Option 1
Part 1
The company selected for the assignment is Teledyne Technologies. Chart below shows the information regarding the company:
The audit report of Teledyne Technologies Inc. for the year ended January 3, 2016 carried an unqualified opinion. The report stated that the consolidated statement of income, comprehensive income, cash flows, and stockholder’s equity for the year then ended presented fairly, in all material respects, the financial position of the company and were in conformity with Generally Accepted Accounting Principles of United States of America.
The company’s internal control for the year ended January 3, 2016 were also audited in accordance with the standards of the Public Company Accounting Oversight Board, based on the criteria of Internal Control-Integrated Framework (2013). This criterion was issued by the Committee of Sponsoring Organization of the Tread way Commission. The audit firm expressed an unqualified opinion on the internal controls of the company over their financial reporting. Analysis of the audit reports reveals that there was nothing unusual in the reports of independent auditors.
Teledyne Technologies belongs to the scientific and technical instruments industry. The 2015 Technology Risk Factor Report from BDO states that increasing competition and dynamic market conditions are the most prevalent risk factors in the technology industry . More specifically, continuous innovations and development remain the major concerns of the companies in this industry. Due to such factors, companies are increasingly striving to attract and retain skilled employees.
The report analyzed SEC 10-k filings of the largest 100 public traded technology companies and it was revealed that merger and acquisition risk is also becoming a major risk factor for the companies. Particularly, those mergers and acquisitions that are resulting in successful completion and integration of future business transactions are becoming the primary risk factors. The awareness regarding merger and acquisition has been increasing in the finance chiefs of the technology companies, and it was noticed by the report that 96% of the executives expect that merger and acquisition activities will increase in the upcoming years.
Another unique risk factor associated with the technology industry is the data security. Many companies are on the edge of security breaches while many show concerns regarding corporate copyright, trademark violations, and property infringements. Moreover, as data breaches are becoming increasingly common, companies are getting more concerned about their infrastructure and are making efforts to enhance the cyber security measures in order to protect their intellectual properties.
One of the main competitors of Teledyne Technologies is Northrop Grumman Corporation, which is the fifth largest defense contractor in the world. The company is included in number 72 in the list of Fortune 500 companies. The revenue of Northrop Grumman in 2015 was $23.525 billion, as compared to the Teledyne's revenue of $1.644 billion . The total assets of Northrop are reported to be of worth $24.454 billion while Teledyne operates with the assets worth of 1.55 billion. The significant difference in the size shows that Northrop is a far large organization as compared to Teledyne.
The major audit risk related to the company is their international revenue, which accounts for around 44% of the company’s total revenue. The product of the company is sold in almost 100 countries ar0und the globe. Moreover, acquisitions made by the company in 2015, including acquisitions of Bowtech and ICM, increased the percentage of international sales significantly. It indicates that the political instability and international terrorism around the globe can several impact the business and revenue of the company. Moreover, US foreign policies, changes in tariffs and tax laws, and international relations of US with other countries can also pose a significant risk. Hence, these risks are considered to be the audit risk since they can have a material and adverse impact on the business of the company, and on its financial operations.
In order to address the risk associated with the international revenues of the company, the analytical procedures should be conducted to compare the performance of the current year’s revenue with the previous year’s performance and with the industry benchmarks . It will provide the auditor with the opportunity to analyze the growth that the company has experienced in the period of one year. Moreover, the auditor should also evaluate the maximum revenue capacity of the company if all its assets and workforce is fully utilized .
Account receivables form the significant part of the Teledyne Technologies current assets. In 2015, the account receivables of the company were $373 million, as compared to the $400.7 million of 2014. In order to assess the risk of material misstatement and to detect the instances of fraud, the auditor should perform substantive audit procedures on the grouping of account receivables.
Firstly, in order to verify the assertion of completeness, cut off, and valuation, the auditor shall send the positive confirmations to the debtors of the company. Positive confirmations shall be sent to the selected sample of debtors who shall then be required to respond directly to the auditor. It is important to note that confirmation must contain the authorization of the client.
If the auditor does not receive the reply to the confirmations, he should perform alternative procedures to verify completeness and valuation . Cash receipts and invoices should be examined and traced to the company accounts. Subsequent clearance should also be checked from the bank statements. If the payments are not found to be received, the auditor should discuss and inquire the matter with the company’s management.
Option 2
The auditor must evaluate the impact of delay in the schedule on the audit work and resources. In case if the delay is having the significant impact on the resources and increasing the cost of the audit, the auditor must communicate the same with the client.
An audit member is required to be independent while performing their professional services. In the given circumstances, the senior audit member should evaluate whether the relationship between junior audit member and client accountant would lead to the threat to independence. If the relationship is found to be threatening to the independence of the junior auditor, the senior member should apply the safeguard and should replace the team member immediately.
Any confidential information obtained in any professional meeting, and which is not available publicly, should not be disclosed. The comments of the CPA firm manager regarding their consideration for internship hiring are not publicly available information. Hence, before the firm takes a final decision regarding their hiring, the candidate should not disclose this information to his friends.
Since the public misconduct of the client’s controller does not pose any threat to the auditor’s work, it does not require any safeguard to be placed. However, the information about the client’s misconduct is of personal nature and therefore should not be used or disclosed in any way by the auditor to any third party. It could only be disclosed to the authorities if the court of law requires the auditor to disclose.
Scott and company are a limited liability company which is headquartered in Columbia, South Carolina. The firm was the external issuer auditor of AFS. The firm violated the rules of PCAOB which requires the public accounting firms and its associated persons to be independent of the issuer audit clients. Furthermore, the firm also violated the section 10A(g) of the Exchange Act, which is regarding the independence of the auditor.
It indicates that the Scott’s firm failed to understand the generally accepted audit standards and the responsibility of the partner to determine the compliance with the rules and requirements of the independence. During the audit, Splanik did not determine that Nelson, who was assisting in the audit, was not an independent person.
Mark Nelson was asked by the firm to assist them in the audit of AFS. Nelson was also in trouble since he was not an independent person and hence he shouldn't have assisted the firm in providing audit related services. The reason why he was not independent is that he was also providing non-audit services to AFS. Particularly, Nelson was also preparing the tax provisions and the tax footnotes for the financial statements of the company. This work was contemporaneous with his work on the audit that required performing audit procedures on the tax provisions that he had prepared.
Works Cited
Annual Report: Teledyne Technologies Inc. California: Teledyne Technologies, 2015. . Print.
Chun, Amanda. As Competition Persists, M&A Risks Prevail Within Tech Industry – BDO Report . May 2015. Web. 28 May 2016 <https://www.bdo.com/news/2015-may/as-competition-persists-ma-risks-prevail>.
Griffiths, Phil. Risk-Based Auditing. Farnham: Gower Publishing, 2012. . Print.
Johnstone, Karla, Audrey Gramling and Larry E. Rittenberg. Auditing: A Risk Based-Approach to Conducting a Quality Audit. Boston: Cengage Learning, 2015. . Print.
Puncel, Luis. Audit Procedures. Illinois: CCH, 2007. Print.
