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[2] Professional standards outline the auditor’s consideration of material misstatements due to errors

and fraud

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

Follow the audit standard VSA 240: Auditor’s responsibility relate to fraud in financial statements audit:

- Take responsibility to achieve reasonable assurance that financial statements, in general, there
are still material misstatements due to fraud or errors or not.
- Maintain professional skepticism through the audit.
- Considerate the possibility that Board of Directors may manipulate controls and be aware of the
controls to detect errors efficiently may not be efficient to detect fraud.
- Set the appropriate procedures to detect material misstatements.
- Does not take direct responsibility of prevent fraud and errors at client’s company.

b) What two main categories of fraud affect financial reporting?

Fraudulent financial reporting: management changes the accounting policies, or the method of
estimating is used to improve the firm’s result.

+ increase personal incentives

+ market pressure

+ improve stock price...

Missappropriation of assets: steal assets for personal use by recording unreal transactions

c) What types of factors should auditors consider when assessing the likelihood of material
misstatements due to fraud?

- Business environment, sector’s features.

- Internal controls of client (design-implementation-effectiveness)

- Ethics and attitude of Managers.

- Allegation, lawsuit, legal responsibility.

d) Which factors existed during the 1997 through 2000 audits of Xerox that created an environment
conducive for fraud?

- Intense competition of foreign competitors

- Development of document sector.

- Meet difficulties to maintain revenue and income growth.

- Pressure to maintain credit rating.

- Satisfy Wall Street expectations.

- Incentives for good results of business for managements.

[5] What responsibility do auditors have regarding accounting reserves established by company
management? How should auditors test the reasonableness of accounting reserves established by
company management?

Responsibility of auditors:

- Collect appropriate evidence that reserves established by company management in financial

statements is reasonable follow applicated framework or not.

- Assess the reasonableness of reserves established by company .

How to test the reasonableness of accouting reserves established by company management:

- Achieve understanding of client to identify circumstances that could lead to the necessary to
established reserves.

- Interview BoD about the necessary of reserves, the method is being used by the company, any changes
in methods between last term and the term present and reasons why, and re-evaluate when needed.
Check whether BoD supervise real results of reserves established.

- Assess the transactions and events through the audit that could lead to the necessary to establish

- Keep professional skepticism on the uncertainty of reserves and reperformance when needed.

[12] What steps could accounting firms take to ensure that auditors do not subordinate their
judgments to client preferences on other audit engagements?

- Assess the risks when accepting audit.

- Always determine the purpose of audit firm is serving public the most independent and belivable view
of client’s financial position. Discuss it with client before accept to serve audit.

- Make sure that all auditors know the importance of keeping independence and professional skepticism
through the audit.

- Choose the audit team members carefully, with suitable skills and experience, avoid relationships
between auditors and client.