In July 2005, Deloitte & Touche LLP dropped WPT Enterprises as an audit client because the audit risk was too high for the Internet gambling client. WPT is a U.S. company offering online poker through its website.
The Federal Wire Act passed in 1961 prohibits Americans from placing bets over the telephone or the Internet. Because Internet gambling is illegal in the United States, most Internet gambling companies are incorporated outside the country. WBT must follow U.S. law as a company registered in the United States on the NASDAQ stock exchange. WBT's auditors must make sure that the company does not take bets from Americans. 4
a. If your audit firm had accepted the audit engagement for this client, how would you ensure that the company complied with the U.S. prohibition against online gambling by American citizens?
b. Suggest a substantive test of balances or of transactions that could be effective in detecting the misstatement.
c. Is this a high-risk client in your opinion? How will you modify your audit procedures because of this risk?