Questions

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1. Financial statement fraud has been a major problem, with company failures or forced mergers often following.  Obviously, in such a case the owners (stockholders) bear the brunt of the loss.  Naturally, losses suffered by stockholders are deductible for income tax purposes.  Since these deductions result in reductions in income tax liabilities, and they result from the fraud someone perpetrated, does this amount to a subsidy of the financial statement fraud from the federal government, and some state governments?

2. While we’re on the subject of taxes and fraud, there’s an interesting potential case winding its way through the IRS appeals system, as I understand it.  Basically, a company engaged in financial statement fraud, overstating net income. As part of covering the fraud, they made the same overstatement on their income tax returns.  Once the fraud was uncovered, they restated their financial statements, and filed amended income tax returns, asking for a substantial refund.  Since this is a result of fraud, should the company be entitled to a refund of their overpaid taxes, which were based on the overstatement of income? 

3. Auditing standards provides guidance on the procedures to be followed in the event an auditor discovers they omitted important audit procedures, but the discovery is not made until after the audit report is released. What is your opinion of the procedures? Do you think the procedures fully address the issue?  Why or why not?

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