Question 1 (a) What responsibility does an auditor have to detect material misstatements due to errors and fraud?

An auditors responsibility has to detect material misstatements due to errors and fraud is to involve more general considerations apart from the specific procedures otherwise planned. Other than that, an auditor is to identify risks involving the nature, timing and extent of the auditing procedures to be performed. An auditors responsibility is to include the performance of certain procedures to further address the risk of material misstatement due to fraud involving management override of controls, given the unpredictable ways in which such an prevail could occur. For example, modifying the assignment of personnel, the degree of supervision, and selecting auditing procedures. Other example for identifiable risks of material misstatement such as significant related-party transactions is by changing the nature, timing, and extent of auditing procedures. (b) What two main categories of fraud affect financial reporting? Two main categories of fraud affect financial reporting are misstatements arising from
fraudulent financial reporting such as falsification of accounting records and misstatements arising from misappropriation of assets such as theft of assets or fraudulent expenditures. (c) What types of factors should auditors consider when assessing the likelihood of material misstatements due to fraud? An auditor should consider when assessing the likelihood of material misstatements due to fraud is to make inquiries of management and others within the entity. Other type of factor is considering the results of analytical procedures performed in planning the audit. Then, considering the fraud risk factors and certain other information. In SAS 99 requires auditors to ask management questions about their awareness and understanding of fraud. Auditors will then make a decision as to whether they need to inform management about fraud and the types of controls that will prevent and detect fraud. The standard also requires auditors to make inquiries of the audit committee, internal audit personnel and others within the entity.

(d) Which factors existed during the 1995 through 1997 audits of CUC that created an environment conducive for fraud? The first factor existed during the 1995 through 1997 audits of CUC that created an environment conducive for fraud is irregular charges against merger reserves. This happens when CUC record a one-time expense and establish a reserve for restructuring costs expected as a result of the merger. Later CUC artificially inflate earnings by fictitiously recording revenues or reducing expenses and reducing the merger reserve account. The second factor existed that created an environment conducive for fraud is false coding of services sold to customers when CUC falsely classify amounts received from customers for deferred revenue recognition programs as amounts received from customers for immediate revenue recognition programs. This misclassification of purchased benefits allowed CUC to immediately recognize revenues and profits instead of deferring them over the benefit

period. The third factor is delayed recognition of member ship cancellations and bank rejection of charges made to members credit card accounts. CUC delay recognizing customer cancellations of benefit programs and bank rejections of credit card charges to inflate revenues and profits during the current reporting period. In the end, pretax annual reporting earnings were overstated by $262 million, $122 million, and $127 million for 1997, 1996, and 1995 respectively.

QUESTION 3 a) Provide an example where management override occurred in the Cendant fraud? Management override in the Cendant fraud that we can classify based on the case study is the control environment. Control environment means that is sets the tone of the organizations, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Example the companies have good staffs which are not having fraud, bribery, cheated and so on, also the top manager also good to all employees, its good to control environment. Based on the case study its different because the Cendant Corporation of the top management asks the staff about more than twenty employees are participating in the fraud. This is not good for a company to practice fraud because it is contrary to the business conducted by the company. Even if other people do not know about the fraud committed by the company for many years but finally the publics known what the company do for previous years thats all because of the auditor appointed carefully investigated the company financial statements.

Auditors who have audited the financial reporting have seen there something wrong in the report they did in 1997 in CUCs financial statement. The fraud was discovered when responsibility of Cendants accounting functions was transferred from former CUC personnel to former HFS personnel. Initial estimates provided by senior Cendant management were that CUCs 1997 earnings would need to be reduces by between $100 and $115. Normally they have intention to do fraud when the Cendants do many things in operations around three business segments which are services, real estate services and alliance marketing. The misstatements reflected in CUCs quarterly reports filed with the Securities and Exchange Commission were not recorded in the general ledger. Some of the most significant misstatement techniques used by CUC to adjust its general ledger such as irregular charges against merger reserves, false coding of services sold to customers and also delayed recognition of membership cancellation and bank rejection of charges made to members credit card accounts. This is because of the top management have intention to do fraud of the company by doing to increased the profit based on what the business do to all their regular customers.

When the case are still investigate, the audit committee report on the fraud investigation notes several instances in which Ernst & Young, LLP did not substantiate or question fraudulent transactions. However, the report also shows that the senior management of CUC encouraged subordinates not to show certain informations to the auditors. Additionally, the report notes instances

in which the auditors accepted incomplete answers from management regarding CUCs financial performance. They doing all of this kind situation to not make auditors to check further on their financial statement. Example that can we assumed to the information that the Cendants Corporation does not give to auditors such as evidence all the transactions between the company and customers. All customers do not know about this because they believe the company does right things due to the business that they operate. Information system relevant to the financial reporting objectives, which includes the accounting system, consists of procedures, whether automated or manual, and records established to initiate, record, process, and report entity transaction and to maintain accountability for the related assets and liabilities. Based on the Cendants Corporation do is false coding of services sold to customers. CUC falsely classify amounts from customers for deferred revenue recognition programs as amounts received from customers for immediate revenue recognition programs. An example is the company false coding of services sold to customer that made to increase profit without customers aware of it. This is because of the opinion that customers will not check all the wrong code or transaction of other goods at the higher price even if the goods ordered by customers is lower prices.

Internal control is not good because maybe the owner of the company can cheated. It is because of the size of the entity may affect how the various components of internal control are implemented. Example is the owner of the Cendant Corporation will increase the stock price due to the situation of fraud by using the money taking money to put into private accounts to be used in the future. This often happens if the companys manager asking the executive to meddle with received the money, issued receipt from the customer and key in wrong the systems.

b) What are the required auditor responses to further address the risk of management override of internal control? Internal control is a process, affected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives based on three categories which are effectiveness and efficiency of operation, reliability of financial reporting and compliance with applicable laws and regulations. For example is based on property when using a law and regulations its never bad happened.

The auditor must responses to further address the risk management override of internal control by using to reviewing all financial reporting for the previous years as many of the transactions carried out by the company to all the customers. From what is seen by the auditor as stated in the financial statement of Cendant Corporation is likely that they have long been committed fraud without the other person aware of this even before they had the auditor who audit the records of the company.

Auditor should also communicate to the Board of Directors that the auditors does not assess whether all risks and controls have been addressed by the Directors or whether risks identified are satisfactorily addressed by internal control. However if the disclosure in the Statement on Internal Controls not supported or is not consistent with the auditors understanding, the auditors should discuss the matter with the directors and seek possible revision to the statement. Besides that the auditors also can take all the evidence kept by the company to see the transaction was done by looking at all the small transaction into the long transactions. The evidence is important to auditors because we can managed to see what the company has done for many years before it announcement of fraud. This can be seen through the perspective of an auditor is doing duty with integrity, trust and efficiently without corruption given by the company.

Lastly is the auditors must make a decision to withdraw the qualification certificates of the company set up because so much fraud that was committed by the company. If not it will continue to do so for years without them realizing it. This is necessary because the customers are who have been cheated by the company to be more severe action against the owner of the company as ordered subordinates overstate the financial statements.