ABSTRACT: This audit case examines an interesting real-life instance of financial statement manipulation by a client (Xerox, Inc.) and the related audit failure by the audit firm (KPMG). The facts of this case are drawn from several SEC Accounting Enforcement and Administrative Proceedings Releases. Learning objectives specific to this case include an increased awareness of the importance of reserves, including when their use is appropriate or inappropriate; better understanding of the role of a concurring partner; improved perception of when departures from GAAP are improper; a heightened awareness of the importance of professional skepticism; the identification of audit risk factors; exposure to International Financial Reporting Standards (IFRS); and identification of illegal acts by a client’s management.

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