6-1materiality and risk

MATERIALITY AND RISK

EXPLAIN TO ME ONE MORE TIME THAT YOU DID A GOOD JOB, BUT THE CMPANY WENT BROKE

Maxwell Spencer is a senior partner in his firm, and one of his regular duties is to attend the firm’s annual training session for newly hired auditors. He loves doing this because it gives him a chance to share his many years’ experience with inexperienced people who have bright and receptive minds. He covers several topics formally during the day and then sits around and “shoots the breeze” with participants during the evening hours. Here we listen to what he is saying.

Suppose you are a retired 72-year –old man. You and your wife, live on your retirement fund which you elected to manage yourself, rather than receive income from an annuity. You decide that your years in business prepared you with the ability to earn a better return than annuity would provide.

So when you retired and got your bundle, you called your broker and discussed with him what you should so with it. he tells you the most important thing is to protect your principal and recommends that you buy bonds. You settle on three issues that your broker and his firm believe are good ones, with solid balance sheets (1) an innovative natural gas distribution company(2) a fast-growing telecom company, and (3) a large national cable company. Now all you have to do is sit back and collect your interest.

Ah, but the best laid plans of mice and men… First, the natural gas company goes broke, and you can look forward to recovering only a few cents on the dollar over several years. Then, the telecom company fails, and you might get something back-eventually. Finally, the cable company has a scandal and has to default on all of its outstanding bonds. A recovery plan is initiated, but don’t hold your breath. Your best strategy is to apply for a job at McDONALD’S. they hire older people, don’t they?

Now what could the auditors of these three entities ever say to you about how they planned and conducted their audits and decided to issue an unqualified opinion that would justify that opinion in your mind? You don’t care about business failure versus audit failure, or risk assessment and reliability of audit evidence, or any of that technical mumbo jumbo. The auditors were supposed to be there for you when you needed them, and they weren’t. anything that would have indicated a problem is material to you.