Read the following and answer the question that follows.

FRAUD In March 2006, General Motors (GM) announced that it needed to restate its previous year's financial statements. Excerpts from the Wall Street Journal describing the restatements include the following:

GM, which is currently under investigation by the Securities and Exchange Commission (SEC) for its accounting practices, also revealed that when its 10-K report is released, it will detail a series of accounting errors that will cause the automaker to restate its earnings from 2001 to the first quarter of 2006. GM also announced that its 2006 loss will be increased by $2 billion.

Many of GM's other issues are related to supplier rebates or credits. Suppliers typically make an upfront payment in return for the customer's commitment to purchase a certain quantity of goods over time. Such rebates cannot be reported until the promised transactions have been made, according to accounting standards.

GM stated that it had come to the conclusion that some of these payments had been reported prematurely. The largest impact came in 2002, when the company admitted to overstating pre-tax revenue by $405 million as a result of early supplier credit recording. The effect in those years was less since the credits were transferred to later years, and GM said it will have a $548 million deferred credit that would help offset costs in future periods. The problem of how to book rebates and other credits from suppliers has tripped up other businesses, including Royal Ahold, N.V., a multinational retail chain, and Kmart Corporation, headquartered in the United States.

GM also admitted that a $27 million pre-tax gain from the sale of precious-metals inventory in 2001, which it was required to buy back the following year, was reported incorrectly.

GM warned investors not to trust its previously announced first-quarter 2006 performance, claiming it had understated its loss by $149 million. GM admitted that it had overestimated the value of cars it was leasing to rental car companies, claiming that they would be worth more until they were returned to GM. GM had previously posted a first-quarter loss of $1.1 billion, or $1.95 per share. (19 April 2006).

You might think the sums are important.

Discuss how the existence of the errors influences the auditor's judgment of the control environment and whether the auditor should assume there are material flaws in internal control without deciding whether the accounting judgment errors were deliberate or unintentional. What would you think if the accounting treatment was considered appropriate by the company's CFO and CEO, but hostile by the CFO and CEO? What impact will those decisions have on the auditor's evaluation of the control environment?

Explain the essence of the company's accounting decision on the residual value of the cars it rents. What kind of information and communication scheme should be in place for the residual value of leased cars? What kinds of safeguards should be in place? What proof does the auditor need to assess the reasonableness of the company's change?

Discuss the company's rebates, or up-front rebates, from its suppliers. Why will the manufacturers pay for the credits up front? What is the correct way to account for up-front credits? What checks and balances should be in place to account for the upfront credits? What does the auditor look for in a test?

1) the accounting controls for up-front credits

2) the accounting controls for end sales credits

3) Do you think the content misstatements were caused by human error or fraud? Discuss why you believe what you believe.