SEQCHAPTER\h\r1Chapter11FraudAuditingReviewQuestions11-1 Fraudulentfinancialreportingisanintentionalmisstatementoromissionofamountsordisclosureswiththeintenttodeceiveusers.Twoexamplesoffraudulentfinancialreportingareacceleratingthetimingofrecordingsalesrevenuetoincreasedreportedsalesandearnings,andrecordingexpensesasfixedassetstoincreaseearnings.11-2 Misappropriationofassetsisfraudthatinvolvestheftofanentity’sassets.Twoexamplesareanaccountspayableclerkissuingpaymentstoafictitiouscompanycontrolledbytheclerk,andasalesclerkfailingtorecordasaleandpocketingthecashreceipts.11-3 Fraudulentfinancialreportingisanintentionalmisstatementoromissionofamountsordisclosureswiththeintenttodeceiveusers,whilemisappropriationofassetsisfraudthatinvolvestheftofanentity’sassets.Fraudsinvolvingfinancialreportingareusuallylargerthanfraudsinvolvingmisappropriationofassets,usuallyinvolvetopmanagement,anddonotdirectlyinvolvetheftofcompanyassets.11-4 Thethreeconditionsoffraudreferredtoasthe“fraudtriangle”are(1)Incentives/Pressures;(2)Opportunities;and(3)Attitudes/Rationalization.Incentives/Pressuresareincentivesofmanagementorotheremployeestocommitfraud.Opportunitiesarecircumstancesthatallowmanagementoremployeestocommitfraud.Attitudes/Rationalizationareindicationsthatanattitude,character,orsetofethicalvaluesexistthatallowmanagementoremployeestocommitadishonestactortheyareinanenvironmentthatimposessufficientpressurethatcausesthemtorationalizecommittingadishonestact.Thefollowingareexampleofriskfactorsforfraudulentfinancialreportingforeachofthethreefraudconditions:Incentives/Pressures-Thecompanyisunderpressuretomeetdebtcovenantsorobtainadditionalfinancing.Opportunities–Ineffectiveoversightoffinancialreportingbytheboardofdirectorsallowsmanagementtoexercisediscretionoverreporting.Attitudes/Rationalization–Managementisoverlyaggressive.Forexample,thecompanymayissueaggressiveearningsforecasts,ormakeextensiveacquisitionsusingcompanystock.Thefollowingareexampleofriskfactorsformisappropriationofassetsforeachofthethreefraudconditions:Incentives/Pressures-Theindividualisunabletomeetpersonalfinancialobligations.Opportunities–Thereisinsufficientsegregationofdutiesthatallowstheindividualtohandlecashreceiptsandrelatedaccountingrecords.Attitudes/Rationalization–Managementhasdisregardedtheinadequateseparationofdutiesthatallowsthepotentialtheftofcashreceipts.Auditorsuseseveralsourcestogatherinformationaboutfraudrisks,including:Informationobtainedfromcommunicationsamongauditteammembersabouttheirknowledgeofthecompanyanditsindustry,includinghowandwherethecompanymightbesusceptibletomaterialmisstatementsduetofraud.Responsestoauditorinquiriesofmanagementabouttheirviewsoftherisksoffraudandaboutexistingprogramsandcontrolstoaddressspecificidentifiedfraudrisks.Specificriskfactorsforfraudulentfinancialreportingandmisappropriationsofassets.Analyticalproceduresresultsobtainedduringplanningthatindicatepossibleimplausibleorunexpectedanalyticalrelationships.Knowledgeobtainedthroughotherproceduressuchasclientacceptanceandretentiondecisions,interimreviewoffinancialstatements,andconsiderationofinherentorcontrolrisks.11-8 SAS99requirestheauditteamtoconductdiscussionstoshareinsightsfrommoreexperiencedauditteammembersandto“brainstorm”ideasthataddressthefollowing:Howandwheretheybelievetheentity’sfinancialstatementsmightbesusceptibletomaterialmisstatementduetofraud.Thisshouldincludeconsiderationofknownexternalandinternalfactorsaffectingtheentitythatmightcreateanincentiveorpressureformanagementtocommitvidetheopportunityforfraudtobeperpetrated.indicateacultureorenvironmentthatenablesmanagementtorationalizefraudulentacts.Howmanagementcouldperpetrateandconcealfraudulentfinancialreporting.Howassetsoftheentitycouldbemisappropriated.Howtheauditormightrespondtothesusceptibilityofmaterialmisstatementsduetofraud.

