Case 6.5 Qwest Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or...

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Case 6.5 Qwest Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Qwest Case Relevant Technical Knowledge Full Disclosure Principle A company should not withhold information that would be considered material to an investor or creditor of the company. So, the disclosures should be enough to allow the users of financial statements to make evaluations and judgments about the company at a reasonable cost.

Transcript of Case 6.5 Qwest Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or...

Page 1: Case 6.5 Qwest Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill.

Case 6.5

Qwest

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Qwest CaseRelevant Technical KnowledgeFull Disclosure Principle A company should not withhold

information that would be considered material to an investor or creditor of the company. So, the disclosures should be enough to allow the users of financial statements to make evaluations and judgments about the company at a reasonable cost.

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Qwest CaseRelevant Technical KnowledgePCAOB AS #12 – Paragraph 67 “the auditor's evaluation of fraud risk

factors . . . should include evaluation of how fraud could be perpetrated or concealed by presenting incomplete or inaccurate disclosures or by omitting disclosures that are necessary for the financial statements to be presented fairly in conformity with the applicable financial reporting framework.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 Paragraph # 25 – “because of its

importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company.” The control environment is influenced heavily by a company’s management team and is therefore often referred to as “the tone at the top.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 – Paragraph A4 “References to financial statements and

related disclosures do not extend to the preparation of management's discussion and analysis or other similar financial information presented outside a company's GAAP-basis financial statements and notes.”

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Qwest CaseRelevant Technical KnowledgeRevenue Recognition Principle Revenue must be both earned and realized

before it is recognized. That is, the product must have been delivered or the services must have been provided to the customer. In addition, the amount of the sale needs to be fixed and determinable. And, there must be a belief that the cash will be collected from the customer in a timely manner.

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Qwest CaseRelevant Technical KnowledgePCAOB AS No. 5 – Paragraph A5 “Internal controls provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #12 – Paragraph #65 “fraud risk factors are events or conditions

that indicate (1) an incentive or pressure to perpetrate fraud, (2) an opportunity to carry out the fraud, for example, the absence of controls, ineffective controls, or the ability of management to override controls—that provide an opportunity for a fraud to be perpetrated, or (3) an attitude or rationalization that justifies the fraudulent action”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #12 – Paragraph #7 “The auditor should obtain an understanding of

the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #13 Paragraph # 8 – The auditor should design

and perform audit procedures in a manner that addresses the assessed risks of material misstatement for each relevant assertion of each significant account and disclosure.

Paragraph # 9 – when identifying the “audit procedures to be performed” that the auditor should “obtain more persuasive audit evidence the higher the auditor's assessment of risk.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 Paragraph # 29 – outlines nine specific

risk factors that are “relevant to the identification of significant accounts and disclosures and their relevant assertions.”

Paragraph #32 – there are often multiple components that make up a particular significant account. Each may be “subject to differing risks.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #15 – Paragraph #4 “The auditor must plan and perform audit

procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.”

PCAOB AS # 15 – Paragraph #6 ”To be appropriate, audit evidence must

be both relevant and reliable in providing support for the conclusions on which the auditor's opinion is based.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 – Paragraph #28 “relevant assertions are those financial

statement assertions that have a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated.”

PCAOB AS #5 – Paragraph #30 “what could go wrong?”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 Paragraph #39 – “the auditor should test those

controls that are important to the auditor's conclusion about whether the company's controls sufficiently address the assessed risk of misstatement to each relevant assertion.”

Paragraph #41 – “the decision as to whether a control should be selected for testing depends on which controls, individually or in combination, sufficiently address the assessed risk of misstatement”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 Paragraph #28 – “relevant assertions are

those financial statement assertions that have a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated.”

Paragraph #30 – “what could go wrong?”

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Qwest CaseRelevant Technical KnowledgePCAOB AS No. 15 – Paragraph 7 “The relevance of audit evidence refers to

its relationship to the assertion or to the objective of the control being tested.”

PCAOB AS No. 15 – Paragraph 8 “The reliability of evidence depends on

the nature and source of the evidence and the circumstances under which it is obtained.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS No. 15 – Paragraph 11 “In representing that the financial

statements are presented fairly in conformity with the applicable financial reporting framework, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation, and disclosure of the various elements of financial statements and related disclosures.”

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Qwest CaseRelevant Technical KnowledgePCAOB AS #5 Paragraph #39 – “the auditor should test those

controls that are important to the auditor's conclusion about whether the company's controls sufficiently address the assessed risk of misstatement to each relevant assertion.”

Paragraph #41 – “the decision as to whether a control should be selected for testing depends on which controls, individually or in combination, sufficiently address the assessed risk of misstatement”

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Epilogue - Qwest Earnings were restated, lowering

revenues by $2.5 billion.

CEO Joe Nacchio convicted of 19 counts of insider trading and sentenced to 6 years in prison


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