Name: Tooba Faheem
Case 3.4: Cendant Corporation
Audit Section: AU section 230,314,316,319
Facts:
• CUC International, Inc. (CUC) and HFS, Inc. (HFS) were merged and Cendant Corporation was created in December 1997.
• At the time of the merger, Cendant had a market capitalization of approximately $29 billion, making it one of the 100 largest U.S. corporations.
• Ernst & Young, LLP and Deloitte & Touche, LLP audited the CUC and HFS accordingly. Deloitte & Touche, LLP was selected as the successor auditor for Cendant.
• Deloitte & Touche, LLP noted that there were non-material disagreements between the company and Ernst & Young, LLP regarding accounting or auditing matters.
• The fraud occurred at CUC prior to its merger with HFS. Originally it was announced that as a result of the fraud CUC’s 1997 earnings were overstated by $100 to $115 million. Later it was disclosed that the fraud covered the period 1995 to 1997 and that the cumulative overstatement of pretax quarterly earnings was approximately $300 million. …show more content…
(a) For each misstatement identified, indicate one management assertion that was violated. (b) For each misstatement identified, indicate one audit procedure the auditor could have used to detect the misstatement.
[a] This case includes the evaluation of management scam and the control environment at CUC. There are three misstatements identified in the CUC:
• Irregular charges against merger reserves – occurrence or accuracy of revenues, completeness or accuracy of expenses, and valuation or existence of merger reserves. Inflate earning by fictitiously recording revenues or reducing expenses and reducing the merger reserve in