Fraud in Financial Statements and Auditor Responsibilities

Fraud in Financial Statements and Auditor Responsibilities 246

Ethics Reflection 246 Fraud in Financial Statements and the Audit Function 247 Nature and Causes of Misstatements 249

Errors, Fraud, and Illegal Acts 249 Reporting an Illegal Act 251 Auditors’ Responsibilities for Fraud Prevention, Detection, and Reporting 252 The Fraud Triangle 252 Incentives/Pressures to Commit Fraud 253 Opportunity to Commit Fraud 254 Rationalization for the Fraud 255 Tyco Fraud 255

Fraud Considerations in the Audit 259 Fraud Risk Assessment 260 Fraud Associated with Management Override of Controls 260 Rite Aid Fraud and Failure of Internal Controls 262 Communicating About Possible Fraud to Management and Those Charged with Governance 262 Management Representations and Financial Statement Certifications 263

Contents of the Audit Report 264 Background 264 Introductory Paragraph 265 Management’s Responsibility 265 Auditor’s Responsibility 265 Opinion 267 Types of Audit Opinions 267

Generally Accepted Auditing Standards (GAAS)—Overview 269

GAAS Requirements 271 Audit Evidence 272 Limitations of the Audit Report 273 Reasonable Assurance 273 Materiality 273

What Is Meant by “Present Fairly”? 275 Audit Risk Assessment 277

min622IX_fm_i-xxii.indd xixmin622IX_fm_i-xxii.indd xix 02/09/13 12:29 PM02/09/13 12:29 PM

xx Table of Contents

Internal Control Assessment 278 Internal Control—Integrated Framework 278

PCAOB Standards 282 AS 4: Reporting on Previously Reported Material Weakness 283 AS 5: An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements 283 AS 6: Evaluating Consistency of Financial Statements 284 AS 8—Audit Risk 285 AS 9—Audit Planning 285 AS 10—Supervision of the Audit Engagement 285 AS No. 11—Consideration of Materiality in Planning and Performing an Audit 286 AS No. 12—Identifying and Assessing Risks of Material Misstatement 286 AS No. 13—The Auditor’s Responses to the Risks of Material Misstatement 286 AS No. 14—Evaluating Audit Results 286 AS No. 15—Audit Evidence 287 Communications with Audit Committees 287 Auditor’s Evaluation of the Quality of the Company’s Financial Reporting 289 Financial Statements Restatements 291 PCAOB Enforcement Program 293

Concluding Thoughts 294 Discussion Questions 295 Endnotes 297 Chapter 5 Cases 303

Case 5-1: Computer Associates 304 Case 5-2: ZZZZ Best 307 Case 5-3: Imperial Valley Thrift & Loan 311 Case 5-4: Audit Client Considerations and Risk Assessment 317 Case 5-5: Krispy Kreme Doughnuts, Inc. 319 Case 5-6: Dunco Industries 321 Case 5-7: First Community Bank 322 Case 5-8: Fannie Mae: The Government’s Enron 324 Case 5-9: Royal Ahold N.V. (Ahold) 329 Case 5-10: Groupon 333

Chapter 6 Legal, Regulatory, and Professional Obligations of Auditors 335

Ethics Reflection 335 Client Confidentiality, Fraud, and Whistleblowing 337

Confidentiality Obligation and Fraud 337 Dodd-Frank and Whistleblowing 337

Ethical and Legal Responsibilities of Officers and Directors 339

Duty of Care—Managers and Directors 339 Duty of Loyalty 339 Director Duty of Good Faith 339 Business Judgment Rule 340 Caremark Opinion 340 Shareholder Derivative Suit—Citigroup Subprime Lending 340 Clawback of Incentive Compensation from Executive Officers 341 Audit Committee and Business Judgment Rule 342

Legal Liability of Auditors: An Overview 343 Common-Law Liability 343 Liability to Clients—Privity Relationship 344 Liability to Third Parties 345 Actually Foreseen Third Parties 345 Reasonably Foreseeable Third Parties 346 Auditor Liability to Third Parties 348

Statutory Liability 350 Securities Act of 1933 352 Key Court Decisions 353 Securities Exchange Act of 1934 354

Interaction of Ethics and Legal Liability 356 Court Decisions and Auditing Procedures 357 Liability for Securities Violations 359

Honest Services Assessment in Criminal Matters 359 Is There a Difference Between Lying and Stealing in Securities Fraud? 360

Insider Reporting and Trading 361 Leaking Nonpublic Information 361 Auditor Betrayal of Client Confidences and Insider Trading 363

Private Securities Litigation Reform Act (PSLRA) 365

Reporting Requirements 365 Proportionate Liability 366

Sarbanes Oxley (SOX) Legal Liabilities 367 Section 302. Corporate Responsibility for Financial Reports 367 Section 302. Liability in Private Civil Actions 368 Section 302. Liability in Civil and Criminal Government Actions 369 Perspective on Accomplishments of SOX 369

Other Laws Affecting Accountants and Auditors 370 Foreign Corrupt Practices Act (FCPA) 370 SEC Charges Pfizer with FCPA Violations 371 FCPA Violations and Tyco 375 FCPA and Whistleblowing 375

Place Your Order Here!

Leave a Comment

Your email address will not be published. Required fields are marked *