...Case #3.4 – Sunbeam – Incentives and Pressure to Commit Fraud I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge PCAOB Auditing Standard No. 5 Paragraph #9 Paragraph #11 Paragraphs #29-30 Paragraph #32 Paragraph #A8 (in Appendix A) III. Classroom Hints This case provides students with an opportunity to apply their technical knowledge about inherent risk and fraud risk to Sunbeam's business model during the 1990's. By providing details about Sunbeam business during this time, students are able to see the relationship between an audit client's business strategy and inherent risk assessment at the financial statement assertion level. In addition, this case provides students with an opportunity to think about fraud risk assessment during times of significant change at an audit client. To meet these objectives, this case illuminates a number of relevant issues about the development of Sunbeam. In particular, the case focuses on the changes that occurred at Sunbeam after hiring Albert J. Dunlap as...
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...post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 201 Section 203 Section 204 Section 206 Section 301 Section 302 Section 305 Section 401 Title IX PCAOB Auditing Standard No. 5 Paragraph #2 Paragraph #9 Paragraph #11 Paragraph #21-22 Paragraph #25 Paragraph #28-30 Paragraph #69 Paragraph #A5 (in Appendix A) Paragraph #A8 (in Appendix A) III. Case Questions – Answer Key 1. Refer to the second general standard of Generally Accepted Auditing Standards (GAAS). What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? The second general standard of generally accepted auditing standards (GAAS) is, “In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” If the auditor is not independent, the financial statements are considered unaudited for all practical purposes. In case where the SEC has found that a CPA firm was not independent, it has required that the financial statements be re-audited by another firm. A lack of independence can result in disciplinary action by regulators...
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...Following are multiple choice questions recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanations. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams. 2006 AICPA Newly-Released Auditing Questions An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of: Presentation and disclosure Yes Yes No No Existence or occurrence Yes No Yes No a. b. c. d. ANSWER: Choice "c" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "a" is incorrect. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers does not provide any assurance regarding how receivables are presented and disclosed in the financial statements. Choice "b" is incorrect. Observing the mailing of monthly statements...
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...ledger balances, adjusted trial balances, original source materials, and the general journal entries. The technique of sampling may be applied in an audit especially if the risk of a material misstatement is fairly low, (Weygandt, at el 2002). The auditing has to report on the financial statements that sampling was used. The main advantage applying statistical sampling is that it minimizes the level of risk faced in performing a test. The various types of transaction and financial account affected include cash sale overview of the Revenue Process, credit sale purchases, cash collection purchases, cash sales account receivable, and inventory credit sales. The most important used financial records are: the Purchasing process order entry which shows the acceptance of client orders for goods and services, (Weygandt, at el 2002). This ensures proper support of client orders for credit endorsement and creditworthiness; Issuance of sales invoices to clients for products billing and shipment; also, dispensation of billing adjustments involving allowances, discounts, and income. Cash revenue processing of the receipt for clients, it helps in recording sales invoices, collections, and credit financial statement for personal client accounts. Therefore correct entry,...
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...Introduction This assignment is to investigate the company’s financial and non-financial information before making an engagement for audit. Barnes Fischer’s is an auditing company which will investigate Ocean Manufacturing and upon evidence will decide whether to accept them as a client or not. Ocean Manufacturing, Inc. Ocean Manufacturing, Inc. is a small- to medium- sized company which manufactures home appliances such as toasters, blenders, and trash compactors. In the past few years the company used to supply with moderate products at an affordable prices. The company sells its products to small retail stores at small quantity. And it only operates nationwide. However, the company is planning to be listed in NASDAQ and want their financial statements to be audited by a professional accounting firm. Internal Control of Ocean Manufacturing, Inc. Cash and Account receivables control According to the case study, Ocean Manufacturing has high accounts receivables, and if high accounts receivables it means most of the company cash in wedged in receivables account. In addition to that, Ocean Manufacturing staffs are also frustrated because they said that receivables billings are often late and inaccurate. This information strongly tells that the company’s receivables control is very weak. However, this affects the cash control, thus weak cash control can lead to liquidity problems in the company whereby, company will face shortage of cash to meet its short term obligations...
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...company acquired Corporate Collaborations this entity manages private and public social media networks that earn its revenue providing corporate social network development and hosting services. The audit committee of the company has requested the company to hire a new audit firm with a better experience in auditing of public technology companies. 2. Auditing and reporting issues: Miss Kristine Drew is the senior auditor for this company and is responsible for auditing revenue. She should start by asking for reviews from the predecessor audit firm in order to identify any problems they faced and to incorporate appropriate actions in order to minimize those risks. Ms. Drew should start off by initially accessing the controls of the activity reports. If the controls are strong and the data could not be manipulated, then it can be presumed that the data is accurate if this is not the case, then Ms. Drew should take up the services of a professional to figure out a way and if it is still not possible then she should state the facts on the audit report. The existing customers with hosting contracts of three years are changed to five-year contract, the revenues from this change have to be accounted prospectively. The revenue recognition for the new contracts for hosting that is for five years with three months free service, at the end of the five-year tenure the revenue should be charged over five years and three months and not over...
