In the Professional Judgment in Context case at the beginning of this chapter, we reviewed some of the pertinent findings from the COSO (2010) study on fraudulent financial reporting. The study notes the many ways in which fixed assets can be fraudulently overstated including:
● Fictitious assets on the books (WorldCom)
● Improper and incomplete depreciation (Waste Management)
● Failure to record impairment of assets, especially goodwill (Sun Microsystems)
● Expired or worthless assets left on a company's books (Millacron)
● Assets overvalued upon acquisition, especially in the purchase of a company (WorldCom)
Required
In a small group, and considering the concepts that you learned in this chapter, answer the following questions.
a. What might motivate management to overstate fixed assets?
b. What methods might management use to overstate fixed assets?
c. As illustrated by these examples, overstatement of fixed assets happens frequently. Assume that auditors detect most of the overstatements. What company or economic information, or audit tests/analyses would likely alert the auditor to the possibility of such misstatements and therefore facilitate auditor detection?
d. What controls can mitigate the risks associated with misstatements in long-lived asset accounts?
e. How can the results of audits be used by clients to improve their control systems over long-lived assets?