Question

Answer Part a, b,c,d in brief

Professional standards outline the auditors consideration of material misstatements due to errors and fraud. (a) \%at responsibility does an auditor have to detect material misstatements due to errors and fraud? (b)What two main categories of fraud affect financial reporting? (c)"What types offactors should auditors consider when assessing the likelihood of material misstatements due to fraud?(d)\%ich factors existed dur ing the 1997 through 2000 audits of Xerox that created an environment conducive for fraud?

Answer 1

THE GIVEN QUESTION CAN BE ANSWERED IN 4 PARTS

PART A

Law relating to Auditor’s responsibility clearly states that Auditor is responsible for obtaining reasonable assurance that the financial statements of company does not contain material misstatement whether it is by fraud or error

However, It is not the responsibility of Auditor that he /She detect all the fraud . Materality is an important concept during auditing of finanacial statement of any company.Thus Auditors are not responsible to plan for fraud which are not material for the company

The Auditor should assess possibility of fraud and error & if chances or likelihood is high than he should extend scope of audit and increase Audit test

PART - B

There are mainly two type of frauds that can be found in any organization and for them Auditor have to plan & perform well these are financial reporting Fraudes & Fraud relating to misappropriation of business assets.

Fraudulent Financial reporting can be explained as an avctivity of omission or misstatement in Finalcial statements that mislead the users and other concerned parties

Misappropriation is related theft of of assets revealed in entity’s Financial Statement

PART – C

Types of Factors auditors should consider when assessing the likelihood of material misstatements due to fraud :

Auditor should use professional scepticism when considering likelihood of material misstatement due to fraud

Auditor should focus on following condition when possibility of committing of fraud is higher:

When Management or other employee of the organization have an incentive or they are under pressure

When management is not able to maintain proper and sufficient control or the controls are not effective or management is able to override control

When some individual in company has an attitude to commit fraud or dishonest act

Auditor should consider above factors while determining possibility or likelihood of fraud .

PART – D

Following are the factors existed during the 1997 through 2000 audits of Xerox that created an environment conducive for fraud

• The use of distructive accounting practiceas recommended by the previous requirement of SEC that financial statement of CUC be restated just because of distructive accounting policy
• The excessive emphasis of management of CUC on fulfilling analyst expectations.
• Rapid growth of CUC
• The focus of management of CUC on maintaining a solid stock price to offer opportunities to usage CUC stock to merge with other firms
• Lack of board oversight as of the close financial ties of four Directors with chairman of walter forbes & CEO of CUC