Assessing audit risk correctly and completely is important to the beginning of a successful audit. Not only should an auditor have an understanding of the individual risk factors of the company itself, but also how those risk factors are affected by external influences. A crucial external influence affecting audit risk is the state of the economy. When an economy enters a recession or an economy bubble bursts, there is a greater likelihood that inherent risk and control risk will increase. These increases are mainly driven by the sudden pressure placed on employees and management to keep the appearance of a positive financial status, which sometimes leads to fraudulent activity.
The affects of a declining economy predominantly affect inherent risk of the audit risk model because of the attraction to either inflate revenues or under report expenses to keep the company in a positive financial standing. Many high-tech related company’s experienced a devastating blow to their financials after the technology bubble burst of 2000, which was marked by two large fraud scandals. First, was Lucent Technologies Inc, a communication equipment provider, which began to inflate revenue of $1.2 billion after management became overwhelmed from the significant decrease in telecommunication equipment spending (Belson, 2004 para. 1). Included in the scheme was $125 of false sales to Winstar Communication (Belson, 2004 para. 1). Second, was MCI WorldCom, a long distance phone company, whose executives under reported its expenses between 2000 and 2002. The executives hid expenses by booking operating costs as capital investments, causing their cash flow to be overstated by over $3.8 billion (Romero & Berenson, 2002 para. 7).
Another factor incre...
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...lthy and still thriving in difficult economic times. These pressures generate an increase in inherent risk and control risk, which results in an increase in audit risk. Auditors should always be aware of how the economy has affected a client and keep an attitude of professional skepticism at all times in order to plan an audit to detect the heightened risk of fraudulent activity occurring.
Works Cited
Belson, K. (2004, 18 May). Technologies; Lucent fined $25 million by S.E.C in fraud case. The New York Times. Retrieved from http://www.nytimes.com.
Bilski, J. (2009, 17 July). Workers gone wild: 7 outrageous cases of employee fraud. CFO Daily News. Retrieved from http://www.cfodailynews.com
Romero, S., & Berenson, A. (2002, June 26). WorldCom says it hid expenses, inflating cash flow from $3.8 billion. The New York Times. Retrieved from http://www.nytimes.com
The risk that the auditor or audit firm will suffer harm after the audit is completed, even though the audit report was correct,
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
Individual Article Review Lily Cobian LAW/421 March 31, 2014 Ramon E. Ortiz-Velez Individual Article Review Introduction My article review is based on Sarbanes-Oxley and audit failure, a critical examination why the Sarbanes-Oxley Act of 2002 was established and why it is not a guarantee to prevent failure of audits. Sarbanes-Oxley Act talks about scandals of Enron which occurred in 2001 and even more appalling the company’s auditor, Arthur Anderson, found guilty of shredding company documents after finding out Enron Company was going to be audited. The exorbitant amounts of money auditors get paid to hide audit discrepancies was also beyond belief. The article went on to explain many companies hire relatives or friends to do their audits, resulting in fraud, money embezzlement, corruption and even the demise of companies. Resulting in the public losing faith in the accounting profession, the Sarbanes-Oxley Act passed in 2002 by congress was designed to restrict what company owners and auditors can and cannot do. From what I gathered in the article, ever since the implementation of the Sarbanes- Oxley Act there has been somewhat of an improvement but questions are still being asked as to why there are still issues that are not being targeted in hopes of preventing more audit failures. The article also talked about four common causes of audit failure: unintentional auditor mistakes, fraud, fatigue and auditor client relationships. The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct clearly states an independent auditor because it produces a credible audit, however, when there is conflict of interest, the relation of a former employer, or a relative or even the fear of getting fire...
In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
Taking a look at Donald Cressey’s hypotheses which is now known as the fraud triangle depicts the certain criteria for the mind frame of the fraudster. The fraud triangle is a theory that consists of perceived pressures, perceived opportunity, and rationalization. It gives us the different pressures placed on individuals that would make them consider “cooking the books.” It also demonstrates where the possible opportunity lies so that we may take precautions to eliminate the opportunity. Last, it demonstrates how a fraudster rationalizes with themselves to make committing the fraud okay. Donald Cressey believes all three elements must be present for fraud to occur. Upper management is usually the focus of financial statement fraud because financial statements are done at the management level. So in this case financial statement fraud was committed by the CEO Gregory Podlucky
Giroux, G. (Winter 2008). What went wrong? Accounting fraud and lessons from the recent scandals. Social Research, 75, 4. p.1205 (34). Retrieved June 16, 2011, from Academic OneFile via Gale:
This channel has been doing well financially and this may make the reporting of statements of finance at Disney to be overstated so as to attract more investors than the competitor (Mertz, 1999).
As with all industries and audits there is audit risk and inherent risks, although GD has potential risks, these risks seem to be mitigated due to GD’s industry performance.
Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
Woolworths LTD has commissioned EA partners for auditing their supermarkets chains. Therefore it is important to prepare a risk analysis report to be added in the audit plan in order to identify and analyze possible events that could have an impact in achieving the company’s objectives. The element of risk is embedded in every business, the risk of not achieving the company objective. Risk assessment is important to the effective operations of the company. Risk Assessment is increasingly in demand today because of the increase demand in transparency that revolves around risks. The business is under continuous scrutiny of whether the correct mechanism was in place at the time of the crisis or whether the correct information was delivered and so on. This is why risk assessment has become a part of the business auditing today.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the This includes but is not limited to; check forgery, inventory theft, cash or check theft, payroll fraud or service theft.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
Pulliam, Susan and Deborah Solomon. "How Three Unlikely Sleuths Exposed Fraud at WorldCom." 30 October 2002. The Wall Street Journal Online. 2 February 2011 .