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...special purpose acquisition corporation on April 15, 2005 to establish operating business in the paper, packaging, forest products and related industries. The Company operates in one segment, the integrated manufacture and sale of containerboard, corrugated products, and specialty paper for industrial and consumer markets. The Company has been actively and continued to be engaged in evaluating a number of potential acquisition opportunities, in an effort to diversify and/or grow the Company’s business. KapStone’s annual revenues exceed $2.3 billion as of fiscal year ended in 2014, which was comprised of $1.5 billion of containerboard and corrugated products and $0.8 million of specialty paper. KapStone’s business is affected by cyclical industry condition and general economic conditions in the U.S. and in the countries where the Company export their products. Export sales may also be affected by fluctuations in foreign exchange rates and trade policies and relations. Industry KapStone competes in the paper, packaging, forest products and related industries with concentrations in the containerboard, corrugated products, and specialty paper markets. Industry Risks * The paper, packaging, forest products and related industries are highly competitive and comprised of many participants. * The paper, packaging, forest products and related industries are highly cyclical. Fluctuations in the prices of and the demand for products could result in smaller profit margins and...
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...were 825. Last year, the carrier number of passengers increased to 35 million with an average of 900 flights in a day. Moreover, it was the fifth largest carrier of travelers in 2015 with around 90 destinations in the USA. Considerably, JetBlue since the commencement of operations accomplished success in a duration of six years (JetBlue , 2016). Nevertheless, the company has various shortcomings in its procedures, and the evaluation of the corporation can provide more insights. JetBlue operating environment In the past years, the cost of fuel has continued to be low, and this has enabled JetBlue to have up surged revenues. The airline is also high with a considerable demand of customers as it has one of the best customer services. JetBlue management has over the years continued to monitor expenditures, and this has led to the success of the carrier. The revenue increment of JetBlue has tom some extent outperformed the airline industry by a mean of 6 %. JetBlue had a debt ratio of approximately 0.48 in 2015, which is at its lowest. Undeniably, this is an indication of that the management has been keen in ensuring a sustainable debt. Jet Blue has mostly adopted differentiation as one of the primary approaches to deal with competitors. Irrefutably, the success in 2015 is presumed to have realized through product enrichments. For instance, there was an investment in products leading in the airline industry, and that enabled the carrier to be...
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...Auditing and Assurance Services Table of Contents Meet the Audit Team 3 Partner Summary 5 Introduction 6 Part 1.1 a) Advanced Analytics in Professional Standards 6 Part 1.1 b) Academic Research on Advanced Analytical 6 Part 1.3 Simple Trend-line Regression 7 Part 2.1 Specific Risk of Material Misstatement 11 Part 2.2 An Appropriate Audit Program 12 Appendix 15 References 16 List of Key Audlish terms 17 Partner Summary In order to better understand the audit reports, we have documented academic research and existing audit standards relevant to planning stage APRs. This background information will provide a summary of professional standards and guidance directly related to APRs. First and foremost, every auditor must follow the standards called the Generally Accepted Auditing Standards (GAAS) which are set by the Public Company Accounting Oversight Board (PCAOB). Important sections within the standards required to know include: Independence, Consideration of Fraud in a Financial Statement Audit, and Communications about Control Deficiencies in Financial Statements, which includes nine rules that deal with identifying and reporting deficiencies found in financial statements. In the second part of our report, we prepared basic ARP’s and identified some key red flags for the Chevron Company. To access client viability, we used vertical and horizontal analysis, where we found...
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...governing an audit; types of evidence to determine whether a company has purchased, sold and maintained proper custody of investment securities; definition of ordinary negligence, gross negligence, and fraud, and whether auditing firm should be facing criminal charges. As the leading auditor of BLMIS, Friehling failed to conduct audits that complied with GAAS and GAAP by failing to conduct independent verification of BLMIS assets, review material sources of BLMIS revenue, including commissions, examine a bank account through which billions of dollars of BLMIS client fraud flowed, verify liabilities related to BLMIS client accounts, verify the purchase and custody of securities by BLMIS, and test internal controls as required under GAAP and GAAS standards. Auditors should review related documents and obtain information from third parties to determine whether BLMIS had purchased, sold, and maintained proper custody of investment securities. The examiner could review all the transaction records to make sure such trades exactly happened. Auditors can also review broker/dealer activities to determine the existence of the trades. Besides, auditors can contact banks to review the accounts balance to substantiate the existence of recorded trades and occurrence of the related transactions, and to verify the cutoff and accuracy of...
