1. Discuss three management events that occurred that should have been a “red flag” to the auditing firm.
The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident
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3. Discuss how the auditing procedure should have been modified to address the high-risk financial statement items. The chief executive of the company was closely working with the vendors whose confirmations were vital in the auditing work and hence they could have submitted false confirmations. The auditing firm established a national risk management program for its clients and so national reviews were done to identify the high risk items in the financial statement. The vendor allowances were particularly high but they were not documented. As such, the auditors were supposed to demand for the documentations and compare them with the real figures. It is however noted that most of the documentations received were non-standard and this could have led to a different audit report given that vendor allowances were earlier identified as a high risk area. Inventory management was found to be poor especially in the allowances for inventory reserves. The audit firm was therefore obliged to carry out a thorough evaluation of the inventory reserves and determine whether it was reasonable. The valuation was also supposed to include all classes of inventory but for the case of the company, the evaluation excluded instances where no sales had been made. Hence, this evaluation could not accurately represent the position of the inventory reserve in the company. (Waters,2003)
4. Discuss what subsequent event procedures the firm should have conducted
5-29 (Assertions) In planning the audit of a client 's inventory, an auditor identified the following
2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit
CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.
There are four stages in this audit. The first stage is the planning and risk assessment. This stage of the audit is completed during the initial planning. The risks for Smackey Dog Foods, Inc. can be better identified by understanding the business, its industry, environment, management culture, the type of accounting used, and the competition. The auditors should be able to understand why Smackey’s sales are steadily increasing and its competitors sales are declining. To be more specific, the implementation and design of Smackey’s internal control procedures, processes, and systems are studied and analyzed for the audit team to be able to assess the control risk for each of the transaction related audit objectives, which are accuracy, occurrence, classification, completeness, summarization, and timing and posting.
In this situation, audit planning should have certain procedures to test the opportunities whether management can commit fraud, such as inquiries of management and employers to establish an overall understanding of the client’s strategies and business, industry and economic environment and competitors’ situations.
AICPA Code of Professional Conduct principles prevents vises such as fraud that are experienced in accountancy field. Audit is the best measure of the effect of the fraud that are imposed to investors by accountants. The relationship of the investors and account holders are supposed to be affirmed through auditing to ensure accounting principles are upheld(Weirich, Pearson, & Churyk, 2010). Improper loss of the funds through propagation of the accountant officer should be treated as fraud and criminal activity that should lead to prosecution. Therefore, the paper seeks to relate two fraud cases that have been audited and presenting AICPA Code of
There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.
This subject company in this case study is WoolEx Mills. The top management team at the Mills had to act fast to prevent the accusations charged upon them, so that they may venture deep into the United States market. In the process, they had to act in a way that will present the company’s financial statements; cash flows in a way that they did not show any suspicious fraudulent activities. The type of fraud in this case study is known as manipulation of accounts which involves the act of offering the accounts in the way they are not in reality.
The Phar Mor case is an example of a fraud that was collusive effort of multiple individuals within the upper management who continually worked to hide evidence from the auditors. With the signs of covering losses, creating fictitious inventory, misstating financial statements, and misappropriating the company’s dwindling assets; the fraud was significant but the oversight inept procedures by the auditors extended this fraud for nearly five-years Currently, accounting firms, with the leverage provided by Statement on Auditing Standard No. 99 are shifting from the cost-pressured audit situation of the past to more quality audits and fulfilling the responsibility to plan and perform.
The audit evidence should include test on controls and inquiry for how these issues are handled, and possible external confirmation of the firm’s lawyers as to the potential settlement and court costs as well as possible duration of the
Some times, when a very experimented analysts see a cash flow statement, he can detect problems that would not be obvious from others financial statements alone. For example, WorldCom committed an accounting fraud that was discovered in 2002; the fraud consisted primarily of treating ongoing expenses as capital investments, thereby fraudulently boosting net income. Use of one measure of cash flow (free cash flow) would potentially have detected that there was no change in overall cash flow (including capital investments) (Peter Elstrom July 2008).
The author of this report is asked to present a report that covers a real corporate fraud and how to help prevent it through techniques and metrics. The author is asked to present five major answers. The first answer is to how to implement the investigation and thus help fetter out who is the culprit and how deep and wide the fraud goes. The second question asks the author to detail what types of surveillance and review will be undertaken including techniques that are covert and unknown to the people being watched up to and including the highest executives of the firm. Red flags that would arise suspicions are to be identified as well as key practices to be used interviews with people with potential knowledge or even involvement in such crimes. In conclusion, a fraud prevention plan will be articulated.
b. Describe the implications of the resulting ratios for the auditor’s audit strategy in year 5. What specific audit objectives are likely to be misstated? How should the auditor respond in terms of potential audits tests?
A number of financial statement frauds went undetected from auditors in past and attracted a high profile attention. The businessmen add fake assets or transfer the assets of companies to their personal assets and result in accounting scandals when the affected companies are bankrupted or are even close of bankruptcy. Just to mention a few names, accounting scandals of Enron, AOL Time Warner and Xerox are among the hottest accounting scandals of the century. This means that despite presence of professional auditors accounting scandals happen and there is a need to learn from the mistakes of the auditors who overlooked these activities. In this report the case study of Xerox is analyzed in detail to highlight violations of accounting principles and present an example from which lessons can be learnt for the future.