During the early 1990s, the CFO of Providian Financial Corporation, which ranked among the largest financial

service company, is Jeremy Lent. Providian Financial Corporation used direct-mail marketing method to identify and then recruit customers, individuals who made extensive use of credit cards. Lent thought that this method could be incorporated well with the internet thats why he and his wife decided to put up NextCard. Its an online company that would offer internet users the opportunity to obtain a credit card in a matter of moments.

1. Should auditors evaluate the soundness of a clients business model? Defend your answer. No, the auditor should not evaluate the soundness of a clients business model. It is not their responsibility to assess on how the company started and how it should run their business and be profitable, their responsibility is to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether caused by error or fraud. Auditors must also keep their integrity and independence when engaged in auditing a client. The evaluation of the business model is for the banks or other financial institution that became the source of the companys capital. In their assessment, they must be able to detect whether the strategies and other activities of the company will be able to provide profit and sustain their company.

2. Identify and briefly describe the specific fraud risk factors present during the 2000 NextCard audit. How should these factors have affected the planning and execution of that engagement? Rapid growth or unusual profitability especially compared to that of other companies in the same industry Significant related-party transaction Significant, unusual or highly complex transactions Oversight by those charged with governance over the financial reporting process and internal control is not effective Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required) Excessive interest by management in maintaining or increasing the entitys stock price or earnings trend The practice of the management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts. / An interest by management in employing inappropriate means to minimize loss Management failing to correct known material weaknesses in internal control on a timely basis There were many risk factors present during the 2000 NextCard audit: unusually rapid growth and profitability, significant related-party transactions, poor or change state financial terminal figure when management guarantees debt, and management uses aggressive story measures to boost stock price. NextCard, incorporated respectively demonstrated these risks as: extending $1 billion of

credit to its customers with an average balance of $2000, executives sold-off bountiful portions of their ownership interests in the company before the financial condition became apparent, in 1999 the company produced a loss of $77.2 billion followed by a $81.9 billion loss in 2000 and NextCards executive chose to screen the companys financial problems, and the management materially 3. What are the primary objectives an audit team hopes to accomplish by preparing a proper set of audit work papers?

4. Identify the specific generally accepted auditing standards violated by the E&Y auditors in this case. Briefly explain how each standard was violated?

5. When he became a member of the NextCard audit engagement team, Oliver Flanagan hoped that Robert Trauger would serve as his mentor. What responsibility, if any, do senior audit personnel have to serve as mentor for their subordinates? Audit Manager administers important aspects of audit engagements, scheduling the audit work to be done with client personnel, assigning work to audit staff, supervising staff and reviewing staff work. Audit managers are often responsible for controlling staff time and overseeing billing and collections. They must keep the audit partner apprised of significant developments during the audit. Specific tasks: -To act as a liaison officer between partners and other members of the staff -To discuss with the client problem that may arise in the course of the audit -To exercise direct supervision on seniors in charge of specific audit engagements -To review working papers and drafts of audit report -To discuss reports and results of audit with clients -To take direct charge of training programs

---In-charge (Senior) Auditor works under the direction of audit managers and assist them in administering the audit. They generally participate in audit planning and provide direct supervision to staff auditors. They also review work performed by staff auditors and summarize audit findings for the audit partner to review.

6. Assume the role of Oliver Flanagan in this case. What would you have done when Robert Trauger asked you to help him alter the 2000 NextCard audit work papers? In answering this question, identify the alternative courses of action available to you. Also, identify the individuals likely to be affected by your decision and briefly describe how they may be affected.