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...(effective and efficient operations), reporting (accurate financial reporting) and compliance (compliance with laws and regulations) • Describe the 5 components of internal control, related examples of each, and how each contributes to the overall control system within an entity (CRIME) 1. Control Environment: The foundation for the other internal control components; it is defined by the standards, processes, and structures that guide individuals in carrying out their duties. Basic principles include: Commitment to integrity and ethical values, Board of directors demonstrates independence from management and exercises effective oversight of internal control, Establishment of effective structure, including reporting lines, and appropriate authorities and responsibilities, Commitment to attract, develop, and retain competent employees, and Holding employees accountable for internal control responsibilities. 2. Risk Assessment: Risk assessment is management's process for identifying, analyzing, and responding to risks from internal and external sources that threaten their ability to meet objectives in the areas of operations, reporting, and compliance. In performing effective risk assessment, organizations should: Clearly specify objectives to allow the identification and assessment of risks related to those objectives, Identify and analyze risks to the achievement of its objectives to determine how they may be managed, Consider potential fraud...
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...and any assumptions underlying budget forecasts. Accountants also develops, maintains, and analyzes budgets, preparing periodic reports that compare budgeted cost to client’s actual costs. Accountants also provide internal and external auditing services for business or individual clients. Further, they analyze business operations, trends, costs, revenues, financial commitments, and other obligations to project...
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...mailed monthly statements. Error or fraud controlled-Controls the recording of inaccurate sales to customer accounts. 11B-1) Cash receipts controls: 1. Control-The receptionist uses cash receipts, which are prelisted. Error or fraud controlled- Based on the recording of cash receipts and the controls of cash abstraction. 2. Control- The accounts receivable computer program is handled by the accounting manager. Error of fraud controlled- Controls the misuse of cash receipts and errors and incomplete posting to records of receivables. 3. Control- The computer summaries of collection of cash and cash sales are reconciled to prelisting of cash receipts and deposits by the accounting manager. Error or fraud controlled-Controls the cash abstraction and the inappropriate recording of cash sales and receipts. 11A-2) There are multiple weakness found throughout. One in particular is the sales invoices, which are created and mailed before to supply of goods. An error that could possibly occur is the qualities of goods, which could be ordered wrong or not at all. So the sales could possibly be documented for goods not delivered until the next year. Another weakness is the internal control has receivables, which aren’t written off on the regular basis. This might results in an insufficient allowance for doubtful accounts, with a related understatement of bad debt expenses. If management is not observing...
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...Audit (Supersedes SAS No. 82.) Source: SAS No. 99; SAS No. 113. Effective for audits of financial statements for periods beginning on or after December 15, 2002, unless otherwise indicated. Introduction and Overview .01 Section 110, Responsibilities and Functions of the Independent Auditor, paragraph .02, states, "The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. [footnote omitted]"1 This section establishes standards and provides guidance to auditors in fulfilling that responsibility, as it relates to fraud, in an audit of financial statements conducted in accordance with generally accepted auditing standards (GAAS).2 .02 The following is an overview of the organization and content of this section: • • • Description and characteristics of fraud. This section describes fraud and its characteristics. (See paragraphs .05 through .12.) The importance of exercising professional skepticism. This section discusses the need for auditors to exercise professional skepticism when considering the possibility that a material misstatement due to fraud could be present. (See paragraph .13.) Discussion among engagement personnel regarding the risks of material misstatement due to fraud. This section requires, as part of planning the audit, that there be a discussion among the audit team members to consider how and where the entity's financial...
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...1 Session 4 Audit Planning; Materiality and the audit risk model Auditing: Principles and Methods 2 After studying this session you should be able to: 1. Discuss why adequate audit planning is essential 2. Make client acceptance decisions and perform initial audit planning 3. Gain an understanding of the client’s business and industry 4. Assess client business risk 5. Perform preliminary analytical procedures 6. Apply the concept of materiality to the audit 7. Define risk in auditing and the audit risk model Auditing: Principles and Methods 3 8. Consider the impact of engagement risk on acceptable audit risk 9. Discuss the relationship of risks to audit evidence 10. Answer the Review Questions Auditing: Principles and Methods 1. Audit Planning 4 Why is adequate audit planning essential? “The auditor must adequately plan the work and must properly supervise any assistants”. There are three main reasons why the auditor should properly plan engagements: to enable himself to obtain sufficient appropriate evidence, to keep audit cost reasonable and to avoid misunderstanding with the client. Auditing: Principles and Methods 1. Audit Planning 5 An important part of audit planning is assessing acceptable audit risk and inherent risk because it helps determine the amount of evidence that will need to be accumulated and staff assigned to the engagement. Acceptable audit risk is a measure of how willing the auditor is to accept that the FSs...
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