11-9 Auditorsmustinquirewhethermanagementhasknowledgeofanyfraudorsuspectedfraudwithinthecompany.SAS99alsorequiresauditorstoinquireoftheauditcommitteeaboutitsviewsoftherisksoffraudandwhethertheauditcommitteehasknowledgeofanyfraudorsuspectedfraud.Iftheentityhasaninternalauditfunction,theauditorshouldinquireaboutinternalaudit’sviewsoffraudrisksandwhethertheyhaveperformedanyprocedurestoidentifyordetectfraudduringtheyear.SAS99furtherrequirestheauditortomakeinquiriesofotherswithintheentitywhosedutieslieoutsidethenormalfinancialreportinglinesofresponsibilityabouttheexistenceorsuspicionoffraud.11-10 Thecorporatecodeofconductestablishesthe“toneatthetop”oftheimportanceofhonestyandintegrityandcanalsoprovidemorespecificguidanceaboutpermittedandprohibitedbehavior.Examplesofitemstypicallyaddressedinacodeofconductincludeexpectationsofgeneralemployeeconduct,restrictionsonconflictsofinterest,andlimitationsonrelationshipswithclientsandsuppliers.11-11 Managementandtheboardofdirectorsareresponsibleforsettingthe“toneatthetop”forethicalbehaviorinthecompany.Itisimportantformanagementtobehavewithhonestyandintegritybecausethisreinforcestheimportanceofthesevaluestoemployeesthroughouttheorganization.11-12 Managementhasprimaryresponsibilitytodesignandimplementantifraudprogramsandcontrolstoprevent,deter,anddetectfraud.Theauditcommitteehasprimaryresponsibilitytooverseetheorganization’sfinancialreportingandinternalcontrolprocessesandtoprovideoversightofmanagement’sfraudriskassessmentprocessandantifraudprogramsandcontrols. 11-13 Thethreeauditorresponsestofraudare:(1)changetheoverallconductoftheaudittorespondtoidentifiedfraudrisks;(2)designandperformauditprocedurestoaddressidentifiedrisks;and(3)performprocedurestoaddresstheriskofmanagementoverrideofcontrols.11-14 Auditorsarerequiredtotakethreeactionstoaddresspotentialmanagementoverrideofcontrols:(1)examinejournalentriesandotheradjustmentsforevidenceofpossiblemisstatementsduetofraud;(2)reviewaccountingestimatesforbiases;and(3)evaluatethebusinessrationaleforsignificantunusualtransactions.11-15 Threemaintechniquesusetomanipulaterevenueinclude:(1)recordingoffictitiousrevenue;(2)prematurerevenuerecognitionincludingtechniquessuchasbill-and-holdsalesandchannelstuffing;and(3)manipulationofadjustmentstorevenuesuchassalesreturnsandallowanceandothercontraaccounts. 11-16 Cashregisterreceiptsareparticularlysusceptibletotheft.Thenotice“yourmealisfreeifwefailtogiveyouareceipt”isdesignedtoensurethateverycustomerisgivenareceiptandallsalesareenteredintotheregister,establishaccountabilityforthesale.11-17 Thethreetypesofinquiryareinformational,assessment,andinterrogative.Auditorsuseinformationalinquirytoobtaininformationaboutfactsanddetailsthattheauditordoesnothave.Forexample,iftheauditorsuspectsfinancialstatementfraudinvolvingimproperrevenuerecognition,theauditormayinquireofmanagementastorevenuerecognitionpolicies.Theauditorusesassessmentinquirytocorroborateorcontradictpriorinformation.Inthepreviousexample,theauditormayattempttocorroboratetheinformationobtainedfrommanagementbymakingassessmentinquiriesofindividualsinaccountsreceivableandshipping.Interrogativeinquiryisusedtodetermineiftheintervieweeisbeingdeceptiveorpurposefullyomittingdisclosureofkeyknowledgeoffacts,events,orcircumstances.Forexample,aseniormemberoftheauditteammightmakeinterrogativeinquiriesofmanagementorotherpersonnelaboutkeyelementsofthefraudwhereearlierresponseswerecontradictoryorevasive.11-18 