Question

1. (8 pts) Case 1.6 NextCard, Inc. (you read this case in Unit 1)
a. Discuss the fraud risk factors that were evident for the 2000 audit.
b. What could (should?) the auditors have done to address these fraud risk factors in the audit planning and implementation?
Be specific with respect to NextCard. (Refer to the above standards although not in effect at the time of this case).

2. (8 pts) Case 2.5 Lipper Holdings, LLC
a. Using hindsight (which is 20/20, of course!), list and discuss some of the specific fraud factors at Lipper that should have served as red flags to the auditors, PwC.
b. What could (should?) the auditors have done to address these fraud risk factors in the audit planning and implementation?
Be specific with respect to Lipper. (Refer to the above standards although not in effect at the time of this case).

3. (8 pts) Case 1.10 DHB Industries, Inc. (you read this case in Unit 1)
a. List and discuss some of the specific fraud factors at DHB that should have served as red flags to the auditors.
b. What could (should?) the auditors have done to address these fraud risk factors in the audit planning and implementation? Be specific with respect to DHB. Refer to the above standards.
4. (6 pts)
a. What responsibility does an auditor have to uncover fraud perpetrated by client management?
b. What responsibility does an auditor of a public company have if he/she discovers an illegal act by the client?


1. (10 pts) Case 7.5 Fred Stern & Company, Inc. (Ultramares Corporation v. Touche et al.)
Auditing has changed drastically since this case.
a. Discuss the significance of the Ultramares decision to the auditing profession.
b. Discuss the concept of negligence as put forth in this case.
c. Discuss the differences of auditor responsibilities under SEC Acts of 33 and 34.

2. (12 pts) Case 7.6 First Securities Company of Chicago (Ernst & Ernst v. Hochfelder et al.)
a. Discuss the significance of the Hochfelder Case to the auditing profession.
b. How was Rule 10b-5 interpreted by the Supreme Court in this case?
c. Discuss the dissenting justice’s argument.
d. Discuss the following terms (as they are used in cases against auditors) and how they differ: negligence, gross negligence, fraud, and recklessness.

3. (8 pts) Case 1.12 Madoff Securities
Read the articles linked in the Unit 6 Readings about the Madoff “feeder firms” auditors.
a. Although none of the Big Four accounting firms were directly related to Madoff Securities, some of them did audit the large “feeder firms” that invested millions with Madoff. Discuss whether or not the auditors of the “feeder firms” should be held accountable for the losses by the investors.
b. After reading “First Madoff Auditor Case Goes to Trial,” do you think EY will be held liable? Why or why not?

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1. NextCard Inc.
The fraud risk factors that were evident for the 2000 audit include management’s incentives and pressure on employees, opportunities to perpetrate the fraud and rationalizations by both management and employees. Lent dominated NexCard’s management and employees were under pressure to implement his will. Additionally, the company did not have strong board oversight to prevent fraud which gave opportunities to management to conceal financial information from the public. Lent and his employees rationalized that the company needed to maintain its leadership role of the Internet Revolution. NextCard had become a market leader through its unique model and investors as well as analysts’ expectations for the business to continue its impressive growth gave management a rationale to justify the fraudulent financial reporting....

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