12-39

A 2010 study on fraudulent financial reporting by COSO notes the many ways in which long-lived assets can be fraudulently overstated, including:

• Fictitious assets, on the books (WorldCom)
• Improper and incomplete depreciation (Waste Management)
• Failure to record important of assets, especially goodwill (Sun Microsystems)
• Expired or worthless assets left on a company's books (Millacron)
• Assets overvalued upon acquisition, especially in the purchase of a company (WorldCom)

What substantive audit procedures might have detected these frauds?

16-51

Assume that an auditor finds a material misstatement regarding the financial statements while performing substantive tests of the account balance. More important, the auditor

concludes that the misstatement involved the misapplication of an accounting principle to achieve a desired financial result and that the misstatement was intentional.

a. What actions should the auditor take upon detecting an intentional misstatement in the

financial statements? To whom must the misstatement be reported?

b. If the company agrees to correct the misstatement, is there a need to communicate the nature of the misstatement to important stakeholders of the company? If yes, explain the avenues the auditor has available to report the misstatement.

c. What are the implications of detecting an intentional misstatement in terms of evaluating the control environment and the effectiveness of internal controls in general?

16-61

Does the auditor always need to engage another independent specialist to test the work of the specialist hired by the company to determine the value of the tangible and intangible assets other than goodwill? Explain, incorporating the idea of the importance of auditor professional skepticism.