April 2019. On 5 May 2019, the senior auditor assigned to this assignment, had the following conversation with Kailash concerning the planning phase of audit.

Kailash: Do you have all the audit programs updated yet for the SCS engagement?

Shazman: Mostly, still have work to do on the fraud risk assessment.

Kailash: Why? Our "errors and irregularities" program from last year is still OK. It has passed peer review several times. Besides, we don't have specific duties regarding fraud. If you find it, we'll deal with it then.

Shazman: don't think so. That new CEO, Mawi, has almost no salary, mostly bonuses and stock options. Doesn't that concern you?

Kailash: No. Mawi's employment contract was approved by the Board of Directors just three months ago. It was passed unanimously.

Shazman: guess so, but Mawi told those stock analysts that the SCS's earnings would increase 30 percent next year. Can Mawi deliver numbers like that?

Kailash: Who knows? We're auditing the 2019 financial statements, not 2020. Mawi will probably amend the forecast every month between now and next May.

Shazman: Sure, but all this may change our other audit programs.

Kailash: No, it won't. The programs are fine as is. If you found fraud in any of your tests, just let me know. Maybe we'll have to extend the tests. Or maybe we'll just report it to the audit committee.

Shazman: What would they do? Ghani is the audit committee chair, and remember, Ghani hired Mawi. They've been best friends for years. Besides, Mawi is calling all the shots now. Borhan, the old CEO, is still on the Board, but Borhan's never around. Borhan's even been skipping the Board meetings. Nobody in management or on the Board would stand up to Mawi.

Kailash: That is nothing new. Borhan was like that years ago. Borhan caused frequent disputes with Jones, CPA, the predecessor auditor. Three years ago, Jones told Borhan how ineffective the internal audit department was then. Next thing you know, Jones is out and in. Why bother? just as happy that those understaffed internal auditors don't get in our way. Just remember, the bottom line is...are the financial statements fairly presented? And they always have been. We don't provide any assurances about fraud. That's management's job.

Shazman: But what about the lack of segregation of duties in the cash disbursement department? That clerk could write a cheque for anything.

Kailash: Sure. That's material weaknesses every year and probably will be again this year. But we're talking cost effective here, not fraud. We just have to do lots of testing on cash disbursements and report it again.

Shazman: What about the big layoffs coming up next month? It's more than a rumour. Even the employees know it's going to happen, and they're real uptight about it.

Kailash: know, it's the worst kept secret at SCS, but we don't have to consider that now. Even if it happens, it will only improve next year's financial results. Borhan should have let these people go years ago. Let's face it, how else can Mawi even come close to the 30 percent earnings increase next year?

Question 1: Describe Kailash's misconceptions regarding the consideration of fraud in the audit of SCS's financial statement that are contained in the preceding dialogue, and explain why each is a misconception.