...Case Study: Lincoln Savings and Loan Association In 1978, Charles Keating, Jr. began focusing his time and energy on his business endeavours when he founded the real estate firm, American Continental Corporation (ACC). Six years later, ACC acquired Lincoln Savings and Loan Association, which was headquartered in Phoenix, although its principal operations were in California. In his application to purchase Lincoln, Keating pledged to regulatory authorities that he would retain the Lincoln management team, that he would not use brokered deposits to expand the size of the savings and loan, and that residential home loans would remain Lincoln's principal line of business. After gaining control of Lincoln, Keating replaced the management team; began accepting large deposits from money brokers, which allowed him to nearly triple the size of the savings and loan in two years; and shifted the focus of Lincoln's lending activity from residential mortgage loans to land development projects. On 14 April 1989, the Federal Home Loan Bank Board (FFILBB) seized control of Lincoln Savings and Loan, alleging that Lincoln was dissipating its assets by operating in an unsafe and unsound manner. On that date, Lincoln's balance sheet reported total assets of $5.3 billion, only 2.3 percent of which were investments in residential mortgage loans. Nearly two-thirds of Lincoln's asset portfolio was invested directly or indirectly in high-risk land ventures and other commercial development projects. At...
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...Case A Overview Neil, Inc. engaged Lifeson and Lee, CPAs to audit its 2010 financial statement. Neil, Inc. has never been audited in prior years. Neil, Inc. is a manufacturing company that uses the periodic inventory system and has no controls in its purchasing process. Neil, Inc. is not a public company. Lifeson and Lee conclude the audit of Neil, Inc.’s financial statements and found no material deviations from GAAP and no other scope limitations. The subsequent discussion will be regarding the opinion that Lifeson and Lee should issue based upon the facts of the case. Issues Examined Upon examining the facts and circumstances of the case several issues arose: - First Year Audits - Not a Public Company - Internal Controls Each issue can greatly influence the appropriate opinion that should be issued by Lifeson and Lee. First Year Audits Neil, Inc. has never been audited. This presents a difficult situation for Lifeson and Lee since they are relying on past financial statements to determine the validity of 2010 financials. According to AU section 420.24, “When the independent auditor has not audited the financial statements of a company for the preceding year, he should adopt procedures that are practicable and reasonable in the circumstances to assure himself that the accounting principles employed are consistent between the current and the preceding.” In order for Lifeson and Lee to gain confidence of consistency and accuracy they would have...
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...Case 3.1 1. Brent has many alternatives. The first alternative Brent has is to eat the time. The pro of eating time is that he gets the work done and helps his team out without any problems. The con of eating time is that he cannot spend time with his wife. Also, this could lead to the firm and company believing that the time granted for the audit is acceptable and put pressure on future staff auditors. A second option Brent has is to quit the firm. The pro of this would be that Brent could not have to deal with the long hours and spend more time with his wife. The con of this decision is that it does not look good to quit a job very early and he would have to find a different job to provide income for his family. A third option would be for Brent to not take as many invoices when performing the audit. The pro of this choice is that Brent would finish the audit on time and the con is that this leaves rooms for mistakes which could be very costly. The final option Brent has is to speak with the manager about the time allotted to the audit. The pro of this choice is that maybe the manager will understand and grant Brent more time. The con to this choice is that Brent is new to the job and should be willing to do what he needs to do to help the team out. 2. If Brent decides to “eat time” there would be many consequences for him and the firm. Brent would have to buckle up and forget about spending time with his wife over the weekend and risk her being very upset. Also...
