1040 Return

The basic steps associated with a financial audit.

a. Assess management's integrity

• Management has a fiduciary duty to act in the best interest of the organization and its stakeholders

b. Evaluate management's credentials.

c. Review the internal control system.

• Adequate documentation

• Background checks

• Comprehensive employee training

• Document matching

• Multiple signatures and approval levels for specific financial thresholds

• Physical safeguards for assets

• Regular bank reconciliations

• Separation of duties

d. Perform compliance testing (the amount is dependent on auditor’s confidence in the internal controls).

• Existence or occurrence

• Rights and obligations

• Valuation and allocation

• Completeness

• Presentation and disclosure

e. Issue the audit report.

• Unqualified

• Qualified

• Adverse

• Disclaimer

Assignment requirements:

First, diagram the above steps. You can use any of these methods: flowchart; dataflow diagram; or entity-relationship diagram. Just diagram the five main steps.

Take the above steps and apply them to the following case. For example, the first step is to assess management’s integrity. Does the management of the company below show integrity?

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