Part 2 book “Auditing and assurance services” has contents: Frau dauditing, the impact of information technology on the audit process, overall audit strategy and audit program, audit sampling for tests of controls and substantive tests of transactions, and other cotents. | 11 CHAPTER FRAUD AUDITING Accounting Scandal Rocks Public Trust The accounting profession was under fire. Throughout the long, hot summer, newspapers were filled with new details of a corporate accounting scandal. One of the largest, most respected companies in the United States had been caught inflating earnings and assets through blatant manipulation of the accounting rules. Thousands of investors and employees had suffered. Congressional hearings were called to examine and understand the fraud, and everyone asked, “Where were the auditors?” The accounting profession was under immense political pressure from reform-minded lawmakers, and the negative publicity surrounding the perceived audit failure cast all CPAs in the most unfavorable light. The year was 1938. The corporate accounting scandal was McKesson-Robbins, and it arguably had a greater impact on the way audits are performed than any subsequent scandal, including Enron and WorldCom. LEAR N I N G O B J ECTIVES After studying this chapter, you should be able to 11-1 Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets. 11-2 Describe the fraud triangle and identify conditions for fraud. 11-3 Understand the auditor’s responsibility for assessing the risk of fraud and detecting material misstatements due to fraud. 11-4 Identify corporate governance and other control environment factors that reduce fraud risks. In 1924, Philip Musica, a high-school dropout with fraud convictions and a 11-5 Develop responses to identified prison record, reinvented himself as F. Donald Coster and awarded himself fraud risks. a medical degree. “Dr. Coster” took control of McKesson-Robbins and 11-6 Recognize specific fraud risk embarked on a massive fraud to inflate its share price. McKesson-Robbins areas and develop procedures to detect fraud. inflated assets and earnings by $19 million through the reporting of non existent inventory and fictitious
