Cendant established in December 1997 by a merge of CUC and HFS. The main business for CUC was marketing. It deals with shopping, travel, entertainment clubs. The company had more than 68 million members. On the other hand, HFS main business was a franchisor of brand name, like Ramada, Days Inn, with over 100 million customers. Cendant was one of the 100 largest corporations in the United States. According to AU-C240, the auditor is responsible to make a reasonable assurance, that the financial statements are free from misstatement materials, whether this misstatement occurred because of fraud or error in accordance with GASS. There are two types of fraud, fraudulent financial statements and misappropriation of assets. They should be considered …show more content…
AUC-315 shows the auditor responsibility toward the internal control components. The auditor required to understand and obtain the environmental control, risk assessment process, the IT and business related to it, control activities, and monitoring of controls in order to determine and define the risk of misstatement. When the auditor evaluates the internal control, he should consider the ethical values and integrity, competence of management levels, participation of governance people, management's approach, entity’s structure, authority and responsibility, and HR policies. During 1995 through 1977, CUC had some weaknesses in its control environment, such as the weakness of the board as regards financial matters, and the management style through focusing on Wall Street analysts’ expectations. There are many examples of management override its internal control, one of them is recording the amounts received from customers for deferred revenues as current revenues. If there is any risk of management override, the auditor is required to exam the journal entries, check accounting estimates for biases that cause of fraud, and evaluate the significant transactions which is not in the regular business …show more content…
Second, false coding of services sold to customers. The violation is revenue classification, and the procedure is to exam the documents that related to cash transactions, based on ASC 605 Third, delayed recognition of membership cancellations and bank rejection of charges made to members’ credit card accounts. The violation is overvalued the cash, and the procedure is to check the year end bank reconciliations, based on AUC-330. Regarding ISB 3, there are three reasons that make the client to hire the external auditor: the auditor does not exercise professional skepticism during his audit process, the auditor is familiar with the company, that hires him, work, and the auditor has good communication with the management. The current auditor independence is probably under threat, when the relationship between former and current auditor existed. In addition, the former auditor might use this relationship to pass some hiding fraud. Professional judgment is to make a decision based on your knowledge, training, and experience, that provided by auditing, accounting, and ethical standards. In this case, without applying professional judgment, the misstatement techniques that used by CUC cannot be
The specific obligations in this case would include monitor corporate governance activities and compliance with organization policies, and assess audit committee effectiveness and compliance with regulations
We will also review the accounting policies and the methods associated to inventory and any indifferences in presentation of accounting method. Auditors will also ask about, if any, outside vendors that maybe linked to inventory management and if we have the right to audit.
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
Without such controls it would be difficult for most business organizations like Trinity Industries with numerous locations, operations, and processes to prepare timely and accurate financial reports. Since no control system can guarantee that financial statements will not contain material errors or misstatements, an effective internal control system can reduce the risk of misstatements. Internal Controls should therefore be designed and implemented with the risk of fraud in mind and tailored to the circumstances of the company. In the case of Trinity part of the SOX project was to identify key process, by interviewing organizational members to understand how the processes and controls worked within the company, and who was responsible. With guidance from PCAOB AS No.5 they identified the gaps of controls and took steps to close them.
In conclusion, internal controls include separation of duties, assignment of responsibilities, third-party verification and the use of mechanical and physical controls. In and of themselves, these tactics stop and prevent much abuse of the bookkeeping and accounting systems. The addition of Sarbanes-Oxley requirements in 2002 require that a company enact internal controls and assign responsibility of the control system to executives and directors, further providing insurance that financial reporting is accurate. Without this insurance that reports are accurate, company stock will fall and investors will be lost. Even with intrinsic limitations, the positive aspects of good internal controls far outweigh the negative implications. Good internal controls equal accurate financial records and future company success.
