Cendant Corporation: Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud

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Cendant Corporation
[1] (a) Related parties make decisions based on information provided through financial statements. It is the auditor’s responsibility to plan and perform audit engagement to offer reasonable assurance that the financial statements are correct and fair. (b) The two main categories of fraud that affect financial reporting include misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets. (c) Factors that auditor’s should consider when assessing the likelihood of material misstatements due to fraud include: whether or not the company has a reason to make something seem consistent (rationalization), whether or not the company or individuals have an incentive or pressure on them, and whether or not the company has the opportunity to commit fraud. (d) Many factors existed during the 1995 to 1997 audits of CUC that created an environment conductive for fraud. For example, CUC’s top management was aggressive to increase their market share due to the pressure put on them to meet analyst expectations. CUC had been committing the same type of fraud for many years before 1995, so it was rational for them to maintain their consistency. One person even stated that he thought he was only doing his job. The adjustments that were made at the end of each year brought about the opportunity for CUC to also commit fraud. [3] (a) In the Cendant fraud management override occurred when the CUC management recognized deferred revenue as revenue immediately, or delaying recognition of membership cancelations. (b) To further address the risk of management override of internal controls auditors must remain skeptical that management override exists. Auditors should also become familiar with the company and it’s internal controls upon acceptance. [5] (a) A company may want to hire a member of its external audit team because the auditor is familiar with the company, or management has developed a strong working...
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