Evolution Of Related Party Transactions (AICPA)

It would seem that the finance or bookkeeping department of any company faces the greatest number of ethical challenges because the opportunity to manipulate the accounting and misrepresent or otherwise take money from the company is ‘ever-present.’ However, there are opportunities for unethical behavior in all areas of a business – and in all businesses in the economy.

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

4. The auditors have the responsibility to search for related-party transactions because of materiality. AU 334 & AS 18 gives a standard for related parties that auditors have to perform during an audit. One way to search for related parties is to examine the transactions between different parties and trace to locate the customers and or suppliers. Another way to locate related parties is money that comes into the business from lenders and or borrowers. Audit procedures that should be applied by discussing with the BOD of any transactions that may be related, examine closely each account and to audit intercompany accounts.

After identifying a significant related party transaction outside the entity’s normal course of business, an auditor should

The Lakeside Company: Auditing Cases, 11th edition, has been updated in light of the accounting scandals of the

Mr. Eatough’s report referred to the profit managing activity as a “deliberate deferral of reported income” when he should have called it fraud. Standard 2410 requires that results are communicated in such a way as to minimize the risk of misinterpretation. Since Mr. Eatough did not call the “profit management” fraud, he left the report open to misinterpretation.

The authors opted to make their refinements in two ways. One was to assess the component approaches and assumptions of previous study approaches and then to replicate what was done in those studies using a second refinement of a new financial kernel that was proposed to be more amendable to publicly available knowledge. The goal of their efforts was to generate the best predictive tool against audit fraud while controlling

Nowadays, more and more attention has been paid on internal auditing. Drawing the lessons from the scandal of Enron, Enron allowed an external accounting firm to take charge of company’s internal audit function, and consequently

The need for ethical changes in the accounting industry has become increasingly pertinent in recent years. This is due to the rise of fraud in the accounting industry. In a recent survey completed by PwC(PricewaterhouseCoopers), nearly 45% of companies in the U.S suffered from some type of fraud within the past two years (Cohn, 2014). Accounting fraud can attributed to misappropriation of

respondents reported that inadequate emphasis on fraud determent practices and on education contributed to this problem. The public interest in fraud investigation encouraged the American Institute of Certified Public Accountants (AICPA) to host a two-hour online fraud conference on CompuServe on 19 June 1996 featuring David L. Landsittel, Chair of the AICPA’s Fraud Task Force, and Edmund R. Noonan, Chair of the Auditing Standards Board (AICPA, 1996a). The conference discussed the proposed Statement on Auditing Standards, “Consideration of Fraud in a Financial Statement Audit”. The Treadway Commission (1987) recommended that accounting programmes pay more attention to fraud investigation education, suggesting that current curriculum content may be deficient in this important area. The range of knowledge required of forensic accountants in performing litigation services, giving expert testimony and conducting fraud investigation is extensive and should, perhaps, have a more prominent position in the accounting curriculum. Many groups in society expect accountants to assume a more active role in providing reasonable assurance regarding responsible corporate governance, reliable financial reporting, and detecting and preventing fraudulent financial activities. In response

16 3 Financial Statement Fraud: Earnings Management and Revenue Recognition .............................................................................................. 17 3.1 Introduction ................................................................................ 17 3.2 Definition – Financial Statement Fraud ..................................... 18 3.3 The Auditor’s Responsibilities for Detecting Fraud.................. 19 3.4 Assessing Risks of Fraud ........................................................... 21 3.5 Definition – Earnings Management ........................................... 27 3.6 Earnings Management – Revenue Recognition......................... 28 3.7 Summary .................................................................................... 31 4 Case Analysis. Why Auditors Have Not Detected Fraud? ............... 33 4.1 Introduction to Three Case Studies............................................ 33 4.2 Analysis of the Three Cases....................................................... 35 4.3 Reasons Why Auditors Have Not Detected Fraud .................... 48 4.4 Summary .................................................................................... 60 5 Recommendations For Improving the Audit Process....................... 65 5.1 Introduction ................................................................................ 65 5.2 Empirical Findings

The interest in accounting disclosure and audit quality by academics, practitioners, and regulators heightened following the various financial reporting scandals, and subsequent legislative and professional response to these scandals (e.g., ASX Corporate Governance Guide 2003; Sarbanes-Oxley Act 2002). An important question that has been on the minds of many is whether the implementation of stricter auditing standards such as those mandated

Auditors provide a key investigation function in the business world. The law in relation to the liability of auditors changed significantly with the introduction of Companies Act 2006. It is now possible for audit firms to limit their liability towards clients through contractual agreements. The current auditing liability regime has proven to be controversial. This essay will first present the relevant liability rules and examine the underlying problems, then evaluating the significance of these rules with regard to auditing reforming.