1. Case 6.3
WorldCom
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2. WorldCom Case Relevant Technical Knowledge
PCAOB Ethics and Independence Rule 3520
“a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period.”

3. WorldCom Case Relevant Technical Knowledge
PCAOB AS #13 - Paragraph #7
“auditor's responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence.”

4. WorldCom Case Relevant Technical Knowledge
PCAOB AS No. 15 – Paragraphs 13-21
Paragraph #13 classifies auditing procedures into three categories, risk assessment procedures, test of controls, and substantive procedures. Next, paragraphs #15-21 describe a number of specific audit procedures, including inspection, observation, inquiry, confirmation, recalculation and re-performance.

5. WorldCom Case Relevant Technical Knowledge
PCAOB AS #15 - Paragraph #13
There are two primary ways of conducting substantive tests: 1) substantive analytical review and 2) test of details.

6. WorldCom Case Relevant Technical Knowledge
PCAOB AS #5 – Paragraph #14
the auditor should evaluate whether the company's controls sufficiently address identified risks of material misstatement due to fraud and controls intended to address the risk of management override
PCAOB AS #5 – Paragraph #A8
controls over financial reporting may be preventive controls or detective controls

7. WorldCom Case Relevant Technical Knowledge
Revenue Recognition Principle
Revenue must be both earned and realized before it is recognized. That is, the product must have been delivered or the services must have been provided to the customer. In addition, the amount of the sale needs to be fixed and determinable. And, there must be a belief that the cash will be collected from the customer in a timely manner.

8. WorldCom Case Relevant Technical Knowledge
PCAOB AS#12 – Paragraph #68
“the auditor should presume that there is a fraud risk involving improper revenue recognition and evaluate which types of revenue, revenue transactions, or assertions may give rise to such risks”

9. WorldCom Case Relevant Technical Knowledge
PCAOB AS #5 - Paragraph #25
“because of its importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company.” The control environment is influenced heavily by a company’s management team and is therefore often referred to as “the tone at the top.”

10. WorldCom Case Relevant Technical Knowledge
PCAOB AS #13 - Paragraph #7
“auditor's responses to the assessed risks of material misstatement, particularly fraud risks, should involve the application of professional skepticism in gathering and evaluating audit evidence.”

11. WorldCom Case Relevant Technical Knowledge
Matching Principle
Costs need to be matched to the revenues that they helped to generate. A key point is that expenses should not necessarily be recognized when the work is completed or a product is produced. Rather, the costs should be recognized when the costs can be matched to revenue that has been recorded.

12. WorldCom Case Relevant Technical Knowledge
PCAOB AS No. 5 – Paragraph A5
“Internal controls provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.”

13. WorldCom Case Relevant Technical Knowledge
PCAOB AS No. 15 – Paragraphs 13-21
Paragraph #13 classifies auditing procedures into three categories, risk assessment procedures, test of controls, and substantive procedures. Next, paragraphs #15-21 describe a number of specific audit procedures, including inspection, observation, inquiry, confirmation, recalculation and re-performance.

14. WorldCom Case Relevant Technical Knowledge
PCAOB AS #12 – Paragraph #7
“The auditor should obtain an understanding of the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement.”

15. WorldCom Case Relevant Technical Knowledge
PCAOB AS #13 – Paragraph #6
The auditor should determine whether it is necessary to “make pervasive changes to the nature, timing, or extent of audit procedures to adequately address the assessed risks of material misstatement. Examples of such pervasive changes include modifying the audit strategy to: a) Increase the substantive testing of the valuation of numerous significant accounts at year end because of significantly deteriorating market conditions, and b) Obtain more persuasive audit evidence from substantive procedures due to the identification of pervasive weaknesses in the company's control environment.”

16. WorldCom Case Relevant Technical Knowledge
PCAOB AS #5 – Paragraph #33
the auditor should follow Appendix B to determine which locations need to be visited.
PCAOB AS #5 – Paragraph #B10
Must assess the risk of material misstatement related to each location or business unit and then increase or decrease audit work depending on risk.

17. WorldCom Case Relevant Technical Knowledge
PCAOB AS #12 – Paragraph #65
“fraud risk factors are events or conditions that indicate (1) an incentive or pressure to perpetrate fraud, (2) an opportunity to carry out the fraud, for example, the absence of controls, ineffective controls, or the ability of management to override controls—that provide an opportunity for a fraud to be perpetrated, or (3) an attitude or rationalization that justifies the fraudulent action”

18. WorldCom Case Relevant Technical Knowledge
PCAOB AS No. 5 – Paragraph A5
“Internal controls provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.”

19. WorldCom Case Relevant Technical Knowledge
SARBOX Section 301
requires that the “audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer.”

20. WorldCom Case Relevant Technical Knowledge
AU Section 322 – Paragraph #7
makes clear that there can be relevant activities completed by internal auditors in their work related to the internal control system.
AU Section 322 – Paragraph #8
makes clear that the external auditor may find the work of internal auditors to be beneficial on the audit.

21. WorldCom Case Relevant Technical Knowledge
PCAOB AS #5 – Paragraph #18
“the auditor should assess the competence and objectivity of the persons whose work the auditor plans to use to determine the extent to which the auditor may use their work. The higher the degree of competence and objectivity, the greater use the auditor may make of the work.”

22. WorldCom Case Relevant Technical Knowledge
PCAOB ET #102 - Paragraph #1
“in the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”

23. Epilogue - WorldCom CEO Bernard Ebbers sentenced to 25 years in prison
CFO Scott Sullivan pardoned from paying $13 million settlement due to having no significant assets remaining after selling $11 million mansion and surrendering his IRA

24. Epilogue - WorldCom
SEC set up a $150 million fund to compensate investor losses
WorldCom emerged from bankruptcy as MCI, which was later bought by Verizon Communications