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Individual Case

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Submitted By lishaodong
Words 835
Pages 4
Individual case 1.6
NextCard, Inc.
131099123 李少东
Questiuons:
1. Should auditors evaluate the soundness of a client’s business model? Defend your answer.
I think obviously auditors should evaluate the soundness of a client’s business model. Reasons are listed below: 1) According to the GAAS, the second standard of field work states: The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature timing, and extent of further audit procedures. So it is the standards that asks auditors to evaluate the soundness of a client’s business model to avoid material misstatements. 2) By means of evaluating the client’s business model, auditors could understand its ability to continue as a going concern. As a result, auditors can more accurately identify the acceptable audit risks and release themselves from being a defendant. 3) Also if the auditors have evaluated the soundness of a client’s business model, they can find potential fraud or error before the field work begins, which could make them easier to focus on some specific accounts to find out whether there is fraud in the company.

2. Identify and briefly describe the specific fraud risk factors present during the 2000 NextCard audit. How should these factors have affected the planning and execution of that engagement?
According to the picture above, which shows the fraud triangle, we can easily know that there are three elementary fraud factors: pressure, opportunity and rationalization. In this case, the specific fraud risk factors present during the 2000 NextCard audit are described below: 1) Pressure/Incentives: NextCard Inc. had been taken public in 1999. On the first day NextCard’s stock was traded, the

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