(WorldCom Fraud) The WorldCom bankruptcy is one of the largest in U.S. economic history

13-35 (WorldCom Fraud) The WorldCom bankruptcy is one of the largest in U.S. economic history. Much of the fraud was carried out by capitalizing operating expenses such as payments to other companies for line rental, as fixed assets. Adjusting journal entries were made at the company’s headquarters in Mississippi even though property accounting records were located in Dallas.

Required:
1. Would it be considered unusual to find debits to fixed assets coming from a journal entry source rather than a purchase journal? Explain.
2. Would it be considered unusual to find entries to accumulated depreciation and depreciation expense to come from a journal entry source rather than another source?
3. Assume you were auditing WorldCom and in your sample of debits to fixed assets, you find an entry for $500,000 with the following notation:

“Capitalization of line capacity per CFO, amounts were originally incorrectly recorded as an expense.”

Explain what you would do to complete the audit of this item. What evidence would you need to see to either corroborate or question the entry?


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Often, questions have been raised "regarding the responsibility of the independent auditor for the auditor for the discovery of fraud

Auditing P 6-22 Often, questions have been raised "regarding the responsibility of the independent auditor for the auditor for the discovery of fraud (including misappropriation of assets and fraudulent financial reporting), and concerning the proper course of conduct of the independent auditor when his or her audit discloses specific circumstances that arouse suspicion as to the existence of fraud."

Required:
a. What are (1) the function and (2) the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, but in this part do not include fraud in the discussion.
b. What are the responsibilities of the independent auditor for the detection of fraud? Discuss fully.
c. What is the independent auditor's proper course of conduct when the audit discloses specific circumstances that arouse suspicion as to the existence of fraud?


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