Case 3.3 WorldCom: Significant Business Acquisitions
1. Consult Paragraphs 710 of PCAOB Auditing Standard No. 12. Identify three specific factors about WorldCom’s strategy that might cause you to elevate the risk of material misstatement.
According to Paragraphs 7-10 of PCAOB Auditing Standard No. 12, auditor should understand the company and its environment. As far as I am concerned, the first specific factor is that the industry environment will be affected by the economy, law and technology. In the case, the government made a decision to re-regulate the industry, which made the competition fiercer. Secondly, the auditors also need to take company’s business into account, which including organization, operation and capital structure. For example, when WorldCom made the acquisitions, the two different company structures would be merge into one structure. Thirdly, the extent of recent changes is also an important factor. WorldCom expanded to new market, but auditors did not know if the management had operated effectively in the new market. Those factors will have an impact on assessment of inherent risk.
2. Consult Paragraphs 5-7 of PCAOB Auditing Standard No. 13. Comment on how your understanding of the risks identified at WorldCom would influence the nature, timing, and extent of your audit work at WorldCom.
Risk identification is the process of determining risks that could potentially prevent the program, enterprise, or investment from achieving its objectives. According to Paragraphs 5-7 of PCAOB Auditing Standard No. 13, the due professional care and professional skepticism play an important role in auditing. Auditors should have a questioning mind and a critical thinking. With those abilities, auditors can evaluate the investment risks of WorldCom.
3. Consult Paragraph 33 and Paragraph B10 of PCAOB Auditing Standard No. 5. If you were conducting and internal control audit of WorldCom, comment about how WorldCom’s acquisition strategy would impact...