Option #2: Auditing Standards and Risk Management

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Please refer to problem 4.60 and 4.57 adapted from your textbook.

Problem 4.60 (adapted)

Management fraud is not the expected norm, but it happens from time to time. In the United States, several cases have been widely publicized. They happen when motives and opportunities overwhelm managerial integrity.


Please respond to the following questions.

  1. What distinguishes management fraud from a defalcation?
  2. What are an auditor’s responsibilities under auditing standards to detect management fraud?
  3. What are some characteristics of management fraud that an audit team should consider to fulfill the responsibilities under auditing standards?
Problem 4.57 (adapted)

Audit risks for accounts and disclosures can be conceptualized in the model: Audit risk (AR) = Inherent risk (IR) x control risk (CR) x detection risk (DR). Use this model as a framework for considering the following situations and deciding whether the auditor’s conclusion is appropriate.

  1. Paul, CPA, has participated in the audit of Tordik Cheese Company for five years, first as an assistant accountant and the last two years as the senior accountant. Paul has never seen an accounting adjustment recommended and believes the inherent risk must be zero.
  2. Fields, CPA, is lazy and does not like audit jobs in Philadelphia. On the audit of Philly Manufacturing Company, Fields decided to use substantive procedures to audit the year-end balances very thoroughly to the extent that the risk of failing to detect material errors and irregularities should be 0.02 or less. Fields gave no thought to inherent risk and conducted only a very limited review of Philly’s internal control system.

Your written response paper should be 3-4 pages in length. Please type your response in a Word document and follow APA format, according to CSU-Global Guide to Writing and APA. Include a title page and reference page. Use two (2) outside academic sources other than the textbook, course materials, or other information provided as part of the course materials.

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