Auditing Case Studies: Fraud and Control Deficiencies Analysis

This assignment provides an in-depth analysis of several auditing case studies. It examines the control environment and deficiencies at Societe Generale, exploring the "tone at the top" and its impact on trading desk oversight, and the incentives, rationalizations, and opportunities that enabled fraud. The analysis extends to Phar Mor, investigating factors that contribute to auditor-client power imbalances, inherent risks, and conditions conducive to fraud, along with auditor responsibilities and legal implications. Additionally, the assignment covers the differences between American Depositary Shares and Receipts and concludes with a brief overview of Satyam Computer Services Limited. The assignment explores the factors that contribute to the high risk assessment and the factors that can lead the power of client of auditors in the relationship of auditor-clients. The document also discusses the responsibilities of auditors to review fraud risk and the activities that led to the commission of fraud. The analysis also explores the legal and ethical implications of the cases, offering valuable insights into the complexities of the auditing profession.

Auditing Case Studies
By: ABC
Dated

Auditing Case Studies
Questions & Answers
Please address the following questions from our textbook:
Module C: Problem 64
Module D: Problem 49
Wells Fargo: Questions 4, 6 & 8
Societe Generale
Question No.1
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?
Below are the attributes of Societe Generale’s control environment:
 The Bank's top management already know that control was not much strong, particularly
in the case of business derivative as well as the internal bank control system.
 The risk-oriented trade was encouraged by top management till it becomes profitable.
 The top management should make the effort that the auditor believes the involvement of
risk in the audit.
 The liberal management attitude encourages traders to bear the risk that is unjustified that
even may not include in their job description.

 The trading desk may not have effective control due to slow management to replace the
posted manager at the trading desk.
To enforce better control at the bank after this incident, the bank started an investigation that is
committed of the group that is based on about twenty individuals who work independently on the
front and back end of the operation of the office.
Question No.4
Fraud research indicates three conditions must exist before fraud occurs:
Pressure/Incentive, Rationalization, and Opportunity.
[a] What do you think were Jérôme Kerviel’s incentives and rationalizations for
committing fraud?
According to the indication of fraud research, it is necessary to exist three conditions
before the occurrence of fraud that may include rationalization, incentive/pressure, and
opportunity.
According to the opinion of the author, the rationalization and incentives of JK for the
committing of fraud include bellow:
 K is represented to conceal trade as well as the position tacking that promoted margin
call.
 Send a fake email, stealing passwords, accessing of a computer of the bank illegally that
can exceed the level of trading limits and also can cover his actions.
 Assess of others’ trading power.
 Accessing computers that have other IDs and passwords.

[a] What created the opportunity for fraud?
The bellow created fraud opportunity:
 No firewall creation as well as security of information technology.
 Not having the system of physical access to security control.
 Not having sufficient abilities to find out such wrong happenings.
 Lack of password strength makes stealing possible easily.
 Provide the ability to access computers with the help of an unauthorized person.
 Deficiency in management responsibilities.
Question No.5
What do you believe were the three most serious control deficiencies at Société Générale?
For each deficiency listed, indicate whether the deficiency is related to poor design or poor
operating effectiveness. Describe how you would remediate or fix each of the deficiencies
listed.
1. The three most serious control deficiencies of Societe General are as bellow:
Lack of follow up on alerts
According to the bank's internal report, there exist controls with the ability to send alerts
properly for the identification of fraud, however, the central issue was that just routine check-up
was made by the officers of compliance. The more detailed and comprehensive checks were not
made by trades officers committed by Kerviel. To validate assertions, a lack of initiative exists
that was made by Kerviel. The deficiency also exists in making an in-depth analysis that is
necessary by two immediate supervisors of Kerviel associated with the brokerage commission.

