Henderson Energy Corporation: A New Client of Whitehead CPA

The Inherent Risk is about the risks before the system of Internal Control takes place. This latter risk of Internal Control discusses all flows In the system of Internal Control, Like for Instance collusion or an Insufficient segregation of duties. Evidence for a segment fails to detect material misstatements. Key elements This case contains the following key elements: Henderson is a newly obtained client Public traded company, regulated by utility commission and in alignment with SEC Extensive investments in complex information technologies

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Investments in speculative markets and use of derivatives and hedging transactions Growth into rural markets and acquirement of regional electric company Addition of experienced accountants – internal audit team / audit committee Difficulties in tracking property, plant and equipment accounts. Extensive review of CPA CPA team with experienced auditors in public companies and utility markets. Identifying the risks The table below shows the risks that are existent at Henderson, including a description of the kind of effect on the risk of material misstatement and the audit sis component.

Also, to in case of control risks and planned detection risks, additional controls/procedures or testing are mentioned to eliminate these risks as much as possible. Factor Effect on the risk of material misstatement Audit Risk Model Component Controls / Actions to reduce risk Henderson is a new client, so Whitehead does not know the company yet. Increases the risk Contact previous CPA. Extensive Investment in information technologies. These are difficult to value.

Increases the risk Experienced auditors in energy business and public companies Henderson is a publicly traded company, so the auditor is less willing to accept risks Decreases the risk Acceptable Audit Risk Extensive partner review of key accounts. Expanded Investment into speculative markets As part of check on key accounts thoroughly review Derivative and hedging transactions to mitigate investment risks. These are used to offset the above investment risk. Decreases the risk *1 Experienced CPA team and highly experienced accountants and Internal Audit team. Alignment with SEC decreases risk, but gives lower error margin.

Difficulties in tracking property, plant and equipment items, according to predecessor auditor Extensive review on key accounts – based on risk more thorough audit on this account / assets. Acquire of electric company. This expands the above risk, due to this company owing a number of production facilities as well. Increases the risk Addition of experienced accountants Henderson has added highly experienced accountants within its financial reporting team, so they keep a close eye at the business as well Decreases the risk Control Risk Not needed, due to addition of experienced accountants – internal control.

Internal Audit is actively involved in reviewing key accounting assumptions and estimates on a quarterly basis Decreases the risk Control risk No additional actions needed, IA already decreases the risk. Whitehead plans to staff the audit engagement with several members who have experience in auditing energy and public companies Decreases the risk Not needed, it already decreases the risk. 1 Due to the complexity of derivatives and hedging strategies this could also create other risk and complexities. The auditing firm should keep a close eye on the above risks, to reduce the risk of the material misstatement as much as possible. When the above risks (the ones that increase the risk) are closely monitored, the auditing firm is more likely to discover any material misstatements and the possibility of anyone suing the firm for issuing a wrong unqualified audit report will be lower.

Opinion about the risks / controls Overall our opinion is that even though the case has some interesting elements and factors that increase the risk the control in order to avoid misstatements in financial statements is done properly. Whitehead are appropriate. To illustrate this we made the following “control framework” in which the relations and important audit participants and controls are presented.