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CONTEMPORARY AUDITING
REAL ISSUES AND CASES
Seventh Edition

Michael C. Knapp
University of Oklahoma

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SOUTH-WESTERN
CENGAGE Learning-

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

CONTENTS
SECTION

1

Comprehensive Cases

1

Case 1.1

Enron Corporation

3

Arthur Edward Andersen established a simple motto that he required his subordinates and clients to invoke: "Think straight, talk straight." For decades, that motto sewed Arthur Andersen & Co. well. Unfortunately, the firm's association with one client, Enron Corporation, abruptly ended Andersen's long and proud history in the public accounting profession. K Y TOPICS: history of the public accounting profession in the United States, scope of E professional services provided to audit clients, auditor independence, and retention of audit workpapers.

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Case 1.2

Just for FEET, Inc.

23

In the fall of 1999, just a few months after reporting a record profit for fiscal 1998, Just for Feet collapsed and filed for bankruptcy. Subsequent investigations by law enforcement authorities revealed a massive accounting fraud that had grossly misrepresented the company's reported operating results. Key features of the fraud were improper accounting for "vendor allowances" and intentional understatements of the company's inventory valuation allowance. K Y TOPICS: applying analytical procedures, identifying inherent risk and control risk E factors, need for auditors to monitor key developments within the client's industry assessing the health of a client's industry, and receivables confirmation procedures. Case 1.3 Jamaica Water P r o p e r t i e s 37

Shortly after accepting an executive position with JWP David Sokol discovered several suspicious items in the company's accounting records. Sokol insisted on thoroughly investigating those items. When that investigation