Case Questions 4.1

1. Consult Paragraphs 6569 of PCAOB Auditing Standard No. 12. Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (the fraud triangle)? Based on the information provided in the case, which of these three conditions appears to have

been the most prevalent at Enron, and why?

2. Consult Paragraph 25 of PCAOB Auditing Standard No. 5. Define what is meant by control environment. Why is the control environment so important to effective internal control over financial reporting at an audit client like Enron?

Paragraph #25 of PCAOB Auditing Standard No. 5 outlines the responsibilities of auditors to make a complete understanding on the control environment. Indeed, because of its importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company.

3. Consult Paragraphs 2122 of PCAOB Auditing Standard No. 5. Comment on how your understanding of Enrons control environment and other entity level controls would help you implement a top-down approach for an internal control audit at Enron.

4. Consult Sections 204 and 301 of SARBOX. What is the role of the audit committee in the financial reporting process? Do you believe that an audit committee can be effective in providing oversight of a management team like Enrons?

5. Consult Sections 302 and 305 and Title IX of SARBOX. Do you believe that these provisions could help deter fraudulent financial reporting by an upper management group? Why or why not?