1.Why is it important for auditors to obtain a general understanding of the economic conditions and risks under which a business operates?
2.How did the “tone at the top” and the control environment contribute to the fraud?
3.Describe the audit risk model and its components. How is management’s incentive to misreport reflected in the auditor’s risk assessment, and how is it incorporated into each component of the audit risk model? How was audit risk at Toshiba affected by the incentives and pressure on management?
4.Research HKSA240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. From the red flags listed in the Appendix 1, “Example of Fraud Risk Factors,” identify those that are applicable to Toshiba. Incorporate relevant aspects of Japanese culture into your answer, if applicable.
5.According to HKSA240, how might auditors adjust the nature, timing, and extent of audit procedures in response to the fraud risk factors identified above. Directly cite 2 sections of the standard which are most relevant to this case.
6.Considering the volume of the price-masking transactions, should Toshiba’s external auditors, Ernst & Young ShinNihon, have objected to the treatment of crediting Production Costs to record transfer of component parts to the contract manufacturers? Provide specific reasons why or why not?
7.From the perspective of the external auditors, what audit procedures would have revealed the magnitude of the financial statement impact created by the accounting for the price-masking transactions?
8.As an auditor with little or no knowledge of nuclear power plant construction, how would you assess the reasonableness of management’s estimates of the total cost of the nuclear construction projects used in the percentage-of-completion method? Refer to HKSA240 and HKSA540 Auditing Accounting Estimates for guidance.
9.Companies influence reported earnings through accrual earnings management and real earnings management. In accrual earnings management, earnings are influenced through discretionary accrual choices either within or outside GAAP. In real earnings management, earnings are influenced through activities that impact cash flow, such as reducing discretionary R&D or marketing expenses.
a.Did the fraud involving price masking at Toshiba constitute accrual earnings management, real earnings management, or both? Why? (6 marks)
b.Did the fraud involving long-term contracts at Toshiba constitute accrual earnings management, real earnings management, or both? Why?
The case write-up should not exceed 2000 words. This is a group case assignment with no more than 5 students in each group. Each group should submit a hardcopy of the report at the beginning of class on week 8 (i.e. 1 Feb 2020). You should prepare a cover sheet showing the names, SID, course section of all group members and word count. The cover sheet should also include the academic honesty statement and signature of all group members. In addition, you are required to submit the assignment electronically Only one student from each group should submit the assignment. You would get a receipt after doing so. Please attach the receipt to your assignment upon submission.
