Cendant Corporation

1a. It is the auditor’s responsibility to provide reasonable assurance that the financial statements
are free of material misstatement. Related parties make important decisions based on information
provided in financial statements, so the auditor has a responsibility to plan and perform the audit
accordingly in order to obtain reasonable assurance that the financial statements are reported
fairly.

1b. The two main categories of fraud affecting financial reporting are fraudulent financial
reporting and misappropriation of assets. Misappropriation of assets typically involves the theft or
embezzlement of a company’s assets by an owner, manager, or employee of the company.
Fraudulent financial reporting occurs by intentionally misstating or omitting important items from
the financial statements.
Financial reporting fraud is what occurred in the Cendant case. CUC’s management inflated
earnings by recording fictitious revenue or reduced expenses in order to meet earnings
expectations.

1c. One factor the auditors should consider when assessing the likelihood of fraud is whether the
corporation has any incentives or pressures to commit the fraud. In order to have the opportunity
to merge or acquire other companies, CUC needed to meet its earnings expectations. This could
have been a sign to the auditors that CUC had a reason to inflate its revenues.

Another factor to consider is whether there are opportunities to commit fraud. CUC made various
year-end adjustments to their general ledger. This allowed CUC opportunities to fraudulently
adjust their general ledger through various techniques.

Auditors should also consider if there are any rationalizations available to the company to justify
committing fraud.