Question 1

The assertions that are relevant to the Paragon’s construction project include valuation, disclosure and occurrence.

Occurrence assertion: Here Arthur Anderson ought to have verified the transactions Paragon was claiming had already taken place. Among these transactions is the $4 million for the “uninvoiced” construction costs. The costs were just fictitious and only worked to inflate Paragon’s revenues. Demanding to see the invoices for this transaction would have been prudent so as to compare with the clients’ invoices.

Valuation assertion: Paragon should have used the “earned value” method from the beginning instead of the “cost to cost” method. It is after switching to the earned value method that he was able to identify accelerated revenue recognition that was in material amounts.

Disclosure assertion: Paragon should have requested for all the relevant invoices of the recorded transactions.

Question 2

In my opinion, by using the phrase “audit failure” SEC meant that Sullivan neglected to implement certain audit tests that would have been helpful given the circumstances involved. It is not Sullivan alone that was solely responsible for the deficiencies experienced. The top executives; Christopher Curbello and John Boyd should share the blame too. The two had too much control with regards to financial reporting and decision-making and worked to defraud Anderson and the public.

Question 3

In a high-risk engagement, the senior auditor should have a close supervision of the engagement team compared to the normal engagement. This is meant t ensure that the team does not miss the important details that will be helpful in conducting the audit.

High-risk engagement also calls for the need of assessing the tops level officials in the organization to help ascertain their level of influence in the organization. This helps in identifying their probability of conducting fraudulent activities and having the ability to cover them up.

There is also the need to use a team that is more experienced, expand the extent of procedures used, and apply audit procedures at the end of accounting year more so in critical audit areas.

Question 4

The audit and accounting guides issued by the AICPA for specialized industries are meant to help auditors in handling auditing, review, valuation, compilation, attestation and accounting issues. The guides are not meant to replace or override authoritative guidance that have been provided in varied professional auditing standards. The guides are meant to supplement the existing standards.

Question 5

When applying the percentage of completion accounting method, the change that Paragon made was a change in accounting principle. In this change, there can be more than one accounting principle that is generally accepted for a given situation. Paragon changed the accounting method in use mid-year, in this case.

Both of these changes require full disclosure that is vivid in the footnotes of a financial statement. The disclosure describes the justification and the effects that would accrue as a result of the change to enable users of the financial statements to have an in-depth analysis of the changes.

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