ACCT5130CB: Auditing and Professional Practice - Toshiba Case Study

This report analyzes the Toshiba fraud case, addressing key questions about the importance of auditors' understanding of business environments, the role of 'tone at the top' and the control environment in contributing to fraud, and the application of the audit risk model. The report also examines relevant fraud risk factors from HKSA240, considering aspects of Japanese culture, and discusses how auditors might adjust audit procedures in response to these factors, citing specific sections of the standard. Furthermore, it explores the fraud involving price-masking transactions and long-term contracts, classifying the fraud as both accrual and real earnings management and analyzing the impact on financial reporting. The report highlights the importance of ethical leadership, internal controls, and rigorous auditing procedures in preventing and detecting financial fraud, drawing on the details of the Toshiba case to illustrate the consequences of such failures.

Running Head: AUDITING AND PROFESSIONAL PRACTICE
AUDITING AND PROFESSIONAL PRACTICE
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 6..................................................................................................................................3
Question 9..................................................................................................................................3
Reference....................................................................................................................................5

2AUDITING AND PROFESSIONAL PRACTICE
Question 1
The auditors are required for obtaining sufficient understanding of firm and their
environment. It consists of internal control to the assess risk of the financial statement’s
material misstatement, which can be either because of fraud or error and designing timing,
nature and extent of further procedures of the audit. It is required for understanding controls,
which are relevant to audit for identifying and assessing materials misstatements risks. The
auditors has objective for identifying and assessing appropriately material misstatement risks
by providing base for implementing and designing responses to material misstatement risks.
The risk assessment procedures should be performed by auditor, which are sufficient for
providing reasonable basis for assessing and identifying material misstatement risks, whether
it is because of fraud or error and designing further procedures of audit (DeZoort and
Harrison 2018).
Question 2
The term “Tone at the Top” have been heard in connection with the prevention of
fraud. This is the requirement of effective environment of internal control followed by the
auditors and outline din framework of COSO. “Tone at the top” is referred to ethical climate
of organization. It is the leadership and commitment of management towards honesty,
integrity, openness and the ethical behavior. In case, if tone is set by the management for
upholding ethical behavior, the employees will be inclined more towards following similar
behavior. However, in case, if the management are concerned more with bottom line in
comparison to ethical conduct, the employees will be more likely for committing fraud.
Hence, the best way for understanding importance of setting the ethical tone at top is for
looking at real case example (Lail et al. 2015).

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Question 6
It is with consideration of the volume of the price-masking transactions, the external
auditors of Toshiba, Ernst & Young should have make the objection of treatment of the
crediting costs of production for recording transfer of the parts of component to contract
manufacturers. The “Production Cost” account is same as the cost of sales. It is the temporary
account that is closed to profit summary at the end of each year-end accounting period. The
transfer effect of component to correct manufacturers could be understood by the analysis of
corresponding T accounts. Hence, when the components from original equipment
manufacturer is transferred to contract manufacturer, exceeds finished products that has sent
back from contract manufacturer to original equipment manufacturer, account of production
cost has the credit balance. Further, at period end, the account is being closed with the debit
and with corresponding credit to the summary of income. This reduced reporting costs and
overstated reported income for that particular period. This technically incorrect accounting
treatment was understood by internal auditors but they were being informed that there will be
immaterial impact of income. It was because the parts held by the CMs were limited to
approx. three production days (Patelli and Pedrini 2015).
Question 9
a) The price masking involving fraud at the Toshiba, constitutes accrual earnings
management. It is because new CEO, Norio Sasaki wanted for decreasing magnitude of the
profits that is generated by the channel-stuffing. The CEO wanted to wait until and unless
business of PC reported excess of profits and he believed that it should not get reduced when
loss was reported in the business of PC. He demanded improvement in operating profit of the
business of PC for achieving in the 3 days prior to the end of quarter. Hence, as the
consequent of this, division of PC engaged in ¥3.9 b additional arrangement of the buy sell

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and ¥6.5 b carry-over. It has resulted into recording of buy sell profits to reach at ¥65.4b
(Sarwoko and Agoes 2014).
b) The fraud consisting of long-term contracts at the Toshiba includes both accrual
earnings management and real earnings management. It was because by December 2007,
losses were anticipated and as the costs increased, the provisions for the contract losses was
required to be recorded but the division head did not have approved recording provisions of
losses. Further, Toshiba under reported the losses by $108 million. The company was also not
clear about deriving of $224 million. Toshiba was having no documentation of this (Caplan,
Dutta and Marcinko 2019).

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Reference
Caplan, D., Dutta, S.K. and Marcinko, D.J., 2019. Unmasking the Fraud at Toshiba. Issues in
Accounting Education.
DeZoort, F.T. and Harrison, P.D., 2018. Understanding auditors’ sense of responsibility for
detecting fraud within organizations. Journal of Business Ethics, 149(4), pp.857-874.
Lail, B., MacGregor, J., Stuebs, M. and Thomasson, T., 2015. The influence of regulatory
approach on tone at the top. Journal of business ethics, 126(1), pp.25-37.
Patelli, L. and Pedrini, M., 2015. Is tone at the top associated with financial reporting
aggressiveness?. Journal of Business Ethics, 126(1), pp.3-19.
Sarwoko, I. and Agoes, S., 2014. An empirical analysis of auditor's industry specialization,
auditor's independence and audit procedures on audit quality: evidence from
indonesia. Procedia-Social and Behavioral Sciences, 164, pp.271-281.