Required Question

1. The major products of Hewlett Packard Company (HP) and Xerox include office printers, fax machines,
scanners, copiers, multifunction machine, servers, storage devices, handhelds, and workstations. HP
offers a large range of products whereas Xerox provides more depth of merchandises in the print and
copier production area.
2. a. Responsibility of an auditor to detect the material misstatement due to fraud and error

Auditor should plan and make audit engagements to give reasonable assurance about the financial
statement disclosures are free of misstatement.

b. Two main categories of fraud affect financial reporting

the two categories are misappropriation of assets and fraudulent. Theft of company asset is termed as
misappropriation of asset while intentional financial statement misstatement are fraudulent.

c. Factors to assess the likelihood of material misstatement due to fraud

- Management’s incentives
- Management’s attitude
- Management’s opportunity

d. The factors that made the Xerox’s environment conductive for fraud

- Changing business situation for document processing items

- Investment climate during 1990s
- Increasing competition
- Need for Xerox Corporation to maintain its credit rating high to attain the funds required to
internally finance buyer purchases
3. Three conditions are frequently present while fraud exists, namely incentives, opportunities, and
attitudes. The examples of each condition at Xerox Corporation are as follows:
a) The incentives conditions which exist in Xerox: high credit ratings, negative balance of cash flow,
win competition with foreign competitors.
b) The opportunity conditions which exist in Xerox: senior management’s capabilities to direct and
amend the accounting techniques without recommendation and oversight of audit committee and
board of directors
c) The attitude conditions which exist in Xerox: Senior managements sight of accounting
manipulations like accounting opportunities
4. a. Accounting manipulation that involve estimates include reallocating revenues from the finance and
service activities to recognize greater revenues in the current reporting period instead of deferring
revenue recognition to future period. This allows Xerox to change the assumptions used to calculate the
return on equity periodically. In addition, Xerox would increase the expected residual value of previously
recorded leased equipment which is not allowed by GAAP after inception of the lease.

b. Auditors responsibility in examining management-generated estimates is to examine management-

generated estimates. The auditor evaluates the rationality of the accounting estimates made by
management in the context of financial statements generally as a whole.

5. The way that the accounting firms ensure that auditors do not subordinate their judgment to client
preference on other audit engagement is by Audit firms could regard as following policies and
procedures instituting to decrease the possibility of auditors subordinating their opinions to client
preferences: Emphasizing to audit firm employees on continuous basis the significance of putting the
investing people first and keeping a questioning mind as well as critical evaluation of audit evidence
during the audit program. Regularly, re-everything with audit committees, executives, and clients BOD,
the audit firms always liable to the investing personnel.
6. Several questionable accounting manipulations and accounts affected and audit procedures for each
manipulation

- Account affected: Sales Revenue, Finance Revenue, Service Revenue, and Finance Receivables.

- Audit process:

1) Auditor could consider practices tracked by Xerox in the past along with follow ups of others
competitors in the industry associated with bundled lease allocations.
2) Based on this observation the auditors cold compare that with their respective current practice
cases.
3) The auditor should identified the changes in practice, and determine what kind of disclosure
would require to ensure he user/reader of financial statement that they are not mislead.
4) The recent non-bundled transaction could also be considered by auditor while evaluation
process.
7. Accounting reserve accounts are established with respect to future expected expenses or losses because
of pas business result and activities. Basically, accounting reserve is a kind of accounting estimate for
which reasonableness to the financial statements is essential to be checked by the auditor. The auditor
should obtain reasonable assertion.
8. a. Enron dissimilar with to Xerox by Both Enron Corporation and Xerox Corporation were big players and
publicity traded companies. Thus, it is mandatory for them to restate their company’s financials due to
massive accounting manipulations. Enron earnings were apparently overstated by amount of 0.5 billion
whereas Xerox earning were seemingly overstated by amount of $1.5 billion. In case of Xerox Corporation,
the basic center of accounting manipulations appear at lease transaction accounting whereas Enron
problems centered with investment transactions accounting.
b. When the accounting matters became public both company share get a major dropped. Xerox stock
value jump downed from $60 per share maximum to $5 per share minimum whereas Enron stock value
crashed from $100 per share maximum to $10 per share minimum.

c. They differently because basically of their different core business and operation’s nature. Both
companies were majorly financed with debt and were facing significant challenges regarding their
respective core business operations. While the restatement process, Enron was mainly a speculative
energy as well as commodity trading company whereas Xerox was dealing with the manufacture of
printing devices and copier equipment’s.

d. KPMG and Andersen are similar because they are charged by SEC, but Andersen was involved in many
high-status fraud cases which drop its credibility. While KPMG, has not caught up in as many high-status
fraud cases.

9. The SEC litigation release concerning KPMG settlement with Xerox Corporation case specifies that KPMG
approved the order entry without admitting or rejecting the SEC conclusion. The findings note proposed
by SEC indicates that KPMG failed to conform by GAAS and allowed Xerox to use accounting treatments
permitted Xerox Corporation to close a gap of $3 of billion between reported revenues and actual
equipment revenues during the year 1997 to 2000. The Securities and Exchange Commissions further
found that KPMG did not insist for evidence required to establish such the accounting treatments and
related assumptions taken by Xerox Corporation were in fact stuck in business realities or somewhat
reflected the firm performance.
10. The idea of reasonableness of executive compensation may vary with person to person. Some person
may argue that executive compensation in corporate is reasonable because the industry for corporate is
reasonable because the industry for corporate is reasonable because the industry for corporate
executives’ market is extremely tight and therefore companies may ready to pay high salaries or
compensation to attract such executives with the required skills.