Read the Hamilton case and You are provided related information from KPMG as well. Answer questions : 1. Based on your understanding of fraud risk assessment and the case information, identify at least three specific fraud risk factors related to Hamilton Company.
2. If you were responsible for planning the audit of Hamilton Company, how would the fraud risk factors identified in question #1 have influenced the nature, timing, and extent of your audit work?
3. As the auditor, how would you expect to address the fraud risks you have identified? How does the fraud risk impact on audit risk and how do you expect this risk to impact on your audit and its planning? You are not expected to research this issue or consider information in your text after Chapter 5. You may find your basic knowledge of accounting helpful, as well as the application of good business practices you have learned.
Case 1 – Hamilton Corporation
Hamilton Corporation (the Company) is a multinational auto parts supplier headquartered in the Midwest. Hamilton began its operations as a wholly owned subsidiary of Motor Company (MC), and was ultimately spun off and incorporated in 1999. Shortly after the separation, MC informed Hamilton that the Company owed an estimated $350 to $800 million in warranty claims related to automotive sales that had occurred prior to the separation in 1999. Hamilton’s management team believed that any warranty claims related to sales prior to the separation should be limited to the reserve amount that was agreed to at the time of separation. However, because MC remained Hamilton’s largest client, the management team was motivated to find a solution that would appease MC. As a direct result, the management team at Hamilton worked hard to convince MC to cap warranty claims related to prior
automotive sales at $100 million. Unfortunately, MC rejected the idea and instead continued to assert the full warranty claim against Hamilton. Recognizing that the Company could not afford to make warranty payments in excess of $100 million without a significant reduction in operating income, management had significant incentives to mask the true level of warranty expense in order to meet analysts’ forecasts