...Auditing Cases instructor resource Manual f our th e d itio n Mark S. Beasley Frank A. Buckless Steven M. Glover Douglas F. Prawitt do not coPy or redistribute Prentice hall Upper Saddle River, New Jersey ta b l e s e ct ion o f co n t e n t s 1 2 client acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . S o l u tionS inc lu de d in t h iS Section 1.1 Ocean Manufacturing, Inc. 3 The New Client Acceptance Decision s e ct ion Understanding the Client’s Business and assessing risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 S o l u tionS inc lu de d in t h iS Section 2.1 Your1040Return.com Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.2 2.3 2.4 Dell Computer Corporation Evaluation of Client Business Risk Flash Technologies, Inc. Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Risk Analysis and Resolution of Client Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Understanding of Client’s Business Environment s e ct ion 3 Professional and ethical issues . . . . . . . . . . . . . . . . . . . . . . . 59 S o l u tio nS inc lu de d in t h iS Section 3.1 3.2 3.3 3.4 3.5 A Day in the Life of Brent Dorsey Staff Auditor Professional Pressures Nathan Johnson’s Rental Car Reimbursement Solving Ethical Dilemmas–Should...
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...what it will always be present. Within the course we have discussed some of the factors that will help the auditor evaluate inherent risk and with that the amount of sufficient and appropriate evidence needed to be collected. Below are a couple more of the more relevant ones to the Comptronix’s Case. The first factor to consider is the industry of the client’s business operations. When conducting an audit the auditor should understand the company and how day to day operations are run. Also they should understand the direct risk associated with the industry the company deals in. With Comptronix they produce circuit boards, a great deal of electronics have a very fast lifespan and an auditor should watch how the company values and accounts for such boards in their inventory. The more risky the business looks based on the results collected, the hire the inherent risk should be set for that type of company in the industry. Another factor that can influence inherent risk is the client’s motivation and presence of related parties. The auditor should always look at transactions that go n between related parties to ensure that the transactions have been recorded correctly. In this case Comptronix had a member of the board of directors’ who was the VP of manufacturing at a major customer the company did business...
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...AUDITING CASE STUDY ACCT: 407-01 3/31/2010 The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audits are performed to ascertain the validity[->0] and reliability[->1] of information; also to provide an assessment of a system's internal control[->2]. The goal of an audit is to express an opinion on the person / organization/system (etc) in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits[->3], a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors. Audit is a vital part of accounting[->4]. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit[->5]). However, recent auditing has begun to include other information about the system, such as information about security risks, information systems performance (beyond financial systems), and environmental performance. As a result, there are now professions conducting security audits, IS audits, and environmental audits[->6]. In financial accounting[->7], an audit is an independent assessment...
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...Requirements 1 What are Mark’s options? Mark is able to ask George for his plans on continuing the company for over a year. The plans must be shared in the form of a financial statement and assuming the plans are adequate, Mark can provide feedback through notes on the mitigating factors. If the disclosed information does not meet the criteria Mark was looking for then he should ask George to provide notes on the shared financial statements, which identify the doubts that he has in particular about the going concern assumption. Assuming the disclosures are sufficed, George is entitled to give unqualified feedback and ensure to specify notes on the financial statement. If George neglects to efficiently disclose information in the financial statement, then Mark must provide qualified or adverse feedback. Whether it’s a qualified or adverse opinion depends on the conclusion of the additional procedures that were committed by Mark as he evaluated the evidence related to the concerning assumptions. 2 How might a going-concern explanatory paragraph become a “self-fulfilling prophecy” for Surfer Dude? The going-concern explanatory paragraph may become a self-fulfilling prophecy for Surfer Dude because like George stated, creditors will not lend Surfer Dude money, vendors will not allow Surfer Dude to buy things on account, and customers may not buy from Surfer Dude because they can’t be sure that Surfer Dude can stand behind their return policy. In addition...
