Substantive Verification Procedures:  Where are the Misstatements? You are a senior attester employed in San Diego, California, by Lopez & Ryan,…

Substantive Verification Procedures:  Where are the Misstatements?

You are a senior attester employed in San Diego, California, by Lopez & Ryan, LLP (LR). The firm has been engaged by DDS to attest to the veracity of information contained on the most recent version of their Form D1.

This form is important because it is the basis for the oral assertions which representatives of DDS make when attempting to induce persons who inquire about joining to become new clients. For example, during a recent site visit, you overheard an employee inform a prospective client that approximately 20% of the persons listed in the database have advanced degrees, the average age of those persons listed in the database is approximately 40 years, and that about 50% of the persons listed in the database never have been married. Moreover, the representative stated that they are one of the few services in the county whose database contains 1 in 5 persons having a professional occupation (e.g., doctor, lawyer, etc.).

You are now at the stage of the attest engagement which directly tests the assertions contained in the most recent Form D1. Based on interviews with DDS personnel, your team currently believes that more than 9 of every 10 clients are honest when providing DDS with various demographic information. The attest team has decided to focus its attention on the following assertions which appear on the most recent Form D1:

In practice, attesters must determine what constitutes a material misstatement, what procedures to perform to verify each key assertion, when to perform such procedures, and the extent to which such procedures should be performed. Attesters then must perform such procedures, evaluate the resulting evidence, and finally, reach a conclusion about the veracity of the assertion. For the present case, the assertions have been identified for you and the timing issue (i.e., when the procedures should be performed) is beyond the scope of the assignment.

Required:

1.     Risk of Material Misstatement Memo                             Due Monday, March 17^th

Assess the risk of material misstatement as high, moderate or low, for each of the three “balances.” Your assessment should be based on the inherent risk factors and control risk factors for each (age, income, and percent with advanced degrees). Document your assessment in a short memo (1 page).  NOTE: I’ll assign you a sample size for your testwork only after you discuss your assessments with me.  Make sure to talk to me in class or come to office hours!

2.     Audit Plan (Program)                                                          Due Monday, March 17^th

Prepare an audit plan detailing the substantive tests-of-detail procedures you would perform to verify the age, income, and percentage of members with advanced degrees balances.  Recall that an audit plan (also called an audit program) is a detailed set of instructions as to how to conduct the audit, it is not a memo.  To simplify matters, assume that the information about specific members in the database is susceptible to only four types of potential misstatements:

entry errors (accuracy concern)- errors which are introduced during the entry of data obtained from clients into the database,

misrepresentation errors (accuracy concern) – errors introduced by clients who misrepresent facts about themselves,

fictitious listings (existence concern)- persons are listed in the database who do not belong therein, and

omission errors (completeness concern)- failure to list someone in the database who should be listed.

You should specify substantive tests-of-detail procedures which would produce evidence on each of these four types of potential misstatements.  In planning, you should focus on procedures that you will be able to implement based on the information available in the case materials (e.g. A confirmation simulator, New Client Information Sheets, and DDS’s database).  While audit plans for a financial statement audit are extensive, your audit plan will likely be 1 page. NOTE:  I highly recommend getting approval of your plan before you begin testwork.  It will save you time and effort!

3.     Substantive Testwork                                                         Due Monday, March 17^th

Perform the procedures identified in your audit plan.  Make sure to document the work you perform!  This will be very detailed and will include the specific clients and related information that you are testing and any discrepancies that you find.  You should document the SDR (sample deviation rate) and the projected population error in your workpapers.  (Hint: The easiest way to perform and document your test work is in an excel spreadsheet.)

4.     Conclusion Memo                                                               Due Monday, March 17^th

Prepare a memo in which you communicate your conclusion with respect to each of the identified assertions. Be sure that your memo explains the reasons for your conclusions. Keep in mind that the implications of a misstatement depends on its magnitude and that you need to allow for sampling risk even if you were to find no misstatements. In addition, you should indicate what, if any, additional information you need before you reach any conclusions. Include the rationale for all key judgments and conclusions you reach in your memo.  Keep in mind that your final conclusions on this project directly pertain to the reliability of the Form D-1 assertions about the dating service’s database.  This memo should be 1 page.

For information about Dave’s Dating Service, refer to the intro handout (available on BbLearn) and the database, confirmation simulator and supporting documentation files available on BbLearn.