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...Brian Finley Auditing Case 3-1 1. What alternatives are available? a. One alternative is that Brent could lie about doing his share of the audits. He could ‘pretend’ to forget a section of his duties in order to shorten up his work load and finish under the budget line. That is a good idea because he would spend more time with his wife and make her happier and also make the firm happy when looking at the budget. It is bad, however, because it would be lying to the client and also be unethical in the accounting rules. He may be found out too, and that may cause his future promotions to be delayed. b. He could also do all of his work and go in over budget. That is an honest way to go. It measures up to accounting principles. The cons are that no one will be happy at the end. His wife will still be mad about his time out of the house, and the firm will be mad since it is over budget and could delay his future success with the company. c. He could also eat the time so all of the work done is under budget. It is an unethical way to go but everyone will be happy at the end of the day. His boss would see the 35 hours completed and client would have the audit finished. But he is putting in all of those hours and may not get paid extra and he would still spend too much time away from his wife. d. He could also tell his boss ‘NO’. He is paid to work 40 hours a week and refuses to work anymore because he must invest in his personal life as well. His...
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...1a) I believe that on a scale from 0-100 the cut off should be about 75 to be considered substantial doubt. I chose 75 because it should definitely be at least 50, there should be more of a doubt than not that the company will not continue. Along that reasoning to me substantial means it should be more than the borderline, 50, of continuing and not continuing so 75 seems like it is at a point where the auditor substantially believe that’s more likely than not the client they are auditing with cease to operate within the year and there won’t be any sort of doubt which could greatly hurt a company. Some information the auditor needs to determine this likelihood is the ability to pay back debt as it becomes due without having to sell assets outside of the course of business (a retailer selling their goods wouldn’t count), a debt restructure to meet obligations, or having to revise business operations. 1b) Upon determining that there is substantial doubt about going concern the auditor should obtain information from the management that contains plans intended to mitigate this assertion then assess those the likelihood that those plans can be effective and actually work. After this he should consider the adequacy of disclosure about the going concern and include an explanatory paragraph to reflect the decision. 1c) Specific areas that the auditor should focus on regarding managements plans are plans to dispose of assets, borrow money or restructure debt, reduce or delay expenditures...
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...As an IT auditor in AlphaCo’s SOX Section 404 audit, my overall assessment would be that AlphaCo passes the compliance audit. The company has done a good job of developing an effective IT system, and it has competently identified and reduced IT risks related to security flaws which were present at the time of the hacking incident. Specifically our IT audit suggest that there are effective internal controls which have been further upgraded to keep up with the security vulnerabilities discovered after the intrusion. The tone at the top of the organization is also adequate. Due to the size of the organization and the materiality (financial and reputation) of multiple hacking incidents to this IT reliant company, the CIO has proposed further increase in IT related budget. The CEO and the CFO are understandably reluctant to increase cost, but they are open to the idea considering that the DIA is also properly concerned about SOX compliance. Due to the rarity and sophistication of the hacking incident the external auditors believe that such intrusions have a very low probability of reoccurrence. Hence, it’s also hard to do risk assessment for such incidents. However, the company has employed various risk mitigating control activities to effectively deal with existing risks. The identified vulnerabilities in the network security controls, especially the untimely installation of patches, has been remedied with policy update and implementation. All critical servers are now required...
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...7 Planning Materiality C a s es inc lu de d in t his Se ction 7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Determination of Planning Materiality and Tolerable Misstatement O t he r c ase s t h at discuss topics rel ated to this section 5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . . Evaluation of Audit Differences . . . . . . . . . . . . . . . . . . . . . . . 369 12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Considering Materiality When Evaluating Accounting Policies and Footnote Disclosures Instructor Resource Manual — Do Not Copy or Redistribute Instructor Resource Manual — Do Not Copy or Redistribute Anne Aylor, Inc. C a s e 7.1 Determination of Planning Materiality and Tolerable Misstatement Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt Ins tr uc t ional O b je c t ive s [1] To provide experience with establishing planning materiality. [2] To provide experience with establishing tolerable misstatement for individual financial statement accounts. [3] To illustrate factors considered when establishing planning materiality...
