Requirements 3 4 and 5 requirement 1 economic events

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Requirements 3, 4, and 5. Requirement 1: Economic events can lead to business risk for companies, which in turn can lead to audit risk. a. Briefly describe some of the major events occurring in Japan and worldwide during the period 2007–2013 that negatively impacted the demand for Toshiba’s products and services. How and why were the accounting choices made by company executives affected by these events? b. Describe the audit risk model and its components. How is management’s incentive to misreport reflected in the auditor’s risk assessment, and how is it incorporated into each component of the audit risk model? How was audit risk at Toshiba affected by the incentives and pressures on management described in your answer to part (a)? c. Why is it important for auditors to obtain a general understanding of the economic conditions and risks under which a business operates? Requirement 2: The fraud at Toshiba was perpetrated by mid-level managers. a. How does the Association of Certified Fraud Examiners (ACFE) define the fraud triangle ( fraud-triangle.aspx )? b. Apply the fraud triangle to Toshiba and discuss in detail the ramifications of each component of the fraud triangle from the perspective of a mid-level manager. Incorporate relevant aspects of Japanese corporate culture into your answer, if possible. c. How did the ‘‘ tone at the top ’’ contribute to the fraud? Requirement 3: Refer to the authoritative guidance provided by the PCAOB in Auditing Standard 2401, Consideration of Fraud in a Financial Statement Audit . a. From the red flags listed in the Appendix, ‘‘ Examples of Fraud Risk Factors, ’’ identify those that are applicable to Toshiba. b. According to AS 2401, how might auditors adjust the nature, timing, and extent of audit procedures in response to the fraud risk factors identified in (a)? Directly cite relevant sections of the standard. 13 This is similar to the legislative tactic adopted in the Sarbanes-Oxley Act that requires companies to either adopt a code of ethics for senior financial officers or provide reasons for not doing so. 50 Caplan, Dutta, and Marcinko Issues in Accounting Education Volume 34, Number 3, 2019
Requirement 4: Toshiba was masking the price of the components it was transferring to its contract manufacturers. Also, as noted in the case, at the point of transfer to contract manufacturers, Toshiba was recording this ‘‘ sale ’’ as a credit to Production Costs, thereby increasing income. Alternatively, a credit to a deferred liability account would have had no transient effect on income. a. Considering the volume of the price-masking transactions, should Toshiba’s external auditors, Ernst & Young ShinNihon, have objected to the treatment of crediting Production Costs to record transfer of component parts to the contract manufacturers? Provide specific reasons why or why not.

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