Auditing and Assurance Services 1st Edition by Iris Stuart

Exercise 25

WorldCom
The WorldCom fraud has been described in this book. A brief summary follows:
In 2005, Bernard Ebbers, the former chief executive of WorldCom, was convicted of conspiracy and securities fraud and sentenced to 25 years in prison for his role in directing the fraud. The fraud, which overstated revenue and understated expenses, eventually totaled $11 billion. It was done by recording operating expenses as capitalized assets. In effect, WorldCom removed expenses from its income statement and recorded them as assets on the balance sheet.
a. Suggest an internal control that would have been able to prevent or detect this misstatement. Describe how the control would work and how the auditor could test it.
b. If the auditor failed to detect deviations in the control, describe a substantive audit procedure that could have been effective in detecting the misstatement.