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Cendant Corporation Evaluating Risk of Financial Statement Fraud and Assessing the Control Environment

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Cendant Corporation Evaluating Risk of Financial Statement Fraud and Assessing the Control Environment
Cendant Corporation Evaluating Risk of Financial Statement Fraud and Assessing the Control Environment

Describe the auditor's responsibility for considering a client's internal controls
Describe the auditor's responsibility to detect material misstatements due to fraud
Identify red flags present during the audits of CUC International, Inc.'s financial statements, which suggest weaknesses in the company's control environment (CUC was the predecessor company to Cendant Corporation)
Identify red flags present during the audits of CUC's financial statements suggesting a higher likelihood of financial statement fraud
Identify management assertions violated as a result of the misstatements included in CUC's 1995 through 1997 financial statements (prior to its merger with HFS, Inc.)
Identify audit procedures that could have been performed to detect misstatements that occurred

One can only imagine the high expectations of investors when the boards of directors of CUC International, Inc. and HFS, Inc. agreed to merge in May 1997 to form Cendant Corporation. The $14 billion stock merger of HFS and CUC, considered a marriage of equals, united two large service organizations. CUC was a direct marketing giant with shopping, travel, automobile, and entertainment clubs serving more than 68 million members worldwide, whereas HFS was a franchisor of brand-name chains such as Ramada, Days Inn, Avis, and Century 21, with more than 100 million consumers world-wide. The cross-marketing opportunities between CUC and HFS were expected to create synergies that would further increase the revenue and profit growth of the newly formed entity, Cendant.
Henry R. Silverman, chairman and chief executive officer (CEO) of HFS, noted at the time of the merger agreement that:
This transaction creates a world-class consumer services company with extraordinary revenue and profit growth potential. By combining HFS's brands and our consumer reach of more than 100 million customers

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