1) Explain the auditor’s responsibility to detect material misstatements due to errors and fraud and the categories of fraud affecting financial reporting. Identify misstatement in financial report is the major task of auditor. Regardless the result of error or fraud, plan and perform audit engagements are being required by auditors to ensure financial statements are free from material misstatement by reasonable assurance instead of total responsibilities to the fair and true reports due to the limitation of auditing. When there is a high likelihood of fraud through evaluating by auditors, audit tests are needed to be expanded. (Moroney, Campbell & Hamilton, 2011)
Fraudulent of financial reporting or misappropriation of assets will arise fraud misstatement where fraudulent shown in the financial statement misstatements or omissions that deceive users and for misappropriation of assets is referring to the thefts of entity assets reported in financial statement. (Kimmel, Carlon, Loftus, Mladenovic, Kieso & Weygandt, 2006).
2) Explain the THREE (3) broad conditions that normally exist when fraud is present? Fraud inclusive assets misappropriation and fraudulent financial reporting is present with three conditions. First, the management may be pressurized or encouraged to commit fraudulent financial reporting within or beyond the entity in order to match the expected earnings target. (Moroney, R., Campell, F., & Hamilton, J. 2011).
Second, a perceived opportunity to commit fraud may exist when an individual believes internal control can be overridden. This can be shown if an individual is in a position of trust or has knowledge of specific deficiencies in internal control. (Moroney, R., Campell, F., & Hamilton, J. 2011).
Third, attitudes and rationalization contribute to commitment of a fraudulent act by individuals. Some individuals have a set of ethical values, an attitude or characters that allow them to commit fraudulent act knowingly and intentionally. However, even honest individuals may be tempted to commit fraud in an environment that pressurized them tremendously. (Ramos, 2003)
3) Which factors existed during the 1995 through 1997 audits of CUC that created an environment conductive for fraud? From the case study, seeking incentive or pressure to commit fraud can be shown through the CUC’s revenue has dramatically increase from $31million in 1995 to $87million in 1996 and $175million in 1997. The fraudulent of the company’s revenue is due to the reason that to merge or acquire other companies, the profit of the company has to keep increasing in order to meet the analysts’ expectation. The managements of CUC have pressures to fraud the financial figures and create more profits in order to meet the analysts’ expectation.
In case study, the perceived opportunity to perpetrate a fraud also happen in which CUC has made various year-end adjustments to incorporate the misstatements reflected in CUC’s quarterly reports into the general ledger. Instead of follow the requirements to amend its financial statements by the Securities and Exchange Commission several times, CUC has fraud the financial figures for year-end reporting purposes.
Finally, the attitudes and rationalization to justify a fraud also shown in the case study where the top management of CUC showed high enthusiasm to maximize the share price of the company to shown that it is a profit-making company. 4a) What responsibility does an auditor have related to each of these five components? Auditors are responsible for the evaluation of whether a culture of ethical behavior and honesty have been created and maintained by the management. They are required to determine the ability of the control environment to form the basis for other components in internal control and whether those components are impaired by deficiencies in internal control (“ACCA Paper”, 2012).
If an entity has established a process of indentifying business risks, estimating...
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