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...Audit Procedures for Account Balances Substantive procedures for disclosures and account balances are necessary to acquire enough evidence as there are many restrictions on internal controls. The auditor's judgments based on opinions when preparing risk assessment concerning the business and its scope can be a limitation to obtaining enough audit evidence (Clatworthy & Peel, 2013). Therefore, the auditor must perform essential procedures applicable in different transaction classes and account balances without directing any attention to the risk assessment of misstatement of material (Gantz, 2014). Substantive Audit Procedures Wages and Salaries Account Balances Interim Audit This type of audit test relies on the particular structure of the system of wages and the evaluation controls of the auditor. Type of test procedures for each control objective are the following: * To make sure that the workers are paid only for the work they have done. The substantive procedure involves the selection of a random sample of workers from the payroll and the agreed hours of payment according to the time recorder that tracks the number of hours worked by an employ in an entity. * To make sure that only valid laborers receive wages. This is tested by attending the payout of salaries and a sample selection of workers' payroll and take the responsibility of the contracts of the individuals employment in the department of HR * To ensure authorization of all wages. Overtime...
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...Auditing & assurance Case 1.2 1. Consider the principles, assumptions and constraints of Generally Accepted Accounting Principles. Define the revenue recognition principle and explain why it is important to users of financial statements. According to the revenue recognition principle, revenues are recognized when they are realized or realizable, and are earned. Thus, it does not matter when the cash is received. To break that definition down, revenues are realized when products are exchanged for cash or claims to cash. Revenues are realizable when related assets received are readily convertible to cash or claims to cash. Revenues are earned when the products are delivered or services are performed. It is important for a company to abide by this principle as it is will help investors. By not recognizing revenues when the goods or services are delivered or performed, investors are given false information. If a company is paid before they deliver a good, they have not technically earned that revenue yet. By deferring revenue in such a way, investors are provided with overstated numbers, which makes the company seem like they are performing better than they actually are. 2. Provide one example of how WorldCom violated the revenue recognition principle in this situation. WorldCom violated the revenue recognition principle when they made “top-side adjusting journal entries, often very large, that were allegedly made during the quarterly closing process in order to hit revenue...
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...Answers to Questions 1. The substance-over-form principle states that the true economic nature of a transaction should determine how it is reported on a company’s accounting records, rather than its legal form (Donaldson, 1964). This concept aims to undercut certain transactions such as related party transactions that are solely to distort profitability, rather than a true economic transaction between two parties. The auditor is responsible for the review and testing of the client’s accounting records to see that the substance of their transactions are reflected in their records. If the substance-over-form concept is violated and the financial statements are materially misstated as a consequence, the auditor is required to issue an opinion on the client’s financial statements. 2. In accepting large, high-risk audit clients for relatively high audit fees, an audit firm may become overly dependent on this client and revenue stream. The loss of such a client may be so detrimental to the audit firm itself that the behavior of auditors may change completely. Auditors know the risk of losing this client, and may become more flexible during audit engagements. The only way to figure out if such prospective clients be avoided is to process each unique situation, and use professional judgment in deciding whether to take on a client or not. 3. This issues goes back to the substance-over-form concept. The audit should consider whether economic substance was used in accounting for...
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...Final Exam Review Practice Case IPI Case: Required: 1. Identify Accounting System Issues * System implementation * Lack of training * I: people try to override the system, inaccurate reporting * R: The company who installed the system needs to be contacted and hold training session for employees * Glitches * I: inaccurate reporting, create room for error * R: Contact the company again and get them back and give them responsibility to fix the glitches 2. Identify Control Issues: * Understaffing people are overworked, may get sloppy * R: Hire more staff * Lack of segregation of duties, bookkeeper does the bank rec and A/R ledger * R: Get someone else to do one of those duties * Mismatch b/w what’s shipped and what’s recorded as revenue since sales reported based on what they are supposed (when order is confirmed for shipment) but Louis goes down to the shipping department and adds a few more COGS is correct but revenue is not * R: Base revenues on actual quantities shipped * Year end cut-off error – Revenue: Takes 3 weeks to get the orders out but actg department records sales based orders * R: System is changed so that revenue is recorded only when shipment is confirmed, send shipping log to the actg department so they know 3. Policy compliance * Costs capitalized to inventory * IPI’s accounting policies state that only the rental cost...
