Yun Jin ACCT 4420-091 Aug.29,2011 New Century Case 1.

Identify the advantages and disadvantages of a heavy concentration of audit clients in one industry or sub-industry. Advantages: auditors may have adequate experience in dealing with auditing. For example, KPMG's audit clients in that sector included the largest subprime lenders, namely, Countrywide, HSBC, and Wells Fargo. So auditors of KPMG should have enough knowledge to properly audit. What's more, a professional audit company would have better internal control to serve the clients. Disadvantage: each company's situation is different, if clients is heavy concentrated in one industry, auditors may easily have same attitude and same methods to deal with different company's data, which may cause errors. Also, heavy concentration of auditor clients may lead to an improperly staffed problem. 2. What quality control mechanisms should accounting firms have in such circumstances to ensure that a high-quality audit is performed? A comprehensive quality control mechanisms should include: 1. leadership responsibility for the quality control 2. Professional ethics 3. Acceptance and maintenance of relationship with clients 4. Human resources

5. Professional work execution 6. Proper financial statements 7. Monitoring 5. List specific GAAS that you believe KPMG may have violated on its New Century engagements. Briefly defend each item you list. KPMG may have violated:
1. General standards #2--the auditor must maintain independence in mental attitude in

all matters relating to the assignment. The bankruptcy examiner questioned KPMG's independence because he found the auditors had been eager to please the company's management team, and they can't be skeptical, strong, and independent.
2. General standards #3--the auditor must exercise due professional care in the

performance of the examination and the preparation of the report. The bankruptcy examiner reported that an audit senior called Biddle and her colleagues failed to thoroughly review the 2004 audit workpaper, which is one of the reason leads to errors.
3. Standards of fieldwork--#1--the auditor must adequately plan the work and must

properly supervise any assistants. KPMG assigned almost entirely new team of auditors, approximately 15 employees in tootal to client and it didn't have adequate plan.
4. Standards of fieldwork--#2--the auditor must obtain a sufficient understanding of

the entity and its environment, including its internal control, to assess the risk..... There are five significant deficiencies in internal controls. The internal controls are

weak and lack effective mechanism,which make accounting staff fail to record the need increases in the loan repurchase loss reserve.
5. Standards of fieldwork-#3--the auditor must obtain sufficient appropriate audit

evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. KPMG auditors don't thoroughly review the workpapers and haven't adequate evidence to make an auditing result.
6. Standards

of reporting-#3--when the auditor determines that informative

disclosures are not reasonably adequate, the auditor must so state in the auditor's report. KPMG didn't performed adequate tests and calculations, so it didn't determined that Interest Recapture was omitted from the repurchase reserve calculation.