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Unformatted text preview: Case 4.3 Cendant Corporation  (a) Section 110, Responsibilities and Functions of the Independent Auditor , paragraph .02, states, &quot;The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected. (b) Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive financial statement users where the effect causes the financial statements not to be presented, in all material respects, in conformity with generally accepted accounting principles (GAAP).5 Fraudulent financial reporting may be accomplished by the following: Manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure Misstatements arising from misappropriation of assets (sometimes referred to as theft or defalcation) involve the theft of an entity's assets where the effect of the theft causes the financial statements not to be presented, in all material respects, in conformity with GAAP. Misappropriation of assets can be accomplished in various ways, including embezzling receipts, stealing assets, or causing an entity to pay for goods or services that have not been received. Misappropriation of assets may be accompanied by false or misleading records or documents, possibly created by circumventing controls. The scope of this section includes only those misappropriations of assets for which the effect of the misappropriation causes the financial statements not to be fairly presented, in all material respects, in conformity with GAAP. (c) Risk factors are classified based on the three conditions generally present when fraud exists: incentive /pressure to perpetrate fraud, an opportunity to carry out the fraud, and attitude / rationalization to justify the fraudulent action. (d) Incentive /pressure: The high expectations of management and investors: CUCs management allegedly inflated earnings by recording fictitious revenues and reducing expenses to meet Wall Street analysts earnings expectations....
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