Question

A study on fraudulent financial reporting by one of the most popular internal controls frame provider, notes that there are many ways in which long-lived assets can be fraudulently overstated, including:
a. Assets fictitious, on the books (WorldCom)
b. Incomplete and Improper depreciation (Waste Management)
c. Failure to record important of assets, especially goodwill (Sun Microsystems)
d. Expired or worthless assets left on a company’s books (Millacron)
e. Overvalued assets upon acquisition, especially in the purchase of a company (WorldCom)
The quetion is “What substantive audit procedures might have detected these frauds”?
List what should auditor do to the five conditions above!

Answer 1

To detect fictitious assets, the auditor should have traced recent acquisitions to the fixed-asset accounts and to original source documents; doing so would have enabled the auditor to realize that such documents did not exist. For improper depreciation, the auditor should have compared depreciation expense over a period of time, adjusted for the volume of business and the number of trucks used. The decrease in depreciation per truck should have led to more detailed investigation, including tests of depreciation on each truck. For the impairment issue, the auditor should have compared current earnings with future expected earnings that were predicted when the goodwill was initially recorded. A dramatic decrease in current earnings signals the need for an impairment adjustment. For the impaired assets, the auditor should have noted (a) the relative age of the assets (net book value has decreased), (b) idle equipment during a tour of the factory, and (c) should have traced apparently idle assets to the books. For the assets overvalued at acquisition, the auditor should have determined if the company had used a reputable and certified independent appraiser. If the auditor had doubts, he or she should have hired an appraiser to form an independent opinion.