Slack

This case is about the Candent Corporation scandal. The auditor is responsible to perform and plan audit to obtain reasonable assurance that the financial statements are free from fraud or error; for that reason, auditor should identify and assess the risk of material misstatement due to fraud or error and design procedures to detect the fraud (AU-C 240). The financial reporting fraud and misappropriation of assets fraud are categories of fraud that influence the financial statement (AU-C 240). The auditor should consider the incentives or pressures, opportunity and rationalization to commit fraud when assessing the material misstatement due to fraud (AU-C 240). Pressures incentives to meet the Wall street analysts’ earnings expectations was the important factor, for CUC’s management, to commit the fraud by recording fictitious revenues and reducing the expenses, and the end-year adjustments to the general ledger made an opportunity to commit the fraud during the 1995 through 1997 audits.

The auditor is responsible to understand the entity’s control environment, its risk assessment process, its information system, control activities relevant to the audit and monitoring of the control in order to identify and assess the level of risk due to fraud or error (AU-C 315). When the auditor evaluates the entity’s control environment, the auditor should consider these elements: communication and enforcement of integrity and ethical values, commitment to competence, participation by those charged with governance, management’s philosophy and operating style, organizational structure, assignment of authority and responsibility, and human resource practices and policies.

There are many examples of management override of CUC’s internal control. For example, CUC’s management recoded the amounts received from customers for deferred revenue as immediate revenue recognition.