Question 1

During audit planning, an auditor obtained the following information:

1. Managementhasastrong interestinemploying inappropriatemeanstominimizereported earnings for tax-motivatedreasons.

1. Assetsandrevenuesarebasedonsignificantestimates thatinvolvesubjectivejudgmentsand uncertainties that are hard tocorroborate.
2. The company is marginally able to meet exchange listing and debt covenant requirements. 4.Significant operations are located and conducted across international borders injurisdictions

where differing business environments and cultures exist.

1. Therearerecurringattemptsmanagementtojustifymarginal orinappropriateaccountingon the basis ofmateriality.

1. Thecompany'sfinancialperformanceisthreatenedbyahighdegreeofcompetitionandmarket saturation.

Required

Classify each of the preceding six factors as one of these fraudconditions:

incentives/pressures opportunitiesattitudes/rationalization

Question 2

Recently,therehavebeenasignificantnumberedhighlypublicizedcasesofmanagementfraudinvolvingthe misstatement of financial statements. Although most managers possess unquestioned integrity, a small number, given sufficient incentive and opportunity, may be predisposed to fraudulently misstate reported financial conditions and operatingresults.

Required

1. What distinguishes management fraud from other types offraud?

1. Whatareanauditor'sresponsibilities,undergenerallyacceptedauditingstandards,todetect managementfraud?

1. Whatarethecharacteristicsofmanagementfraudthatanauditorshouldconsiderinorderto fulfill the auditor's responsibilities for detecting management fraud under generally accepted auditingstandards?

1. Three factors that heighten an auditor's concern about the existence of management fraudare:
   1. anintendedpublicplacementofsecuritiesinthenearfuture,(2)managementcompensation dependentonoperatingresults, and(3)aweakinternal controlenvironmentevidencedlackof concern for basic controls and disregard of the auditor's recommendations. What other factors should heighten an auditor's concern about the existence of managementfraud?

Question 3

You are the auditor of Hitech Disposal Ltd., which owns and operates a large sanitary landfill in western Canada. During your examination for the current year, you become aware of rumors that the company is acceptingalargeamountoftoxicchemicals atitssite,inviolationitsprovincialwastemanagementpermit.

Before you have time to raise the issue with the audit committee, the CFO takes you aside and says, "The audit committee will be very unhappy if there is any discussion of toxic chemicals on-site and any potential liabilities. The very mention of this would amount to a self-fulfilling prophecy, and bring in the regulators and lawsuits. It could bankrupt the company and throw hundreds of people out of work. You will have lost a valuable client, and I guarantee that you will never get another client in the waste disposal business. I personally assureyouthatanyproblematicchemicalswillbe removed fromthesitebythetimetheauditreport is published."

Required

Outlineyourresponsibilitiesinthissituation,assumingthedumpingtoxicwasteinthelandfillisdeemedtohave a direct effect on Hitech's financialstatements.

How would you respond to the CFO's comments? List at least three points you might make to the CFO. You do not need to prepare a answer using the case format for solving ethical dilemmas.

Question 4

Yougo outtoanewclient's office tomeetwiththecontrollerandarepleaseddiscoverthatthecontrolleris Pierre, an old high-school classmate of yours. After working through some of the basic "getting to know your client" information, you notice that Pierre seems a bit uncomfortable. When you casually ask how he likes the job so far, he sighs and says, "Actually, I've got some concerns about this place, and I'm glad the bank asked forauditedstatementsthisyear.Itgivesmeanexcuseddigdeeperwithoutpeople questioningwhy.I'vegot some suspicions, and I need your help as part of the audit to determine whether I'm right ornot."

The following are the controller's "suspicions":

1. Thecustodianofthepettycashfundmayberemoving ashonFridayafternoontopayfor personal weekendactivities.

1. A manager has noticed that eight new vendors have been added to the purchasing department's approvedlistsincetheassistantpurchasingagentwaspromotedchiefagentthreeweeksago. Themanagersuspectsthatallorsomeofthemmaybephonycompaniessetupbythenewchief purchasingagent.

1. Thepayrollsupervisormaybestealing unclaimedpay chequesofpeoplewhoquitworkanddon't pick up the lastcheque.

Required

Write procedures to address each of the controller's suspicions. Be sure to describe each procedure in definite terms so that another person on the audit team would know what to do.

Question 5

1. Otherthantheexpectationoflitigation,explain fourdifferencesbetween anauditoffinancial statements and a fraudexamination.

1. Althoughitseemsmoreefficientforafraud examinertointerview thesuspect first,whyisthis not generallydone?

1. Why is it important for an auditor to recognize when a fraud examiner should be calledin?

Question 6

The following are excerpts from e-mail communications at various audit clients.

1. "It is important that this deal is closed in time to meet thedeadline."

1. "Thanksforsharingyourplan.Thatsoundsreasonabletome,andI'mconfidentwecan justifyit to the board."

1. "Pleasecopymeonyourcommunicationstokeepmeintheloop." 4."If they fail to confirm the order, we can correct it after thefact."

5. "I'm concerned that this will impact our divisional results for the quarter."

Required

1. Foreachexcerpt,determine whetheritisindicativeofone ormoreofthethreefactorsofthe fraud triangle (incentive/pressure, opportunity,attitudes/rationalization).

1. Whenauditorsdiscoverasignificantnumber oftermsincommunicationsthatareindicativeof fraud risk elements, what can they do to followup?