Whenmakinginquiriesofadeceitfulindividual,threeexamplesofverbalcuesarefrequentrephrasingofthequestion,fillertermssuchas“well”or“totellthetruth,”andforgetfulnessoracknowledgementsofnervousness.Threeexamplesofnonverbalcuesbytheindividualarecreatingphysicalbarriersbyblockingtheirmouth,leaningawayfromtheauditor,andsignsofstresssuchassweatingorfidgeting.11-19 Whentheauditorsuspectsthatfraudmaybepresent,SAS99requirestheauditortoobtainadditionalevidencetodeterminewhethermaterialfraudhasoccurred.SAS99alsorequirestheauditortoconsidertheimplicationsforotheraspectsoftheaudit.Whentheauditordeterminesthatfraudmaybepresent,SAS99requirestheauditortodiscussthematterandauditapproachforfurtherinvestigationwithanappropriatelevelofmanagementthatisatleastonelevelabovethoseinvolved,andwithseniormanagementandtheauditcommittee,evenifthemattermightbeconsideredinconsequential.Forpubliccompanyauditors,thediscoveryoffraudofanymagnitudebyseniormanagementisatleastasignificantdeficiencyandmaybeamaterialweaknessininternalcontroloverfinancialreporting.Thisincludesfraudbyseniormanagementthatresultsinevenimmaterialmisstatements.Ifthepubliccompanyauditordecidesthefraudisamaterialweakness,theauditor’sreportoninternalcontroloverfinancialreportingwillcontainanadverseopinion.■ MultipleChoiceQuestionsFromCPAExaminations11-20 a. (3) b. (4) c. (1) d. (2)11-21 a. (1) b. (4) 11-22 a. (1) b. (1) c. (1)

■ DiscussionQuestionsandProblems11-23 InformationFraudCondition1.Managementhasastronginterestinemployinginappropriatemeanstominimizereportedearningsfortax-motivatedreasons.Incentives/Pressures2.Assetsandrevenuesarebasedonsignificantestimatesthatinvolvesubjectivejudgmentsanduncertaintiesthatarehardtocorroborate.Opportunities3.Thecompanyismarginallyabletomeetexchangelistinganddebtcovenantrequirements.Incentives/Pressures4.Significantoperationsarelocatedandconductedacrossinternationalbordersinjurisdictionswheredifferingbusinessenvironmentsandculturesexist.Opportunities5.Therearerecurringattemptsbymanagementtojustifymarginalorinappropriateaccountingonthebasisofmateriality.Attitudes/Rationalization6.Thecompany’sfinancialperformanceisthreatenedbyahighdegreeofcompetitionandmarketsaturation.Incentives/Pressures11-24 a. Managementfraudisoftencalledfraudulentfinancialreporting,andistheintentionalmisstatementoromissionofamountsordisclosuresbymanagementwiththeintenttodeceiveusers.Incontrast,defalcations,whicharealsocalledmisappropriationofassets,involvetheftofanentity’sassets,andnormallyinvolveemployeesandothersbelowthemanagementlevel.b. Theauditor’sresponsibilitytodetectmanagementfraudisthesameasforothererrorsthataffectthefinancialstatement.Theauditorshoulddesigntheaudittoobtainreasonableassurancethatmaterialmisstatementsinthefinancialstatementsduetoerrorsorfraudaredetected.c. Theauditorshouldevaluatethepotentialformanagementfraudusingthefraudtriangleofincentives/pressures,opportunities,andattitudes/rationalizations.

