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Koss Corporation

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Submitted By raddcar
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Koss Corporation
Part A The overall control environment at Koss Corporation in the years leading up to the fraud was inadequate. The structure of the Board of Directors was poor and the management did not place enough importance on financial reporting. These reasons allowed Ms. Sujata Sachdeva easily make unauthorized wire transfers, without being caught by either the management or the auditors – the people responsible for detecting fraud. The poor structure of the Board of Directors was one of the main reasons that the unauthorized transactions went unnoticed. First, there was only one person managing and assessing the internal control system. According to the Sarbanes-Oxley Act (SOX), non-accelerated filers require the CEO and CFO to separately perform an assessment on the internal controls over financial reporting (ICFR). However, in the case of Koss Corporation, both the CEO and CFO were the same person – Michael Koss. Therefore if he implemented a defective the internal control system, there was nobody there to correct him. Furthermore, the company’s auditor, Grant Thornton, was not required to, nor did they assess the effectiveness of the ICFR. They simply designed their audit of financial statements based on the manager’s report of the ICFR. Consequently, if Michael Koss incorrectly told Grant Thornton that the company had an effective ICFR, Grant Thornton probably designed a financial statement audit with little skepticism. Another problem with the structure of the Board of Directors was the lack of independence. Five out of the six members had been on the board for on average of 32 years, instead of changing members every few years. This violated one of the key elements of having an effective control environment as stated by COSO (Committee of Sponsoring Organizations of the Treadway Commission). As a result, Ms. Sachdeva knew the board well enough to...

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