What responsibility does an auditor have to detect material misstatements

Xerox Corporation is one of the planetary trade name companies, which is selling and fabricating different scopes of coloring material pressmans and photocopies, every bit good as supplying related consulting services and supplies to their clients. Major rival of Xerox Corporation is Hewlett Packard Company ( HP ) , which provides similar merchandise lines and concern strategic as Xerox Corporation. The different between Xerox Corporation and HP is that HP provides merchandises such as computing machine, scanners, digital cameras, reckoners, PDAs and other. However, Xerox is merely concentrating on digital production printing

( B ) Using the fiscal information, execute some basic ratio analyses for the two companies. However does the two companies fiscal public presentation comparison?

Short-run Liquidity Ratio:

Xerox Corporation

Hewlett Packard Company

1997

1998

1999

2000

1997

1998

1999

2000

Current Ratio

1.4

1.466

1.508

2.083

1.867

1.559

1.511

1.53

Quick Ratio

1.037

1.082

1.125

1.776

1.264

1.163

1.172

1.155

Xerox Corporation had an increasing tendency in liquidness ratio which may better the ability to do net income during 2000. The information indicated that Xerox Corporation had a much higher ability for paying short-run liability and gathered hard currency from recognition clients than Hewlett Packard.

Profitableness Measures

Xerox Corporation

Hewlett Packard Company

1997

1998

1999

2000

1997

1998

1999

2000

Net income Margin

0.08

0.02

0.074

-0.021

0.088

0.075

0.082

0.076

Roe

0.291

0.081

0.29

-0.106

0.193

0.17

0.19

0.26

ROA

0.052

0.013

0.049

-0.013

0.107

0.093

0.099

0.108

Net income border

Both Xerox Corporation and Hewlett Packard Company experienced an obvious lessening in footings of cyberspace gross revenues which brings major net income to concern. However, Hewlett Packard had more power to maintain higher gaining per dollars of gross revenues than Xerox Corporation.

Return of Equity ( ROE )

The tendency of Xerox Corporation while negative has non ensured the figure has dropped to an unsatisfactory degree. It does demo, nevertheless, that the return to stockholder is less in 2000 than that in 1997. Xerox Corporation ‘s ROE was lower than Hewlett Packard Company ‘s ROE which indicated that the former has collected much more money than the later from stockholder.

Tax return of Assetss ( ROA )

There had been dramatic addition and lessenings in the ability of both Xerox Corporation and Hewlett Packard Company. The ratio of Hewlett Packard Company indicated that its assets could be used more expeditiously to gain net income, and its stockholders could gain more from their investing.

Fiscal Leverage Ratio:

Xerox Corporation

Hewlett Packard Company

1997

1998

1999

2000

1997

1998

1999

2000

D/E Ratio

3.74

4.278

4.027

5.752

0.088

0.075

0.082

0.076

Debt Ratio

0.767

0.79

0.78

0.829

0.193

0.17

0.19

0.26

Debt/Equity Ratio

Xerox Corporation has been aggressive in financing its growing with debt during 1997-2000. This could ensue in fluctuating net incomes as a consequence of the extra involvement disbursal. However, Hewlett Packard Company had got a stable tendency in fiscal purchase ratio, which may bespeak that the company has a stronger fiscal involvement in the concern than Xerox Corporation.

Debt Ratio

There is a lifting debt ratio of both of the companies during 1997-2000. However, Xerox Corporation still had a higher debt ratio of 0.829 in 2000, which illustrates that Xerox Corporation is more likely confront tenseness on paying involvement and their long-run debt. In add-on, because debt ratio increased more rapidly in Hewlett Packard Company so it decreased in Xerox Corporation, it is possible that Hewlett Packard Company have a higher concern ‘s duties in the hereafter.

Capital Turnover Ratios:

Xerox Corporation

Hewlett Packard Company

1997

1998

1999

2000

1997

1998

1999

2000

Assetss Liquidity

0.388

0.416

0.416

0.441

0.66

0.584

0.613

0.683

Gross saless to Assetss

0.654

0.648

0.667

0.628

1.117

1.243

1.2

1.437

Net Worth Gross saless

0.356

0.324

0.33

0.273

0.456

0.429

0.432

0.291

There is a growing in assets liquidness and gross revenues to assets ratios in both companies. And this means both companies use its shareholders ‘ equity to bring forth gross better from 1997 to 2000. Merely, less in assets liquidness ratio, Xerox Corporation does non needfully bespeak it had worse public presentation than Hewlett Packard Company.

Question 2

( a ) What duty does an hearer have to observe material misstatements due to mistakes and fraud?

Hearers spend a great part of their clip planning and executing scrutinizing to observe the unwilled errors made by direction and employees in fiscal studies. ( Arens, Best, Shailer, Fiedler, Elder and Beasley. 2010 ) . Hearers detect mistakes because of such things as errors in computation, skips, misconstruing and misapplication of accounting criterions, and wrong summarizations and descriptions.

The auditing criterions recognise that it is more hard to observe fraud and mistakes because direction, or the employees commiting the fraud, effort to hide the fraud. ( Arens, Best, Shailer, Fiedler, Elder and Beasley. 2010 ) one of import thing to measure fraud is to maintain in head fraud has two features: the force per unit area and inducement to acquire a coveted fiscal addition, and the sensed chance to perpetrate the fraud.

( B ) What two chief classs of fraud affect fiscal coverage?

Deceitful fiscal coverage

This is an knowing misstatement or skip of sums with the purpose to deceive users. The fraud involves direction ‘s deliberate actions to run into gaining aims and switching gross and disbursals to cut down fluctuations. Companies frequently overstate net income and assets or omit liabilities and disbursals or they intentionally understate net income in an effort to cut down net income revenue enhancements.

Embezzlement of assets

This is larceny of an entity ‘s assets affecting employees and others internal to the administration. The embezzlement of assets is by and large perpetrated at lower degree of the administration hierarchy. Sometimes, top direction in involved in the larceny because of its greater authorization and control over organisation assets.

( degree Celsius ) What types of factors should hearers see when measuring the likeliness of stuff misstatements due to fraud?

Incentives/pressure, chances and attitudes are three conditions of fraud ( Arens, Best, Shailer, Fiedler, Elder and Beasley. 2010 ) . In measuring the fraud hazards, hearers should skeptically see the followers:

Information the hearers obtained through communicating about their cognition of the company and its industry.

Inquires of direction about their position of the hazard of fraud and about bing plans and controls to turn to specific fraud hazards.

Specific hazard factors, such as inducements or force per unit areas to commit fraud, chance to transport out fraud or attitudes used to warrant a deceitful action.

Analytic processs consequences obtained during planning

Information gained from other processs every bit good as corporate administration and other control factors.

( vitamin D ) Which factors existed during the 1997 though 2000 audits of Xerox that created an environment conducive for fraud?

Xerox ‘s action to speed up the rental gross acknowledgment. For illustration, it allocates a bigger part of the lease payment to the equipment alternatively of service or funding activity or sporadically change the premises used to cipher the return on equity.

Xerox elects to acknowledge the gross from lease monetary value instantly alternatively of acknowledging the gross over the life of the rentals.

Xerox write-up the residuary value of some leased equipments.

Xerox switched from sales-type rental understandings to rental contracts, and there is no revelation of the alteration.

Xerox established an acquisition modesty for unknown concern hazards and recorded unrelated disbursals to the modesty accounting.

The involvement income acknowledgment had been implemented since 1997, but had non been done for the old old ages.