Deficiency type
It can be exemplified by poor operating effectiveness and also has some type of poor
designs as the bank policies may not support much follow up.
Remediation
It is necessary to keep the proper tracking system of alerts. It is also necessary to provide
enough training to officers to make them able to discharge their resolving alerts responsibilities
efficiently. The appropriate monitoring system is also the requirement by the internal audit team
as well as supervisors to make sure that investigation is conducted appropriately.
2. lack of control over canceled, modified, or unusual trades
According to the bank's internal control, there exist no controls for the implementation of
trade that were modified, canceled, or have some unusual features. Traders, who have
counterparties that are technical and also have a high level of position also had a lack of
appropriate control due to which fraud cannot be identified.
Deficiency type
It is related to the effectiveness of the poor design.
Remediation
It is necessary to have proper control to make sure that when traders enter data into fields,
computer, drop-down, or range check menus may not permit to process till the trade may not
meet.
3. Stress on net trading bank’s position

It is central looping in the system of internal control in which motivation is provided to
the controller to monitor the position of net trading.
Deficiency type
It exemplified poor design deficiency.
Remediation
It is necessary to have an appropriate policy associated with the guideline f trading as
well as tools available to make sure the monitoring is effective of exposure.
Phar Mor, Inc.
Question No.2
(a) What factors in the auditor-client relationship can put the client in a more powerful
position than the auditor? (b) What measures have and/or can the profession take to
reduce the potential consequences of this power imbalance?
a. The factors that can lead the power of client of auditors in the relationship of auditor-clients
are as following:
 mostly client financial management select auditors, decides their authority and
compensation itself terminate auditors.
 Auditors must keep and maintain good liaison of working with clients to conduct an
effective audit.
 It is also necessary for auditors to have client support and the auditor is in the position to
depend on the guideline of clients to get the required information.

 Many cases or disputes between auditors and clients include professional judgment.
Mostly in such cases, the client can influence the auditors to permit stances that are
aggressive due to professional standards based on subjective perspective.
b. To decline the imbalance of potential power that may include the relationship of auditor and
clients, the profession must take bellow measure:
 In the US, SAS no.84 makes communication necessary between predecessor and
successor auditors.
 In the US, SAS 50 implemented necessary responsibilities on auditors that are potential
who as per client involved in the opinion of shopping behavior.
 All the entities that are listed on NYSE are necessary to include such frames of audit
committees based on outside directors. Such type of mandate of audit committee mandate
is not essentials under neither AICPA (American Institute of Certified Public Accounts)
nor SEC.
 In the US, SEC calls 8-K disclosure that is changed by the auditor. This disclosure can
tell about important circumstances surrounding changes. It is also necessary for the
auditors to report any type of discrepancies that support the client's basis for switching.
Question No.3
(a) 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. Not amazingly, the investors and auditor sued the auditor Coopers & Lybrand. In the year
1995, the auditor Coopers & Lybrand made a settlement with Phar-Mor client, many banks, and
mutual partners who were seeking simultaneously of loss of over $1 billion. The name was not
revealed. Different creditors/investors did not clear up due to which their cases were under trial.
The claims were brought by claimants in both Pennsylvania and Security Exchange Act of 1934
common law. However, the third-party creditors/investors were not considered basic
beneficiaries. This indicates to win under both, these claimants must give evidence that the
auditor was wrong due to ordinary negligence. On 14 February 1996, the initiate was taken by
central jury Coopers & Lybrand was on fault as committed fraud under central law and common
state because they kept knowing disregard for material and large in problems.
The attorneys of the plaintiff enlightened the person associated with the jury and implicit
that Coopers did not job for the fraud management deduction. The Coopers & Lybrand asserted
may keep the compulsion to perform GAAS audit. The claimants filed a case against Coopers &
Lybrand as it inattentive grossly in the performance of the audit. It is argued by the claimants
that GAAS audit would easily reveal fraud in different areas of audits.
It was pointed by Coopers & Lybrand repeatedly that scam was made by the top
management of the company with lies by sophisticated conspiracy, forgery as well as aimed to
fool external auditors.
b. The meaning of ordinary negligence can be defined as the shortage or absence of reasonable
concerns that may be anticipated in a situation for individuals.
c. When any misstatement is done, fraud occurs and there exist two things that tell about the
knowledge of the falsity of financials with misleading of internet. The major difference between

