Question 1: Suppose you are auditing the financial statements of a company. As you review the company’s internal control, you become concerned about the adequacy of internal control components. Select one component discussed in week 4 and describe how you would ensure there is adequacy of internal control in the component.
There are five internal control components (Hermanson, Smith & Stephens, 2012) . However, this paper will discuss the control environment. In order to ensure that there is adequacy of the internal control in the component, it would be imperative to check to ensure that all the seven elements of control environment are inexistent. First, communication, integrity enforcement as well as ethical values need to be well understood (Ramos, 2004) . Many organizations have elevated values and will often strive to ensure that their employees demonstrate honesty and integrity on their daily duties.
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Second, it is imperative to consider how the organization is committed to competence. Understanding this aspect is important in when determining the level of experience of the accountant. An inexperienced accountant will be susceptible to the misstatement. Other considerations that would of the essence when ensuring adequacy of internal control include the level of participation of those mandated with governance, organizational structure, the philosophy and the style of management operation (Ramos, 2004) . Besides, it would be imperative to consider how authority and responsibility are assigned within the organization. The final consideration would be to examine the policies and practices set by the human resource management.
Question 2: Review a company that was recently involved in an accounting fraud or scandal. Describe how an audit firm, accounting firm, or accountant directly or indirectly aided and abetted the company's fraud? I look forward to reading your stories .
WorldCom is among the companies that have been involved in scandals facilitated by auditors. This telecommunication firm was initiated in 1983. In the 1990s, the company was experiencing economic boom following the acquisitions it had made (Lyke & Jickling, 2002) . Despite the success realized by this company, a 2002 internal audit realized that the company had performed various transactions that were against the principles of accounting. After the internal audit in March 2002, SEC demanded the company to document how the company was connected with those transactions.
These inquiries led to the discovery that throughout 2001 and 2002 first quarter, the company had wrongly accounted for about $3.8billion in relation to expenditures. In 2001, the company erased a cash flow of $3.055 billion and $797 million in 2001 and during the 2002 first quarter respectively. The misstatement had recorded $3.8 billion in the balance sheet as capital assets instead of recording it on the income statement as cost expenses (Lyke & Jickling, 2002) . If the company would have recorded that information accordingly, WorldCom would have realized a loss during that period. The personal loan incurred were $341 million for the CEO of the company (Lyke & Jickling, 2002) . Nevertheless, in June 2002, the company was accused of fraud. Notably, the auditor who had served the company for over five years facilitated the fraud and could not escape from the scandal.
References
Hermanson, D. R., Smith, J. L., & Stephens, N. M. (2012). How effective are organizations' internal controls? Insights into specific internal control elements. Current Issues in Auditing , 6 (1), A31-A50.
Lyke, B., & Jickling, M. (2002, August). WorldCom: The accounting scandal. In Congressional Research Service Report for Congress, August (Vol. 29).
Ramos, M. (2004). Evaluate the control Environment. Journal of Accountancy . Retrieved from http://www.journalofaccountancy.com/issues/2004/may/evaluatethecontrolenvironment.html.
