2-31 ? List some common incentives for managers to commit fraudulent financial reporting.

2-32 ? Identify factors (red flags) that would be strong indicators of opportunities to commit fraud.

2-34 ? Each of the following scenarios is based on facts in an actual fraud. Categorize each scenario as primarily indicating (1) an incentive to commit fraud, (2) an opportunity to commit fraud, or (3) a rationalization to commit fraud. State your reasoning for each categorization.

1. There was intense pressure to keep the corporation?s stock from declining further. This pressure came from investors, analysis, and the CEO, whose financial well-being was significantly dependent on the corporation?s stock price.
2. A group of top-level management was compensated (mostly in the form of stock options) well in excess of what would be considered normal for their positions in this industry.
3. Top management of the company closely guards internal financial information, to the extent that even some employers on a need-to-know basis are denied full access.

2-35 ? Refer to Exhibit 2.3 and briefly describe the frauds that were perpetrated at the following companies. For each company, categorize the fraud as involving primarly (1) asset misappropriation or (2) fraudulent financial reporting.

1. Eron
2. WorldCom
3. Parmalat
4. HeatlhSouth
5. Dell
6. Koss Corporation
7. Olympus
8. Longtop Financial Technologies
9. Peregrine Financial Group
10. Sino-Forest Corporation
11. Diamond Foods, Inc

2-40 ? What is the responsibility of the external auditor to detect material fraud?

7-29 ? Some audit firms develop very specific quantitative guidelines, either through quantitative measures or in tables, relating planning materiality to the size of sales or assets for a client. Other audit firms leave the materiality judgements up to the individual partner or manager in charge of the audit. What are the major advantages and disadvantages of each approach? Which approach do you favor? Explain.

7-31 ? Define the following terms: (a) performance materiality, (b) tolerable misstatement, (c) clearly trivial.

7-35 ? The audit report provides reasonable assurance that the financial statements are free from material misstatements. The auditors is put in a difficult situation because materiality is defined from a user?s viewpoint; however, the auditor must assess materiality in planning the audit to ensure that sufficient audit work is performed to detect material misstatements.

1. Define materiality as used in accounting and auditing, particularly emphasizing the differences that exist between the FASB and the U.S. Supreme Court materiality definitions.
2. Three major dimensions of materiality are (1) the dollar magnitude of the item, (2) the nature of the item under consideration, and (3) the perspective of a particular user. Give an example of each.
3. Once the auditor develops an assessment of materiality, can it change during the course of the audit? Explain. If it does change, what is the implication of a change for audit work that has already been completed? Explain.

7-36 ? Define the terms inherent risk, control risk, audit risk, and detection risk. Refer to Exhibit 7.1 and explain how these risks relate to each other.

2-31 - List some common incentives for managers to commit fraudulent financial reporting. 2-32 - Identify factors (red flags) that would be strong indicators of opportunities to commit fraud. 2-34 - Each of the following scenarios is based on facts in an actual fraud. Categorize each scenario as primarily indicating (1) an incentive to commit fraud, (2) an opportunity to commit fraud, or (3) a rationalization to commit fraud. State your reasoning for each categorization. a. There was intense pressure to keep the corporation's stock from declining further. This pressure came from investors, analysis, and the CEO, whose financial well-being was significantly dependent on the corporation's stock price. b. A group of top-level management was compensated (mostly in the form of stock options) well in excess of what would be considered normal for their positions in this industry. c. Top management of the company closely guards internal financial information, to the extent that even some employers on a need-toknow basis are denied full access. 2-35 - Refer to Exhibit 2.3 and briefly describe the frauds that were perpetrated at the following companies. For each company, categorize the fraud as involving primarly (1) asset misappropriation or (2) fraudulent financial reporting. a. Eron b. WorldCom c. Parmalat d. HeatlhSouth e. Dell f. Koss Corporation g. Olympus h. Longtop Financial Technologies i. Peregrine Financial Group j. Sino-Forest Corporation k. Diamond Foods, Inc 2-40 - What is the responsibility of the external auditor to detect material fraud? 7-29 - Some audit firms develop very specific quantitative guidelines, either through quantitative measures or in tables, relating planning materiality to the size of sales or assets for a client. Other audit firms leave the materiality judgements up to the individual partner or manager in charge of the audit. What are the major advantages and disadvantages of each approach? Which approach do you favor? Explain. 7-31 - Define the following terms: (a) performance materiality, (b) tolerable misstatement, (c) clearly trivial. 7-35 - The audit report provides reasonable assurance that the financial statements are free from material misstatements. The auditors is put in a difficult situation because materiality is defined from a user's viewpoint; however, the auditor must assess materiality in planning the audit to ensure that sufficient audit work is performed to detect material misstatements. a. Define materiality as used in accounting and auditing, particularly emphasizing the differences that exist between the FASB and the U.S. Supreme Court materiality definitions. b. Three major dimensions of materiality are (1) the dollar magnitude of the item, (2) the nature of the item under consideration, and (3) the perspective of a particular user. Give an example of each. c. Once the auditor develops an assessment of materiality, can it change during the course of the audit? Explain. If it does change, what is the implication of a change for audit work that has already been completed? Explain. 7-36 - Define the terms inherent risk, control risk, audit risk, and detection risk. Refer to Exhibit 7.1 and explain how these risks relate to each other. Reference: Johnstone, K. Gramling, A., Rittenberg, L. (2005). CS-EBK: Auditing: A risk-based approach (10th ed.). Boston: Cengage