Audit Risks Report: Case Studies and Financial Statement Analysis

This report provides an analysis of audit risks, focusing on financial statement fraud and its implications. It examines cases such as WorldCom and Xerox, highlighting the consequences of violating general accounting principles and the role of the SEC. The report discusses the Sarbanes-Oxley Act of 2002 and the responsibilities of auditors, including the use of analytical and substantive procedures to detect material misstatements. The analysis emphasizes the importance of auditors in ensuring the accuracy and reliability of financial statements and the potential legal ramifications of audit failures. This report is a valuable resource for students studying finance and accounting, offering insights into real-world examples of audit risks and the measures taken to mitigate them. The report's findings underscore the critical need for rigorous auditing processes to maintain investor confidence and uphold the integrity of financial reporting. This report provides a comprehensive overview of audit risks and their impact on financial reporting. It is an important resource for students studying finance and accounting, providing insights into real-world examples of audit risks and the measures taken to mitigate them. This report is available on Desklib, a platform that provides AI-based study tools for students.

Running head: AUDIT RISKS ATTACHMENT
Audit Risks Attachment
Name of the Student
Name of the University
Author’s Note

1AUDIT RISKS ATTACHMENT
Discussion
1. General accounting principles were violated by a famous company named WorldCom
through committing fraud in the financial statements in 2002 and the company had to
face key penalties for this crime. WorldCom was required by the SEC to appear for
hearing in the court under the procedures of Federal Rule of Bankruptcy (sec.gov,
2020).
2. Another case can be seen in 2002 where sanction was imposed by SEC in the year
2002 on a company named Xerox as general accounting principles were breached by
the firm. In order to meet and exceed the expectations of Wall Street, the company
involved in inflating its equipment revenue recognition by $3 billion. A complained
against the company was filed by the SEC in U.S. District Court for the Southern
District of New York. A bar of 3 to 5 years was imposed on Xerox by the SEC
(sec.gov, 2020).
As per Sarbanes-Oxley Act 2002, Section 404, attesting the fairness and faithful
representation of the financial statements along with assessing the internal control
effectiveness are the auditor’s responsibilities. Criminal prosecution may be there on the
auditors due to audit failure. Therefore, the audit firm could be held liable for the investors
relying on the financial statements.
The two alternative methods are as follows:
1. The auditors can use analytical procedures that involve to obtain understanding of the
client and its environment.
2. Substantive procedures can also be used by the auditors which involve in detecting
whether the financial statements contain any material misstatements.

2AUDIT RISKS ATTACHMENT
References
Xerox Corporation: Lit. Rel. No. 17465 / April 11, 2002. (2020). Sec.gov. Retrieved 15 April
2020, from https://www.sec.gov/litigation/litreleases/lr17465.htm
WorldCom, Inc.: Lit. Rel. No. 17866 / November 26, 2002. (2020). Sec.gov. Retrieved 15
April 2020, from https://www.sec.gov/litigation/litreleases/lr17866.htm