a. Discuss at least three specific ways in which big data, data analytics, and new technologies can enhance external audits. How does each item discussed improve the effectiveness and/or efficiency of the audit?
b. On the other hand, what challenges do auditors face when using big data, data analytics, and new technologies during the audit?
2. As noted in the case, auditing standards specifically require auditors to identify revenue recognition as a fraud risk in most audits. Based on your understanding of the company, what factors may increase the risk of fraudulent financial reporting in Souper Bowl’s 2016 revenues?
The auditing standard ASA 240 requires auditors to find and analysis the risks of material misstatement because of frauds at two main levels, financial report level and assertion level for various classes of transactions, disclosures and accounts balances. Further this auditing standard clearly mentions when identifying and analyzing the risks of material misstatement because of fraud, the auditor should presumes that risks of fraud are primarily due to revenue recognition. In case of Souper Bowl there are many factors that increase risks of fraudulent financial reporting (ASA 240, 2013). The risk factors relating to misstatement of financial reporting due to revenue recognition can be broadly divided into three factors such as incentives/pressures, opportunities and attitudes/rationalizations. Some of factors associated with the case of Souper Bowl are pressure to show the positive after tax profit in order to keep the loan taken from the bank active, high degree of competition which is accompanied by the reducing margins, recurring negative cash flows from operations while reporting positive earnings, significant financial interest in the company, the compensation of managers critically dependent upon the profit level or revenue (compensation such as bonuses, stock options or others), guarantee given by the owner in respect of debt owned by the company, excessive pressure on the managers to meet the financial targets as set by the board of directors (target can be of sales or profitability), and lastly there can be possible cause of related party transactions that can help to proportionate the revenues and save the tax of either party (PCAOB, 2018).
ASA 240. 2013. Auditing Standard ASA 240 The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report. Retrieved September 15, 2018, from https://www.auasb.gov.au/admin/file/content102/c3/Nov13_Compiled_Auditing_Standard_ASA_2 40.pdf
PCAOB. 2018. AS 2401: Consideration of Fraud in a Financial Statement Audit. Retrieved September 15, 2018, from https://pcaobus.org/Standards/Auditing/Pages/AS2401.aspx
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