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Case 4.2 Comptronic Corporation

Case 4.2 Comptronic Corporation - MEMORANDUM To John Giles...

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MEMORANDUM To: John Giles, CPA From: Cilla Okunlola Date: Febuary 9, 2011 Subject: Case 4.2 Comptronix Corp Comptronix Corporation sold all of its remaining assets in September of 1996. A lack of internal controls and a poor assessment of both inherent risk and control risk created a perfect environment for upper management to hide fraud in the form of material financial misstatements. The result of Comptronix Corporation shows why it is important to understand the inherent risks and control risks within a company. Inherent Risk Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control. Inherent risk implies that the auditor should attempt to predict where misstatements are likely to appear in the financial statement segments. Typical factors the auditor should consider when assessing inherent risk include: -Nature of the client’s business -Results of previous audits -Initial versus repeat engagement -Related parties -Non-routine transactions -Judgment required to correctly record account balances and transactions -Makeup of the population -Factors related to fraudulent financial reporting -Factors related to misappropriation of assets Looking back, there were many inherent risk factors present during the 1989-1992 audits related to fraudulent financial reporting. One factor of inherent risk would be the loss of one of Comptronix’s key customers in 1989. Losing the key customer, SCI, meant that Comptronix
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