Incentives/pressures–Auditorsshouldevaluateincentivesandpressuresthatmanagementorotheremployeesmayhavetomisstatefinancialstatements,including:Declinesinthefinancialstabilityorprofitabilityofthecompanyduetoeconomic,industry,orcompanyoperatingconditions.Pressuretomeetdebtrepaymentordebtcovenantterms.Networthofmanagersordirectorsismateriallythreatenedbyfinancialperformance.Opportunities–Circumstancesprovideanopportunityformanagementtomisstatefinancialstatements,suchas:Financialstatementsincludesignificantaccountingestimatesthataredifficulttoverify.Ineffectiveboardofdirectororauditcommitteeoversight.Highturnoverinaccountingpersonnelorineffectiveaccounting,internalauditing,orITstaff.Attitudes/Rationalizations–Anattitude,character,orsetofvaluesexistthatallowsmanagementtorationalizecommittingadishonestact.Inappropriateorineffectivecommunicationofentityvalues.Historyofviolationsofsecuritieslawsorotherlawsandregulations.Aggressiveorunrealisticmanagementgoalsorforecasts.d. Therearepotentiallymanyfactorsthatshouldheightenanauditor’sconcernabouttheexistenceofmanagementfraud.Thefactors(1)ofanintendedpublicplacementofsecurities,and(2)managementcompensationdependentonoperatingresultsarebothfactorsthataffectincentivestomanipulatefinancialstatements.Theauditorshouldbealertforotherincentives,suchastheexistenceofdebtcovenantsorplanneduseofstocktoacquireanothercompanythatmayprovideincentivestomanipulatethefinancialstatements. Thethirdfactorofdeficientinternalcontrolreflectsbothanopportunitytomisstatementfinancialstatements,andanattitudethatallowsrationalizationofactionstomisstatethefinancialstatements.Asadditionalexamples,theauditorshouldbealerttothepotentialtouseaccountingestimatesordiscretionoverthetimingofrevenuestomisstatefinancialstatements.Theauditorshouldalsoconsidertheattitudeofmanagement,andwhethertheyareoverlyaggressiveorhavepreviouslyviolatedsecuritieslawsorotherregulations. Inadditiontotheriskfactorsfromthefraudtriangle,theauditorshouldconsiderothersignalsofthepotentialexistenceofmanagementfraud.Thesesignalsmayincludeunusualchangesinratiosorotherperformancemeasures,aswellasinquiriesofmanagementandcommunicationamounttheauditteam.11-25 a.DEFICIENCYRECOMMENDATION1. Thereisnobasisforestablishingthedocumentationofthenumberofpayingpatrons.Prenumberedadmissionticketsshouldbeissueduponpaymentoftheadmissionfee.2. Thereisnosegregationofdutiesbetweenpersonsresponsibleforcollectingadmissionfeesandpersonsresponsibleforauthorizingadmission.Oneclerk(hereafterreferredtoasthecashreceiptsclerk)shouldcollectadmissionfeesandissueprenumberedtickets.Theotherclerk(hereafterreferredtoastheadmissionclerk)shouldauthorizeadmissionuponreceiptoftheticketorproofofmembership.3. Anindependentcountofpayingpatronsisnotmade.Theadmissionclerkshouldretainaportionoftheprenumberedadmissionticket(admissionticketstub).4. Thereisnoproofofaccuracyofamountscollectedbytheclerks.Admissionticketstubsshouldbereconciledwithcashcollectedbythetreasurereachday.5. Cashreceiptsrecordsarenotpromptlyprepared.Thecashreceiptsshouldberecordedbythecashreceiptsclerkdailyonapermanentrecordthatwillserveasthefirstrecordofaccountability.6. Cashreceiptsarenotpromptlydeposited.Cashshouldnotbeleftundepositedforaweek.Cashshouldbedepositedatleastonceeachday.7. Thereisnoproofoftheaccuracyofamountsdeposited.Authenticateddepositslipsshouldbecomparedwithdailycashreceiptsrecords.Discrepanciesshouldbepromptlyinvestigatedandresolved.Inaddition,thetreasurershouldestablishpolicythatincludesareviewofcashreceipts.8. Thereisnorecordoftheinternalaccountabilityforcash.Thetreasurershouldissueasignedreceiptforallproceedsreceivedfromthecashreceiptsclerk.Thesereceiptsshouldbemaintainedandshouldbeperiodicallycheckedagainstcashreceiptsanddepositrecords.b. Allofthedeficienciesincreasethelikelihoodofmisappropriationofassets,byallowingindividualsaccesstocashreceiptsorfailingtomaintainadequaterecordstoestablishaccountabilityforcashreceipts.c. Thedeficiencieshavelessofaneffectonthelikelihoodoffraudulentfinancialreportingthantheydoformisappropriationofassets.Thefirstfourdeficienciesincreasethelikelihoodoffraudulentfinancialreportingforreportedrevenuesduetothelackofadequaterecordstoestablishthenumberofpatrons.11-261. a. Errorb. Internalverificationofinvoicepreparationandpostingbyanindependentperson.c. Testclericalaccuracyofsalesinvoices.2. a. Fraud.b. Theprelistingofcashreceiptsshouldbecomparedtothepostingsintheaccountsreceivablemasterfileandtothevalidatedbankdepositslip.c. Tracecashreceivedfromprelistingtocashreceiptsjournal.Confirmaccountsreceivable.3. a. Error.b. Useofprenumberedbillsofladingthatareperiodicallyaccountedfor.c. Traceasequenceofprenumberedbillsofladingtorecordedsalestransactions.Confirmaccountsreceivableatyear-end.4. a. Error.b. Nomerchandisemayleavetheplantwithoutthepreparationofaprenumberedbilloflading.c. Tracecreditentriesintheperpetualinventoryrecordstobillsofladingandthesalesjournal.Confirmaccountsreceivableatyear-end.5. a. Error.b. Internalreviewandverificationbyanindependentperson.c. Testaccuracyofinvoiceclassification.6. a. Errorb. Onlinesalesaresupportedbyshippingdocumentsandapprovedonlinecustomerorders.c. Tracesalesjournalorlistingentriestosupportingdocumentsforonlinesales,includingsalesinvoices,shippingdocuments,saleorders,andcustomerorders.7. a. Errorb. Salesinvoicesareprenumbered,properlyaccountedforinthesalesjournal,andanotationontheinvoiceismadeofentryintothesalesjournal.c. Accountfornumericalsequenceofinvoicesrecordedinthesalesjournal,watchingforduplicates.Confirmaccountsreceivableatyear-end.

8. a. Fraud.b. Allpaymentsfromcustomersshouldbeintheformofacheckpayabletothecompany.Monthlystatementsshouldbesenttoallcustomers.c. Tracefromrecordedsalestransactionstocashreceiptsforthosesales;confirmaccountsreceivablebalancesatyear-end.11-27 a. ThelackofseparationofdutieswasthemajordeficiencythatpermittedthefraudforApplianceRepairandServiceCompany.Gydershasresponsibilityforopeningmail,prelistingcash,updatingaccountsreceivable,andauthorizingsalesallowancesandwrite-offsforuncollectibleaccounts.ItiseasyforGyderstotakethecashbeforeitisprelistedandtochargeoffanaccountsreceivableasasalesallowanceorasabaddebt.b. Thebenefitofprelistingcashistoimmediatelydocumentcashreceiptsatthetimethattheyarereceivedbythecompany.Assumingallcashisincludedontheprelisting,itistheneasyforsomeonetotracefromtheprelistingtothecashreceiptsjournalanddeposits.Furthermore,ifadisputeariseswithacustomer,itiseasytotracetotheprelistinganddeterminewhenthecashwasactuallyreceived.Theprelistingshouldbepreparedbyacompetentpersonwhohasnosignificantresponsibilitiesforaccountingfunctions.Thepersonshouldnotbeinapositiontowithholdtherecordingofsales,adjustaccountsreceivableorsalesforcredits,oradjustaccountsreceivableforsalesreturnsandallowancesorbaddebts.c. Subsequenttotheprelistingofcash,itisdesirableforanindependentpersontotracefromtheprelistingtothebankstatementtoverifythatallamountsweredeposited.Thiscanbedonebyanyoneindependentofwhoeverdoestheprelisting,orpreparesormakesthedeposit.d. Ageneralrulethatshouldbefollowedfordepositingcashisthatitshouldbedepositedasquicklyaspossibleafteritisreceived,andhandledbyasfewpeopleaspossible.Itis,ideally,thepersonreceivingthecashthatshouldpreparetheprelistingandpreparethedepositimmediatelyafterward.Thatpersonshouldthendepositthecashinthebank.Anyunintentionalerrorsinthepreparationofthebankstatementshouldbediscoveredbythebank.Theauthenticatedduplicatedepositslipshouldbegiventotheaccountingdepartmentwhowouldsubsequentlycomparethetotaltotheprelisting.Whenanindependentpersonpreparesthebankreconciliation,thereshouldalsobeacomparisonoftheprelistingtothetotalsdepositedinthebank. Anymoneytakenbeforetheprelistingshouldbeuncoveredbytheaccountingdepartmentwhentheysendoutmonthlystatementstocustomers.Customersarelikelytocomplainiftheyarebilledforsalesforwhichtheyhavealreadypaid.

11-28 a.DEFICIENCIESLIKELYMISSTATEMENTS1. Theforemanhastheabilitytohireemployeesandentertheirnamesintothepaysystemwithnootherapproval.Nonexistentorincompetentemployeesmaybehiredattheforeman'soption.2. Theforemanmaymakechangestosalaryrateswithoutapprovalofcompanymanagement.Employeesornonexistentemployeesmaybepaidatratesthatarehigherthantheirskillwarrants.3. Noinvestigationofnewemployeestodeterminebackgroundexperienceanddependabilityisperformed.Dishonestorunqualifiedemployeesmaybehired.4. Nocontrolexistsovertimecardsandthecompletionthereof.Employeesmayreportandbepaidfortimethattheydidnotwork.5. Norevieworinternalverificationoftheamountonthepayrollchecksisperformed.Misstatementsmadebythepayrollclerksinfavorofemployeeswouldlikelynotbediscovered.6. Payrollchecksarenotprenumberedorcontrolledbythepayrollclerks.Thechiefaccountantcouldprepare,sign,andcashanextrapayrollcheckwithoutdetection.b. Deficiencies1,2,4,5,and6increasethelikelihoodoffraudinvolvingmisappropriationofassets.Fraudinvolvingmisappropriationofassetsisrelativelycommonforpayroll,althoughtheamountsareoftennotmaterial.Fraudulentfinancialreportinginvolvingpayrollislesslikely.11-29 a. Theauditormustconducttheaudittodetecterrorsandfraud,includingembezzlement,thatarematerialtothefinancialstatements.Itismoredifficulttodiscoverembezzlementsthanmosttypesoferrors,buttheauditorstillhassignificantresponsibility.Inthissituation,thedeficienciesininternalcontrolaresuchthatitshouldalerttheauditortothepotentialforfraud.Ontheotherhand,thefraudmaybeimmaterialandthereforenotbeofmajorconcern.Theauditorofapubliccompanymustalsoconsidertheimpactofnoteddeficiencieswhenissuingtheauditor’sreportoninternalcontroloverfinancialreporting.Whennoteddeficienciesareconsideredtobematerialweaknesses,whetherindividuallyorcombinedwithotherdeficiencies,theauditor’sreportmustbemodifiedtoreflectthepresenceofmaterialweaknesses.