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...Keith Parkinson 2/3/15 Auditing Case 1: Merry-Go-Round Merry-Go-Round (MGR) is a clothing retailer that was founded in 1968. The company’s locations were in malls that targeted the youth and teen market. In the late 1980s, the company was listed by Forbes magazine as one of the top 25 companies. By the early 1990s, sales fell due to stiff competition from other retailers. Facing bankruptcy, the company hired turnaround specialists from Ernst and Young (E&Y) to help overcome the financial crisis. However, the company filed for Chapter 11 reorganization and due to that a group of 9,000 creditors filed a lawsuit against E&Y saying they were the main reason for MGR’s decline. First of all, E&Y violated GAAS first standard that states, “The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.” The turnaround team included inexperienced personnel that included a retired consultant, a partner with little experience in the U.S. and with retail firms, and two recent college graduates. I would say the first standard of Field Work was violated because the work wasn’t adequately planned and there was no supervision. The leader of the team took an eight-day vacation at critical point during the engagement. Also, while store closing were key to MGR’s survival, only 230 of 1,434 stores had been closed and MGR still operated two stores in some malls. Last, the cost-cutting strategy called for only $11 million in...
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...A national laboratory of the U.S. Department of Energy Office of Energy Efficiency & Renewable Energy National Renewable Energy Laboratory Innovation for Our Energy Future Preliminary Technical Risk Analysis for the Geothermal Technologies Program J. McVeigh and J. Cohen Princeton Energy Resources International Technical Report NREL/TP-640-41156 March 2007 M. Vorum, G. Porro, and G. Nix National Renewable Energy Laboratory NREL is operated by Midwest Research Institute ● Battelle Contract No. DE-AC36-99-GO10337 Preliminary Technical Risk Analysis for the Geothermal Technologies Program J. McVeigh and J. Cohen Princeton Energy Resources International Technical Report NREL/TP-640-41156 March 2007 M. Vorum, G. Porro, and G. Nix National Renewable Energy Laboratory Prepared under Task No. GT04.1101 National Renewable Energy Laboratory 1617 Cole Boulevard, Golden, Colorado 80401-3393 303-275-3000 • www.nrel.gov Operated for the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy by Midwest Research Institute • Battelle Contract No. DE-AC36-99-GO10337 NOTICE This report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product...
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...Smackey Dog Foods, Inc. started in the kitchen of Sarah, Kim, and Jillian’s family home in the suburbs of Chicago. The three sisters initially bought the ingredients for their natural dog food recipes from the local grocery store. They used their dogs and the neighborhood dogs as their taste testers. Their dog food products were so good, the local kennels and veterinary offices were glad to distribute the sisters' products to their customers. Local demand increased significantly. Local pet stores and small grocery stores discovered the products and became distributors. The sisters moved the expanding business into a larger facility and hired a few more workers. While their competitors’ sales were flat or declining, Smackey Dog Food, Inc.’s sales were on a vertical climb! Sales were so good last year, that the sisters opened a boutique division named Best Boy Gourmet, specializing in freshly manufactured, one-serving packages meant for consumption no later than 3 days after production. They sell this product at 3 times the cost of their other products and by special order only through their new website. Demand is high, but waste has been an issue. Sarah is the president and general manager of the operation. Sarah has been very proactive in growing the business. She has met with her banker to discuss expanding the facilities and equipment with another $150,000 loan. Their first loan for $150,000 was secured by the industrial size, food production equipment...
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...Corruption Case The case study “Why is this Furniture Falling Apart?” is about Art Metal U.S.A., a furniture manufacture, that had put out “$200 millions of worth of defective and useless that the General Services Administration (GSA) bought.” (Wells, 2011, p. 237) Federal agencies and GSA customers put in several complaints but nothing was done to investigate. After many years of complaints and suspicion of a corruption scheme there were articles written that instigated a congressional investigation. This type of investigation is more thorough than a regular audit and looks into all areas of the financials and operations. The investigation found that there was indeed corruption going on between top management at Art Metals and GSA inspectors. They revealed several unusual payments by reviewing cancelled checks. There were payments in whole numbers to a subcontractor that was cashed rather than deposited and made out to 3 different names. There were also many checks that were made out to “Auction Express” that was all in large and whole amounts. This provided enough reasoning to now look for evidence of a bribery which is when they began looking into GSA inspectors. This is where they discovered a previous inspector’s financial life-style was more than his income. After interviewing an past bookkeeper of Art Metals they had testimony that they did in fact bribe GSA inspectors and they even had a petty cash fund that they used to pay for their meals and hotels. According...
