What is the definition of a small probability event and try to discuss the vignette using this concept ?

 

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Sometimes an Isolated Exception Is the Tip of the Iceberg David Chen was an experienced assistant on the audit of Sol Systems, a manufacturer of solar panels. While performing tests of controls over sales transactions, he discovered that one of the sales transactions selected for testing was missing ship- ping information. When asked about the missing documenta- tion, the controller suggested this was an isolated clerical mistake. An hour later, he pro- vided Chen with the shipping document, which appeared to be valid. Since this was the only one in the sample with a problem, Chen thought that the results of the test would be considered acceptable un- der the sampling plan his firm had established, even if the transaction was considered an ex- ception. Still, the transaction was for a fairly large amount, and Chen was concerned that the documentation was not initially available. Chen consulted with Cindy Hubbard, the experienced senior on the engagement. Her initial reaction was to accept the documentation so Chen could move on to other testing. But after considering it for a few minutes, she asked Chen to look further into the transaction. Chen discovered that the receivable had not been paid. Instead, a journal entry had been recorded to credit the receivable from the sale. Through a series of journal entries, the receivable ultimately ended up recorded as an asset in a long-term asset account. He examined additional transac- tions involving this customer and found that they had been handled the same way. Hubbard escalated the findings to the engagement partner. The firm's forensic auditors dis- covered that Sol was engaged in a large-scale fraud to overstate sales and earnings. The firm resigned from the engagement and reported their findings to the SEC. Chen was promoted to audit senior a year earlier than normal for assistants. Sometimes an Isolated Exception Is the Tip of the Iceberg David Chen was an experienced assistant on the audit of Sol Systems, a manufacturer of solar panels. While performing tests of controls over sales transactions, he discovered that one of the sales transactions selected for testing was missing ship- ping information. When asked about the missing documenta- tion, the controller suggested this was an isolated clerical mistake. An hour later, he pro- vided Chen with the shipping document, which appeared to be valid. Since this was the only one in the sample with a problem, Chen thought that the results of the test would be considered acceptable un- der the sampling plan his firm had established, even if the transaction was considered an ex- ception. Still, the transaction was for a fairly large amount, and Chen was concerned that the documentation was not initially available. Chen consulted with Cindy Hubbard, the experienced senior on the engagement. Her initial reaction was to accept the documentation so Chen could move on to other testing. But after considering it for a few minutes, she asked Chen to look further into the transaction. Chen discovered that the receivable had not been paid. Instead, a journal entry had been recorded to credit the receivable from the sale. Through a series of journal entries, the receivable ultimately ended up recorded as an asset in a long-term asset account. He examined additional transac- tions involving this customer and found that they had been handled the same way. Hubbard escalated the findings to the engagement partner. The firm's forensic auditors dis- covered that Sol was engaged in a large-scale fraud to overstate sales and earnings. The firm resigned from the engagement and reported their findings to the SEC. Chen was promoted to audit senior a year earlier than normal for assistants.

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Answer To small probability events are also at the center of the literature on prospect theory The p... View the full answer