Illustrate what actions would you take if the hypothesis

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Reference no: EM1348878

Analysis of the use of the scientific method in an audit situation:

The auditor, in order to mitigate their audit risk, is to presume that there is fraud in the reporting of revenues for a firm. Consider a company that manufactures high-tech fiber-optic gear. Assume that the Wall Street analysts believe the industry has good growth prospects. The audit client is predicting a 20% increase in sales and a 27% increase in profits for the year under audit. The auditor is planning the audit and knows the following:

a) 65% of all sales are made to just five customers.

b) There are three companies with very similar products. One has a moderately larger market share and the other has a significantly smaller market share.

c) There are indications that the economy is slowing down and it is expected that a slowdown would affect the market for high-tech products that the company sells.

Following the scientific method in this example, what steps would you as an auditor take to assure you have minimized the potential for audit risk (making a positive evaluation of the firmï¿½s financial status when it is in fact negative)? Provide the questions you would ask in order to determine the potential for fraud. Identify in your evaluation what questions you would ask in your process of determining the Hypothesis for your evaluation. Once you have determined the hypothesis, what actions would you take to test the hypothesis? Following your test illustrate what actions would you take if the hypothesis must be rejected given the outcome of the test?

Reference no: EM1348878

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