b. Thefollowingdeficienciesininternalcontrolexist: 1. Thepersonwhoreconcilesthebankaccountdoesnotcomparepayeesoncheckstothecashdisbursementsjournal. 2. Thepresidentsignsblankchecks,thusprovidingnocontroloverexpenditures. 3. Noonechecksinvoicestodeterminethattheyarecancelledwhenpaid.c. Touncoverthefraud,theauditorcouldperformthefollowingprocedures: 1. Comparisonofpayeeoncheckstocashdisbursementsjournal.2. Followupalloutstandingchecksthatdidnotclearthebankduringtheengagementuntiltheyclearthebank.Comparepayeetocashdisbursementsjournal. 11-30 a.a.FRAUD?b.TYPEOFFRAUD1.YesFraudulentfinancialreporting2.YesMisappropriationofassets3.YesFraudulentfinancialreporting4.YesMisappropriationofassets5.YesFraudulentfinancialreporting6.YesMisappropriationofassets7.No*N/A * Fraudinvolvesintent.ThecircumstancessuggestthattherewasnointentonthepartofFranklintobedeceptive.Ifthepurposeofomittingthefootnotewastodeceivethebank,thenthiscasewouldrepresentfraudulentfinancialreporting.11-31 1. a. Theremaybeunrecordedcashdisbursementtransactions.

b. Becausethetransactionsrelatetocashdisbursements,thecashaccountwillbeaffected.Theaccountspayableaccountmaybemisstatedifthedisbursementisthepaymentonanaccount.Ifthedisbursementisforthedirectpaymentofanexpenseorisrelatedtothepurchaseofassets,thenexpenseorassetaccountswillbeaffected.Paymentsonotherliabilityaccountswouldimpactthoseliabilityaccounts. c. Existingtransactionsarerecorded(completeness).2. a. Theremaybefictitiousaccountsreceivableaccountsincludedinthemasterfile. b. Accountsreceivableandsalesarelikelytobeaffectedby fictitiousreceivables. c. Amountsincludedexist(existence).3. a. Managementmayhavemanipulatedkeyassumptionssothatpensionexpenseandpensionliabilityamountswouldbelower.b. Pensionexpenseandpensionliabilityaccountsarelikelytobeaffected.c. Amountsincludedarestatedatthecorrectvalues(Accuracy).4. a. Theclientmayhaveshippedandrecordedlargeamountsofgoodsclosetoyearendtothirdpartieswhomayholdthegoodsonconsignmentorwhohavefullrightsofreturn.Theseshipmentsweremadetorecordafictitioussaleandrelatedreceivable.b. Accountsreceivableandsalesandtherelatedcostsofgoodssoldandendinginventorywouldbeaffectedbythisactivity. c. Recordedamountsexisted(occurrence).5. a. Assetsthatweremisappropriatedmaybeconcealedbyrecordingpurchasetransactionsusingnon-standard,fictitiousvendornumbers.b. Accountspayablewouldbeoverstatedandtherelatedassetaccountwouldbeincreasedbytheunauthorizedtransaction.c. Recordedamountsexisted(occurrence).6. a. Salesmaybefictitiouslyrecordedbeforeanygoodswereshipped. b. Salesandaccountsreceivable. c. Recordedamountsexisted(occurrence).

■ Case11-32 a. Therearemanyfraudriskfactorsindicatedinthedialogue.Amongthefraudriskfactorsarethefollowing:AsignificantportionofMint’scompensationisrepresentedbybonusesandstockoptions.AlthoughthisarrangementhasbeenapprovedbySCS’sBoardofDirectors,thismaybeamotivationforMint,thenewCEO,toengageinfraudulentfinancialreporting.Mint’sstatementtothestockanalyststhatSCS’searningswouldincreaseby30%nextyearmaybebothanundulyaggressiveandunrealisticforecast.ThatforecastmaytemptMinttointentionallymisstatecertainendingbalancesthisyearthatwouldincreasetheprofitabilityofthenextyear.SCS’sauditcommitteemaynotbesufficientlyobjectivebecauseGreen,thechairoftheauditcommittee,hiredMint,thenewCEO,andtheyhavebeenbestfriendsforyears.Onein