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...Audit Evidence of Grande Store Case Nancy Johnson Rasmussen College Author Note This paper is being submitted on January 23, 2015, for Gary Rosner, A340 Advanced Auditing Concepts and Standards course. Audit Evidence of Grande Store Case When it came to the audit of the Grande Store there was insufficient numbers (four out of 1,100) to be an exact for the confirmations that were made regarding what was spent by McClure Advertising Credits. With 114 pages, 1,100 vendors and $300,000 at least 1% should have been audited for each vendor. Getting information to confirm by an outsider who has the qualifications is reliable and acceptable but it should be in written form. The auditors of Grande Store used the phone. This alternative procedure might be acceptable but it should never be used. The auditors felt the differences in the audit were immaterial, but the auditors should have went further and found out the reason for these differences. If the auditors had kept track of the differences they might have found that there were many errors this causing them to find the reason why there were so many differences (Arens, Elder, & Beasley, 2012, pp. 175-206). When it came to testing the ad’s the auditors should never rely on just internal documentation. By trusting the internal documentation they did not have sufficient enough evidence to support the credits. Placing an ad is not sufficient enough evidences without quality supporting evidences from the vendor that it...
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...Adefemi introduced the audit team and thanked AHRC officials for sending the general ledger for the affiliates. Adefemi asked about the AHRC officials’ expectations for the update meeting. Amy replied that we would like to provide enough information, so OSC does not disallow full amount of agency admin. We are also working to provide the response to the second preliminary report. Adefemi mentioned that if you need any further clarification for Preliminary II, we would be happy to provide you more information. Regarding Prelim I, we tried to explain the ratio value in our last meeting. He provided the excerpt from the CFR manual explaining ratio value. Adefemi added that ratio value is for the allocation of agency admin cost and not for allocating...
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...when assessing inherent risk. If related parties go unreported or if the auditor can see significant related party transactions, inherent risk should be raised. The auditor should be doing this during the planning stage of the audit. These transactions show a lack of uncertainty and independence for the auditor. Management and Governance will also have an impact on inherent risk. If the auditor believes management’s policies are not strict or the business is involved in unethical policies then a higher inherent risk should be given. Contracts made by management may also be another strong indication of inherent risk. If management has entered several different contracts that affect different parts of the financial statements (liabilities, inventory, cash) than this could create a possibility for misstatement. Another possible indication of inherent risk is if management has set objectives that are unrealistic to attain. An auditor must look at objectives and what the company is capable of performing, and see if inherent risk should be raised because of unreachable goals. If compensation is based on sales then an auditor will have to raise inherent risk level, because employees will want to record sales before they actually happen. Results of previous audits will also be a factor in assessing inherent risks. If this is the first year the company is being audited inherent risk would usually be set at high. If in previous years auditors have found material misstatements then the auditor...
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...creditors and thus revenues and earnings will be more important to stockholder decisions than creditor decisions b) Why are different materiality thresholds relevant for different audit engagements? Materiality is a relative rather than an absolute concept. The materiality threshold that will influence users of the financial statements will vary depending on the context in which the entity operates. For example, the magnitude of a misstatement that will influence financial statement users will vary depending on how the entity is performing relative to the industry. Misstatements of a smaller magnitude will be more influential for an entity just achieving the industry average compared to an entity significantly over- or under-achieving relative to the industry average. c) Why is the materiality base that results in the smallest threshold generally used for planning purposes? The dual entry nature of accounting results in misstatements affecting at least two accounts. Most misstatements affect both a balance sheet and income statement account. Therefore auditors must design the audit to find the smallest misstatement that would influence users of the financial statements. Reasonable assurance that the financial statements are free of material misstatements cannot be provided unless the audit is designed to detect the smallest misstatement that would influence users. d) Why is the risk of management fraud considered when determining tolerable misstatement The auditor...
