EXERCISES

$(1)$ According to Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit, the auditor should consider whether the information indicates that one or more fraud risk factors are present. Fraud risk factors are potential problems or indicators of potential fraud. Three conditions that are typically present when fraud exists: an incentive or pressure to perpetrate fraud, an opportunity to carry out the fraud, and the attitude to justify the fraudulent action. Based on the conference with Rogers, perform the following $[$Case$1-1.$doc$]$:

a$)$ List the fraud risk factors that the CPA firm might encounter if they accept this audit engagement. Be sure to include a discussion of all items that will probably require special attention during the audit. You should find at least $10$ fraud risk factors.

b$)$ For each of these fraud risk factors, indicate how the auditor should follow up on each potential problem if the engagement is accepted. Consider how Abernethy and Chapman should include the fraud assessment in conducting the audit.

$(2)$ Based upon discussion in the case, prepare the auditor's report that King and Company rendered at the end of the year $2011$ engagement. How does this opinion differ from a standard auditor's report? $[$Case$1-2.$doc$]$