Madoff Case

MADOFF ANSWERS IN WORD FORMAT

Question 1: Research recent developments involving this case?

* More than1,000 civil lawsuits have been filed

* Statute of limitations is running out

* 15 people have been criminally charged

* 9 people have plead guilty

* $9.3 billion has been recovered

* JP Morgan offers to settle

* Ultimate sacrifice…family

Question 2: Suppose that a large investment firm had approximately 10 percent of its total assets invested in funds managed by Madoff Securities. What audit procedures should the investment firm’s independent auditors have applied to those assets?

* Use the understanding of the client and its environment to consider inherent risks, including fraud risk related to financial investments.

* Obtain an understanding of internal controls over financial investments.

* Assess the risks of material misstatement and design further audit procedures.

* Perform further audit procedures- Test of Controls

* Perform further audit procedures – substantive procedures for investment transactions and year-end balances.

Question 3: Describe the nature and purpose of a “peer review.” Would peer reviews of Friehling & Horowitz have likely resulted in the discovery of the Madoff fraud? Why or why not?

* "People do what is inspected, not what is expected."

* System Review: Independence, "Tone at the top," and Understanding of the CPA firm

* Engagement Review: Existence

Question 4: Briefly explain the difference between a fraud “condition” and a “fraud risk factor” and provide examples of each. What fraud conditions and fraud risk factors were apparently present in the Madoff case?

* Condition – Indicates Fraud

* Discrepancies in accounting records

* Conflicting or missing evidential matter –

* Problematic or unusual relationship between auditors and client

* Factors – do not indicate fraud but are often present when fraud exists

* Incentives and Pressures...