In: Business and Management

Submitted By yklman5
Words 376
Pages 2
Midterm 2
Case 3.1
Government’s decision to deregulate the once highly regulated industry, Enron no longer need to charge regualted price for its gas to customers. The force of supply and demand dictated the price, therefore Enron has higher risk of material misstatement compare to before.
The deregulation helped Enron expanded into natural gas trading and financing. And for the first time Enron was allowed to use mark to market accounting for its nature gas trading business.
Enron expanded beyond its natural gas business into other markets such as electricity and commodity markets. And it also undertook international projects outside the United States. Such aggressive expansion could elevate the risk of material misstatement.

Case 3.2
The existence of related parties presents additional risks to an auditor because an auditor has to obtain an understanding of management responsibility not just the entity itself by also the related party, the purpose of the related party and the relationship of each related party to the whole entity. It’s more area for an auditor to cover, which means greater audit risk. I think auditor should pay special attention to related party transactions because related parties are under the same management and it is prone to fraud and misstatement. For example one of ALO primary activity was to buy BFO’s overvalue investment so BFA could avoid recording losses. If ALO were an independent company, such transactions would not occur.

Case 3.3
Pressure, opportunity and rationalization are likely to be present when a fraud occurs. For WorldCom case, pressure played an important role for fraud to occur when WorldCom faced increasing competition by 2000, WorldCom’s merger with Sprint were called off, stock price dropped more than 20% when WorldCom reduced revenue expectations, and industry conditions worsen in 2001.…...

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