...CASE 1.6 NEXTCARD, INC. Jeremy Lent, a chief financial officer (CFO) with Providian Financial Corporation decided to apply the marketing tactics used by Providian to establish an internet based company to offer Internet users a faster way to obtain credit cards. Lent hired dozens of marketing researchers to analyze the “surfing habits of Internet users. With this information the marketing team developed an Internet-based advertising campaign to target internet users that frequently used their credit cards and maintained large balances due to purchases made over the internet. NextCard advertised to new customers if they applied on line a response would be received within 30 seconds. Lents business model was a success and by 2000 and had more daily hits than any other credit card issuer. Other well established credit card affiliates referred potential clients to NextCard. NextCard had extended more than $1 billion of credit to internet customers but unfortunately profits were not immediate which the executives ignored to disclose in any press releases. A NextCard executive boasted in February of 2000 that the “company continues to beat our aggressive growth targets while maintaining very strong parameters and core elements of our business model” (Knapp, p 6). In 1999 the company produced a large loss of about $77.2 million. NextCard was able to take the company public with stock price initialing selling for $20 per share regardless of large losses for each reporting...
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...Individual case 1.6 NextCard, Inc. 131099123 李少东 Questiuons: 1. Should auditors evaluate the soundness of a client’s business model? Defend your answer. I think obviously auditors should evaluate the soundness of a client’s business model. Reasons are listed below: 1) According to the GAAS, the second standard of field work states: The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature timing, and extent of further audit procedures. So it is the standards that asks auditors to evaluate the soundness of a client’s business model to avoid material misstatements. 2) By means of evaluating the client’s business model, auditors could understand its ability to continue as a going concern. As a result, auditors can more accurately identify the acceptable audit risks and release themselves from being a defendant. 3) Also if the auditors have evaluated the soundness of a client’s business model, they can find potential fraud or error before the field work begins, which could make them easier to focus on some specific accounts to find out whether there is fraud in the company. 2. Identify and briefly describe the specific fraud risk factors present during the 2000 NextCard audit. How should these factors have affected the planning and execution of that engagement? According...
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...CASE 1.6 NEXTCARD, INC. Synopsis In November 2001, Arthur Andersen & Co. employees in that firm’s Houston office shredded certain Enron audit workpapers during the midst of a federal investigation of the large energy company. The decision to destroy those workpapers ultimately proved to be the undoing of the prominent accounting firm. A few years later, a felony conviction for obstruction of justice would effectively put Andersen out of business. Ironically, at the same time that the Andersen personnel were shredding Enron workpapers, three senior members of the NextCard, Inc., audit engagement team were altering the fiscal 2000 audit workpapers of that San Francisco-based company. NextCard was founded during the late 1990s by Jeremy Lent, the former chief financial officer of the large financial services company, Providian Financial Corporation. Lent’s business model was simple: use a massive Internet-based marketing campaign to quickly grab a large market share of the intensely competitive credit card industry. By 2000, NextCard, which by then was a public company, had signed up one million credit card customers. Unfortunately, NextCard’s customers tended to be high credit risks, which resulted in the company absorbing much higher than normal bad debt losses. When the company’s management team attempted to conceal those large credit losses, the SEC and other federal regulatory authorities uncovered the scam. By 2003, the once high-flying Internet company...
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...CONTEMPORARY AUDITING REAL ISSUES & CASES MICHAEL C. KNAPP SEVENTH EDITION MAKE IT YOURS! SELECT JUST THE CASES YOU NEED Through Cengage Learning’s Make It Yours, you can — simply, quickly, and affordably — create a quality auditing text that is tailored to your course. • Pick your coverage and only pay for the cases you use. • Add cases from a prior edition of Knapp’s Contemporary Auditing. • Add your course materials and assignments. • Pick your own unique cover design. We recognize that not every program covers the same cases and topics in your auditing course. Chris Knapp wrote his case book for people to use either as a core e book or as a supplement to an existing book. If you would like to use a custom auditing case book or supplement the South-Western accounting book you are currently using, simply check the cases you want to include, indicate if there are other course materials you would like to add, and click submit. A Cengage Learning representative will contact you to review and confirm your order. G E T S T A R T E D Visit www.custom.cengage.com/makeityours/knapp7e to make your selections and provide details on anything else you would like to include. Prefer to use pen and paper? No problem. Fill out questions 1-4 and fax this form to 1.800.270.3310. A Custom Solutions editor will contact you within 2-3 business days to discuss the options you have selected. 1. Which of the following cases would you like to include? Section...
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...A CONTEMPORARY AUDITING REAL ISSUES AND CASES Seventh Edition Michael C. Knapp University of Oklahoma ; \ 1% 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. ; 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...
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