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Koss Corporation: unauthorized financial transactions

- From Koss Corporation case, discuss how a weak internal control system and board oversight contributed to the embezzlement activity at Koss Corporation. Speculate on how embezzlement impacts the corporate stock price, and determine the key type of disclosures that management should make to the financial statements. Provide specific examples.

- Discuss the responsibility of an auditor to uncover fraud perpetrated by its management client. Describe at least three mitigation risk strategies to satisfy this responsibility. Compare and contrast the responsibilities of both auditors and management to detect fraud based on the General Accepted Accounting Standards (GAAS) and the Public Company Accounting Oversight Board (PCAOB) guidelines.

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In the Koss Corporation case, there was a weak internal control system that contributed to embezzlement activity. Michael J. Koss who was the CEO of the company was also the CFO and held various responsibilities. The effect was that the Principal Accounting Office, Sujata Sachdeva embezzled 34 million dollars from the company. The board oversight was weak because the board members were in office for last 27 years. The computer system was old and did not allow locking after month-end. Even though current standards require the board and the board audit committee to review the financials and watch out actively for fraud such review was not done in case of Koss Corporation. The board members rarely changed and they did not properly carry out their duties. Embezzlement negatively impacts the corporate stock price. The stock prices will decline because the shareholders will ...

Solution Summary

The relationship between internal control systems and embezzlement is explained in a structured manner in this response. The answer includes references used.