The paper "Auditing and Fraud at Cendant Corporation" is a good example of a finance and accounting case study. The main intention of declaration engagement is improving the dependability of the focuses; thus, it was the liability of Cendant’ s auditor to offer a sensible level to guarantee the financial statement is factual and just. Chow (2008) defines financial statement as information accumulation which reveals the business stand. For that reason, these users, which includes boards, investors, financiers, as well as the other involved parties can decide with regards to the data offered by the financial report.
In this regard, materiality can be defined as the data which influences management processes as a result of using the financial report. Basically, the auditor is responsible for planning and carrying out the audit to get hold of sensible assurance with reference to whether the financial reports are free of material misstatement, and if are brought about by fraud or error. Owing to the nature of Cendant fraud attributes and the audit-proof, the auditor could attain sensible, but not complete, assurance of material misstatements detection. Part A Basically, fraud can be defined as a deliberate act by making use of dishonesty to gain an unmerited or unlawful advantage.
There are two main categories of fraud and they include asset misappropriation fraud and financial reporting fraud. In general assets misappropriation fraud entails several types of stealing. As a result, assets misappropriation fraud reduce the assets and heighten the operating cost; thus, leading to equity reduction for the company owners. On the other hand, financial reporting fraud is deliberately neglecting essential information or misstating items from the financial statement. Based on Cendant Corporation fraud, it occurred when the accounting department stage-managed the returns to cope with the anticipation of Wall Street analyst.
According to Fogarty, Graham, and Schubert (2006), the financial reporting fraud affects probably heightens sales and as a result, boosts the company’ s revenue. Essentially, financial reporting with deception will reveal the prospect earning capability to the share market; thus, increasing the price of share within the exchange market. Part B Looking for inducements and demands to carry out fraud, materially expressed in the beginning and mid-1990's CUC took over a number of companies through acquisitions to increase its market share.
Some of the acquisitions entailed business organizations such as Net Market, Sierra On-Line, Entertainment Publications, Davidson & Associates, Welcome Wagon International, and Privacy Guard. What’ s more, CUC signed contracts with an enormous business organization like s American Airlines, Time Warner and Intel. Through such acquisitions, CUC managed to twofold its profits from an estimated $738 Million to $1.4 billion in a span of two years (1993-1996), and simultaneously net profits of CUC went up from $ 25 Million to an estimated $163 Million (McLaughlin, 1999).
This arguably increased the competitive advantage of CUC tremendously. However, for the reasons of year-end reporting, CUC was compelled to make a range of year-end modifications in order to allow misstatements to be integrated into the general ledger; therefore, those modifications created the chances to carry out a fraud (Chow, 2008). Question 2 Part A Fundamentally, there were three misstatements recognized in the CUC: lopsided charges in opposition to merger reserves, phoney services coding vended to clients as well as belated acknowledgement of membership annulments and charges dismissal by banks with regards to credit card accounts of the members.
According to Chow (2008), lopsided charges in opposition to merger reserves are abnormally inflated earning by deceitfully accounting profits or decreasing costs and cutting down the CUC’ s merger reserve. In this regard, an audit can make use of the assertions utilized for dealings and transactions, which entails items of the income statement. According to Fogarty, Graham, and Schubert (2006), the accuracy assertion is utilized to examine amounts along with other information regarding recorded dealings and transactions that have been recorded properly. For this reason, the profit and cost for the merges must be recorded properly.
Phoney services coding vended to clients is termed by McLaughlin (1999) as classification fraud. Classification as that dealings and transactions recorded within the suitable accounts. Yet, CUC recorded their income into a distinct account it can be identified as revenue instantly rather than overdue revenue; thus, the income became inflated. What’ s a more, belated acknowledgement of membership annulments as well as charges dismissal by banks with regards to credit card accounts of the members was a disconnected issue.