The AICPA Code of Professional Conduct defines independence as consisting of independence of mind and independence in appearance. According to the AICPA Code of Conduct, Section 55 Article IV, An accountant member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. Moreover, a member who practices their accounting work in a public firm should be independent in fact and appearance when providing auditing and other attestation services (aicpa.org). According to the case study What Lies Beneath, I think that Betty did not show her professional skepticism since she built trust on her client, which she could not have as an auditor. As an auditor,
They contacted the CFO of Cendant Mr.Monaco and explained to him the “breathtaking fraud”. And it was Mr.Monaco who delivered this news to Cendant’s Chief Executive Henry R. Silverman. (WSJ) Those two men were the whistleblowers that brought Cendant to its knees. As mentioned in the sworn affidavits the managers explained what was happening at Cendant, they said that they were told to record millions of dollars of orders that never occurred and were told to do what was necessary in order to increase the income on the books and decrease the expanses. In their statements they named two people whom have been responsible for putting pressure on their employees and ordering the accounting irregularities, these two people were Cosmo Corigliano, the former chief financial officer of CUC, and Anne Pember, CUC 's former comptroller. (WSJ) Though it was known at the time that Walter Forbes the former CEO and Chairman of Cendant had some part in everything that was going on, it wasn’t until the new auditors came and started working that his true purpose and place in the fraud came out to the light of day. Forbes was the one that led the laissez-faire environment at the company. (CNNMoney) But even though this could be proven Forbes insisted that he was innocent and had no part in any of this till the day he was sentenced. After the news of this was announced Cendant was forced to restate their financial statements for the year 1997 and had to cut their earning for the year by over $100 million to around $115
With every business activity come opportunities for fraudulent behavior which leads to a greater demand for auditors with unscathed ethics. Nowadays, auditors are faced with a multitude of ethical issues, and it is even more problematic when the auditors fail to adhere to the standards of professional conducts as prescribed by the American Institute of Certified Public Accountants (AICPA). The objective of this paper is to analyze the auditors’ compliance with the code of professional conduct in the way it relates to the effectiveness of their audits.
The first factor is the personal specific traits and characteristics of auditor that influences the professional skepticism as it is important in determining the personality of an auditor and developing tendency towards skepticism. Second facto involves the knowledge, training and experiences that are attained form education and have significant impact on auditors’ skepticism. Third factor involves the incentives that are for developing effective audits and the incentives involve clients’ fee, potential costs of negative inspections and audit failures and evaluation of time
The oversight responsibilities of the board, the CAE lacking of expertise or broad understanding of financial controls and responsibilities, and the understaffed internal audit functions lacking of independence and direct access to the board of directors contributed to the absence of internal controls. To begin with, the board should be retrained to achieve financial literacy to review financial reporting. Other than attending formal meetings, the board of directors should be more involved with the management. For the Audit Committee, the two members who were recruited as acquaintances to Brennahan need be replaced with experts who are more sufficiently knowledgeable about accounting rules beyond merely “financially literate”. Furthermore, the internal audit functions need to expand with different expertise commensurate with the expanded activities of the organization, testing financial reporting rather than internal controls from an operational perspective. The CAE should be more independent and proactive to execute audit plans, instead of following orders from the CFO, and initiate a direct and efficient communication between internal audit and audit
...e financial reports and statements are correct. This auditing will be conducted by auditing department of the organization, even may be done by an independent auditor who is not part of the organization, and sometimes public officials are elected. In case of unmatched consequences the organization need to give explanation on the misrepresentation of wrong statements. Auditors purpose is then to ensure that the misrepresentations are corrected, then maintain accurate, reliable financial documents and statements.
Audit Risk is the risk that an auditor has stated an incorrect audit opinion on the financial statements. It may cause the auditors fail to alter the opinion when the financial statements contain material misstatement. The auditor should perform the audit to lower the audit risk to a sufficiently low level. In the auditor’s professional judgement, the auditor should appropriately state a correct opinion on the financial statement
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.
The complete destruction of companies including Arthur Andersen, HealthSouth, and Enron, revealed a significant weakness in the United States audit system. The significant weakness is the failure to deliver true independence between the auditors and their clients. In each of these companies there was deviation from professional rules of conduct resulting from the pressures of clients placed upon their auditors (Goldman, and Barlev 857-859). Over the years, client and auditor relationships were intertwined tightly putting aside the unbiased function of auditors. Auditor careers depended on the success of their client (Kaplan 363-383). Auditors found themselves in situations that put their profession in a questionable time driving them to compromise their ethics, professionalism, objectivity, and their independence from the company. A vital trust relationship role for independent auditors has been woven in society and this role is essential for the effective functioning of the financial economic system (Guiral, Rogers, Ruiz, and Gonzalo 155-166). However, the financial world has lost confidence in the trustworthiness of auditor firms. There are three potential threats to auditor independence: executives hiring and firing auditors, auditors taking positions the client instead of the unbiased place, and auditors providing non audit services to clients (Moore, Tetlock, Tanlu, and Bazerman 10-29).