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...JUST FOR FEET, INC. 19981 1997 1996 Current assets: Cash .02 .19 .37 Marketable securities .00 .00 .09 Accounts receivable .03 .04 .02 Inventory .58 .46 .35 Other current assets .03 .01 .01 Total current assets .66 .70 .84 Property and equipment .23 .21 .14 Goodwill, net .10 .08 .00 Other .01 .01 .02 Total assets 1.00 1.00 1.00 Current liabilities: Short-term borrowings .00 .20 .27 Accounts payable .14 .12 .10 Accrued expenses .04 .02 .01 Income taxes payable .00 .00 .00 Current maturities of LT debt .01 .01 .01 Total current liabilities .19 .35 .39 ...
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...PENYELESAIAN AUDIT Sebagai bagian dari tahap IV proses audit, auditor mengevaluasi bukti yang mereka peroleh selama tiga tahap pertama dalam audit untuk menentukan apakah mereka mesti melaksanakan prosedur prosedur tambahan untuk tujuan-tujuan penyajian dan pengungkapan. Auditor melakukan pendekatan untuk memperoleh bukti untuk tujuan audit yang berkaitan dengan transaksi dan saldo. · Melaksanakan prosedur untuk memahami pengendalian yang berkaitan dengan tujuan penyajian dan pengungkapan sebagai bagian dari prosedur penilaian resiko. · Melakukan uji pengendalian yang berhubungan dengan pengungkapan ketika penilaian awal atas resiko pengendalian berada di bawah maksimum. · Melaksanakan prosedur substantive untuk memperoleh assurance bahwa semua tujuan audit dicapai untuk informasi dan jumlah yang disajikan dan diungapkan dalam laporan keuangan. TABEL 24-1 Tujuan Audit Penyajian dan Pengungkapan| Tujuan Audit|Contoh Prosedur Substantif| Keterjadian serta hak dan kewajiban|Mereview kontrak | Kelengkapan|Menggunakan daftar pengungkapan| Klasifikasi dan kemampuan untuk dipahami|Mereview laporan keuangan| Ketepatan dan penilaian |Merekonsiliasi jumlah yang dimasukkan dalam catatan kaki utang panjang dengan informasi yang diperiksa dan didukung dalam kertas kerja audit utang jangka panjang auditor.| II. REVIEW KEWAJIBAN KONTIJEN DAN KOMITMEN Kewajiban kontijen (contingent liability) adalah potensi kewajiban di masa mendatang kepada pihak luar untuk jumlah yang tidak diketahui...
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...Prefab Sprout Construction Company You have been approached about auditing Prefab Sprout Construction Company, a family-run general contracting company which is publicly traded on the New York Stock Exchange. The president of Prefab is Jack Warner. His wife, Joan, is the vice president and his son, John, is the treasurer. The Warner family owns about 40 percent of all outstanding shares and no other investor owns more than 1 percent. The company has been previously audited (receiving standard unqualified opinions) by a sole practitioner who closed his practice and is now the controller of Prefab. The company has an audit committee consisting of Joan, John and a local college professor. The company also has a compensation committee consisting of Jack, the company’s lawyer and an employee selected on a rotating basis. Prefab specializes in modular home developments located in areas of South Florida that are densely populated by retirees and recent immigrants from the Caribbean basin. Prefab acquires land, builds streets and other land improvements, builds modular homes on the land and then sells the entire development to limited partnerships that are set up as tax shelters. Prefab finances most of its construction costs through the Sun Atlantic Bank in Fort Lauderdale. Prefab's condensed financial statements for 2013 (audited) and 2014 (un-audited) are presented below. 2013 2014 Cash Receivables Projects in progress Total assets Bank loans payable ...
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