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...Mark, As discuss at our last meeting Elizabeth has put together a list of all the action plans regarding the Manage Regular Driving Records audit (see attachment). There are three tabs the first tab “No Action Required” are those action plans that have been completed or the item was pass on reporting. For those completed that indicated Shannon Polk would you want us to retain his name in the report or change it to someone else, possible yourself? The second tab “Past Due Date” are those action plans where the due date has passed since we agreed to the action plans; however, we haven’t receive verification that the items have been completed. If we can get a confirmation of which items are completed and the completion date along with which...
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...The Case In this case, Patrick Walker is an audit partner at a medium-sized CPA firm. Pat has decided to invest in a mutual fund that is managed by a third-party distributor, Fidelity Investments. Of the shares that are outstanding of this mutual fund, he owns less than 1%. It is also important to note that Pat’s mutual fund is diversified. Pat’s private client, XYZ Corporation, is a part of his diversified investment portfolio and happens to be one of the major holdings of the 1% that he possesses. Since Pat is an audit partner and XYZ Corporation is his client, he plays a determining role in the key decisions of the audit and that he possesses significant influence over the audit outcomes. Because XYZ Corporation is a nonpublic client, Pat and the firm are not required to abide by the U.S. Securities and Exchange Commission (SEC) or the Public Company Accounting Oversight Board (PCAOB). The PCAOB is a “private-sector, nonprofit corporation created by the Sarbanes Oxley Act of 2002 to oversee accounting professionals who provide independent audit reports for publicly traded companies”. Also, since Congress gave the SEC the authority to control its operations, they essentially have the same goal of regulating public companies. With that being said, Jack is not mandated to follow these rules while auditing his private client, XYZ Corporation. However, the State Board of Accountancy Code of Conduct and the Generally Accepted Auditing Standards, which is promulgated...
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...ISSUES IN ACCOUNTING EDUCATION Vol. 18, No. 3 August 2003 pp. 275-290 Designing Audit Procedures When Evidence Is Electronic: The Case of e-Ticket Travel Revenue A. Faye Borthick and Jack E. Kiger ABSTRACT: The objective of the Fly Airline case is for you to learn to develop audit procedures in a context, e-ticket revenue, in which most of the evidence is available electronically, and in which many tests of controls and substantive tests can be performed using data stored in electronic form. In sequence, you will identify controls and their objectives, match controls to financial statement assertions for revenue, develop tests of controls, develop substantive tests for each assertion, and organize audit procedures into an effective and efficient audit program. Keywords: auditing; e-ticket revenue; collaborative learning; electronic evidence; internal control; monitoring; systems expertise for auditing. OVERVIEW ly Airline's revenue generation begins when a customer selects a flight for a specific date and time. The process is similar whether a ticket agent or the customer interacts with the system to make the reservation. If the customer is paying with a credit card, the system validates the credit card number the customer presents for billing before making the reservation. When it obtains approval of the credit charge (electronically, from the card issuer), the system records the charge and other details of the reservation. The customer...
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...Accounting 440 Case 1 When auditors are determining when or how much revenue should be recognized, they call on a list of criteria in SABs 101 and 104 created by the SEC. The four main points that should be considered in making this decision are: 1. Persuasive evidence that an arrangement exists 2. Price must be fixed or determinable 3. Collectability must be reasonably assured 4. Delivery has occurred. The first of this criterion is in place because the business must be able to show that a buyer has promised them revenue. The second means that the buyer and seller have agreed on the price. The third means that the seller can expect to get revenue. It is also important to know that unless a reasonable estimate of the amount of allowance for doubtful accounts can be made, revenue should not be recognized until it is possible to make an estimation or the entire payment has been received. And finally, ownership of the goods has transferred to the buyer and they have accepted them. These criteria are important in making sure that revenue is not recognized too early because financial statements need to be as accurate as possible. 1. AOL Software The main issue to address for if AOL Software can recognize revenue is figuring out if AOL can use a 30%/70% split for recognizing revenue. Auditors should first find out why AOL decided to use the 30%/70% split. It should also be known if prices could be separated by software and Internet services, and what happens...
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