negligence or recklessness and fraud is the intention to mislead others. The constructive fraud is
called racklenesses associated with the negligence without any intention to mislead.
Question No.6
(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 an equal responsibility to detect material misstatements due to errors
and fraud? (c) Which conditions, attitudes, and motivations at Phar-Mor that created an
environment conducive for fraud could have been identified as red flags by the external
auditors?
A. the elements with the capacity to add internet risk assessment include the following:
 Phar-Mor was rapidly expanding; however, the structure of accounting was not
maintaining with this speed.
 Phar-Mor was functioning in a competitive environment.
 The management of the company was motivated greatly to maintain growth and financial
plan.
 Phar-Mor Inc. was engaged extensively in related parties.
 It was acknowledged by prior audits that system flaws and misstatements exist.
 It was necessary to the made decision for the transaction of accounting.
 Inventory is considered an important account and it was necessary that physical inventory
security should base on the short run.
b. It is difficult to show irregularities and the reason behind it is that fraud is committed by using
the internet. Across the world, the professional standard of auditing recognize that auditor may

not prevent as well as identify all types of irregularities, however, an adult may act for this
purpose. It is the requirement of a professional standard that the auditor plan as well as performs
an engagement audit with professional skepticism. The procedures of the audit are designed as
well as performed for the provision of rational assertion for the deduction of material frauds. The
international standards and specific countries standards explain explicitly the responsibilities of
auditors to review fraud risk and they do utilize the term "fraud" till the provision o SAS 82 that
has the requirement by the auditor to modify the plan of the audit to handle fraud risk.
c.
 key executives were engaged in regular or excessive gambling and major speculations.
 Only one individual controlled decision.
 Key executives were also considered "Wheeler dealers".
 Key executives showed desire and greed for self-environment and frame.
 The transactions were a present major related party.
 Company’s rapid growth.
 Inexpired management
 The prevailing attitude that indicates achievement was more necessary than ethics.
 Intense competition
 Inventor increased just on paper
d. at Phar-Mor, the activities types that led commission of fraud are as bellow:
 Rapid company growth.
 More stress on the expansion of eaning
 Inadequate profits by the last forecasted budgets and performance.

Satyam Computer Services Limited
Question No.1
Research the difference between American Depositary Shares and American Depositary
Receipts. Then, visit the SEC's website (www.sec.gov) to locate the final SEC rule Release
No. 33-8879 issued on December 21, 2007, and research whether foreign issuers must file
with the SEC financial statements in conformity with generally accepted accounting
principles (GAAP).
An American Depositary Receipt (ADR) is a transferable/negotiable certificate that a
depository bank issued that also represented specific common share numbers of the firms that
were not in the US, however, traded in the US stock exchange. An ADS was a common issued
share under ADR that is traded. In most cases, the term ADR and ADS are utilized
interchangeably.
The releases no. 33-8878 of Securities Exchange Commission rule that was issued on 21
December 2007.
It is specified by this rule that to accept from private foreign issuers associated with
financial statements filling/reporting with International Financial Reporting Standard without
any type of reconciliation to United States GAAP only.
Question No.8
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 PW five firms of India that were accompanied by five other associates based on
India organization of PwC IL called as PricewaterhouseCoopers International Limited that
operates with the network of audit firms of India. The India PW and other associates, as well as
the domestic network of India, perform their practice of audit in the arrangement of resource
sharing that help the provision of audit sharing network of the shared firms of the audit. The
Indian PW firms, keeping with these specific sharing organizations, PW lovelock and Calcutta
have both partners and people who perform the process of audit and also make sure the provision
of employment to their specific audit engagement who administer the work of audit that is lead
by personal engagement. This is the reason that PCAOB changed all firms.