Question

The brainstorming session must be conducted during what phase of an audit? In the case "World Com: The Expense Recognition Principle," how did the Company's Management commit fraud with respect to line costs? Define inherent Risk Define Audit Risk

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Answer 1

1.Brainstromming session

As per SAS no.99 "consideration of fraud in financial statement audit, to conduct a brainstorming session" in every audit.
Brainstorming session can give auditor high quality of ideas about the possible risks of fraud in the financial statement, if the session is carefully planned and managed.
And also, inappropriate brainstorming session prepared by the auditor can produce inefficiencies and distraction, that could affect the key audit decisions.

Brainstorming session is conducted by auditor at two phases:

1. To a certain the risk of rod that may be present in the financial statement.
2. To implement the importance of professional scepticism in the entire audit process.

2. worldcom company fraud

worldcom was a telecommunication company. It has its headquarters in Clinton. It has a large customer base.
During 2000, telecom business started to slow down and worldcom faced job cuts, down fall in credit ratings, etc.
  
The fraud in world com took place in two main ways

1. By reducing the reserve accounts.
2. Under reporting the expenses.

Worldcom to increase its stock price, the company under reported its "line cost" which was the interconnect expenses in the industry.
The company also covered its losses by using account fraud and they recorded profits of 2608 million.
The expenses were recorded as capital investment in the balance sheet to present that company is spending less and earning more incomes.
Current expenses were also shown in capital accounts.
Conclusion, worldcom maintained balance sheet by capitalising the "line cost" instead of expensing the expenses and avoided million dollar losses.

3.Inherent risk
inherent risk is suspectability of an account balance ,or class of transaction to missstatement that could be material either individually or when aggregated with Misstatements or other balances of classes assuming that there were no related internal control.

So,the audito while designing the further audit procedure to be performed, the auditor shall consider the reasons for the assessment given to the risk of material misstatement at the assertion level for the likelihood of material misstatement.

4.Audit risk
An auditor's judgement as to what is sufficient and appropriate audit evidence is affected by the degree of risk of my statement audit risk is and risk that an auditor may give an inappropriate opinion on financial information which is materially misstated.
for example, an auditor may give an unqualified opinion on financial statements without knowing that they are materially misstatement. such risk may exist at overall level, while verifying various transactions and balance sheet items.