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1-In their letter to the KPMG CEO, the four Senators refer to the sales practices as representing a “massive fraud.” Discuss 2-whether or not you agree with their claim.
2- Would the alleged sales practices be considered a significant deficiency or material weakness in internal control over financial reporting?
3- Because the letter from the four Senators is a public document accessible under the Freedom of Information Act, the response from KPMG would need to be carefully crafted. If you were in Lynne Doughtie’s position, would you respond to the letter from the Senators? If so, what would be some of the challenges in crafting your response?
1- What factors in the auditor-client relationship can put the client in a more powerful position than the auditor? (b) What measures has and/or can the profession take to reduce the potential consequences of this power imbalance?
2- Assuming you were an equity investor, would you pursue legal action against the auditor? Assuming the answer is yes, under what law(s) would you bring suit and what would be the basis of your claim? (b) Define negligence as it is used in legal cases involving independent auditors. (c) What is the primary difference between negligence and fraud; between fraud and recklessness?
(a) The auditors considered Phar-Mor to be an inherently “high risk” client. List several factors at Phar-Mor that would have contributed to a high inherent risk assessment. (b) Should auditors have equal responsibility to detect material misstatements due to errors and fraud? (c) Which conditions, attitudes, and motivations at Phar-Mor created an environment conducive for fraud could have been identified as red flags by the external auditors?
Satyam Computer Services
1- The Satyam auditors attempted to confirm both cash and accounts receivable balances with external parties. Which of the audit assertions for cash and accounts receivable would confirmations be most relevant?
2- Locate the PCAOB’s Settled Disciplinary Order against the auditors of the Satyam financial statements, which can be found on the PCAOB’s website under the link for “Enforcement” (see PCAOB Release No. 105-2011-002 dated April 5, 2011), and review the sanctions imposed on the audit firms within the PW India network.You will see that the PCAOB censured all five firms in the PW India network, even though three of those firms did not participate in the audit of Satyam’s financial statements. Discuss why the PCAOB charged all five firms rather than only charge PW Bangalore and Lovelock & Lewes?
 The term “tone at the top” is typically associated with a firm’s control environment. How would you characterize Société Générale’s tone at the top and what effect do you believe that had on oversight at the trading-desk level?
 Fraud research indicates three conditions must exist before a fraud occurs: Pressure/Incentive, Rationalization, and Opportunity.
[a] What do you think were Jérôme Kerviel’s incentives and rationalizations for committing fraud?
[b] What created the opportunity for fraud?
 What do you believe were the three most serious control deficiencies at Société Générale? For each deficiency listed, indicate whether the deficiency related to poor design or poor operating effectiveness. Describe how you would remediate or fix each of the deficiencies listed.