NAME: Ubaid ur rehman

SAP ID: 7428

Auditor’s Search for Materiality

There was once a group of very famous accountants and auditors who joined together as a
mutual study group. They determined that they could find the basic truths of auditing. They read
all manner of philosophical, scientific, and religious works and discussed those theories amongst
themselves. They felt that knowledge of the pure truths of auditing would form a basis for
discovering the core truths of business and, indeed, life itself.

They studied the great works of accounting for many years, but felt that they were getting
nowhere. Finally, they decided to take leave of their day jobs and search the world to find the
answer. They sought the advice of great teachers the world over. They would ask each great
teacher to recommend one who was even wiser. Thus, they collected these recommendations
until their search pointed to one man – a teacher of teachers.

The group journeyed to an isolated area in the great dessert wastes of Africa. There they met the
great man, and paying their respects, they told him of their heart-felt desire and long suffering to
find the pure truths of auditing. He said, “I cannot give you the answers. These you must find
yourself.” He instructed them to collect all the world’s accounting knowledge, encompassing
everything from the Sarbanes-Oxley Act 2002 back to cuneiform tablets of 3400 BCE. Then they
were to condense all that knowledge to ten volumes.

The group went away and gathered and summarized knowledge for all the ages. After years of
work, they again sat at the feet of the teacher of teachers and presented their ten volumes. The
sage picked up the volumes and thumbed through them. He handed the volumes back to the
group and then said, “Go and make this into one volume.”

After years of toil, the group, whose membership was now thinning appreciably, returned with
their one volume of the world’s audit truths. The teacher of teachers said, “Make this into one
sentence.”
Taking on this almost impossible task, the remaining members of the group locked themselves
into a cave and ate nothing but soup made of nettles to sustain them until they came up with the
one true answer. When they returned to the guru with this sentence, he smiled and said to them,
“You got it.” This was the sentence.

“There is no such thing as a free lunch.”

■ Why can we expect that a fraud that works now may not work in the future?
ANSWER The audit expectation gap is frequently associated with theFraudissue. Both
governments and the financial community expect the auditor to find existing fraud cases and
report them. The fact that this part of the expectation gap has attracted so much attention is partly
attributable to the evolution of auditing. As stated in our brief description of the history of
auditing, the detection of fraud has been one of the profession’s cornerstones during the first
decades of its existence.

■ Why can a company not continue to grow indefinitely at 15 percent per year?
The sustainable growth rate is the rate of growth that a company can expect to see in long term.
The growth rate is the indicator of what stage a company is in during its life cycle. Sustaining a
high growth rate in the long term can prove difficult for most companies. As the sales revenue
increase, a company tend to reach a sales capacity point with its product. So the company with
high growth rate can not grow in the long term. The high growth rate is the also the indication
that a company is investing in research and development which is generally consider as a riskier,
so the creditor consider it as a reason of delay in repayment of debts. Hence It is difficult for a
company to take outside financing.
■ Why can a management who make up fictitious sales not profit in the long run?
 The company will lose revenues, profits, cash flow, and market share–and not to mention some
very sad little customers. Manipulation does not only occur during the process of setting up the
budget. Also during the ... In rare cases, budget pressures have led managers to engage in
accounting fraud, for example by recording fictitious sales or inflating revenues.

■Why does every form of earnings manipulation have its cost?

ANSWER: Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which thefinancial statements are prepared. An example would
be where the management deliberately change the trial balance whichis then used as the basis of
preparation of the financial statements. Fictitious journal entries could be used to ‘window
dress’the year-end figures.Misrepresentation in, or deliberate omission from, the financial
statements of events, transactions or other significantinformation. An example would be where
management knowingly fails to account for a transaction, so that the financialstatements are
incomplete. Turnover or costs could be omitted or delayed until the next accounting period.
Failure to provideinformation about going concern problems is a deliberate omission of
significant information.
■ Based on this one sentence, how would you justify the existence of ethics?

Ethics, or moral philosophy, is a branch of philosophy that involves systematizing, defending,

and recommending concepts of right and wrong conduct. ... Ethics has to do with social
standards; morality is about personal beliefs.