...Comptronix Corporation provided contract manufacturing services to original equipment manufacturers in the electronics industry. • The company was formed in the early 1980s and suffered several years of losses until receiving an infusion of capital from a venture capitalist in 1987. The company went public in 1989. • Three of the senior executives at Comptronix fraudulently issued financial statements for 1989, 1990, and 1991, before confessing in 1992 to their shenanigans. • The chief executive officer (CEO), the chief operating officer (COO), and the controller/ treasurer, who were all founders, colluded torecord fictitious assets and profits by overriding existing internal controls. • Top company executives began the fraud by understating cost of goods sold and overstating inventory in the interim financial statements filed in Form 10-Qs with the Securities and Exchange Commission (SEC). • Due to concerns that the auditors might detect the interim misstatements, the executives reversed those transactions at year-end but then booked fictitious sales and receivables to overstate annual assets and income. • To make the fictitious sales and receivables appear legitimate, top management prepared and recorded cash payments for fictitious equipment purchases and then re-deposited those cash payments as cash receipts from the fictitious accounts receivable customers. • Top executives were able to maintain the fraud by overriding established controls and recording...
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...Message | : | Key facts of the case Comptronix Corporation provided contract manufacturing services to original equipment manufacturers in the electronics industry. The company was formed in the early 1980s and suffered several years of losses until receiving an infusion of capital from a venture capitalist in 1987. The company went public in 1989. Three of the senior executives at Comptronix fraudulently issued financial statements for 1989, 1990, and 1991, before confessing in 1992 to their shenanigans. The chief executive officer (CEO), the chief operating officer (COO), and the controller/treasurer, who were all founders, colluded to record fictitious assets and profits by overriding existing internal controls. Top company executives began the fraud by understating cost of goods sold and overstating inventory in the interim financial statements filed in Form 10-Qs with the Securities and Exchange Commission (SEC). Due to concerns that the auditors might detect the interim misstatements, the executives reversed those transactions at year-end but then booked fictitious sales and receivables to overstate annual assets and income. To make the fictitious sales and receivables appear legitimate, top management prepared and recorded cash payments for fictitious equipment purchases and then re-deposited those cash payments as cash receipts from the fictitious accounts receivable customers. Top executives were...
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...present when fraud occurs. Research the authoritative standards for auditors and provide a brief summary of each of the three fraud conditions. Additionally, provide an example from the Comptronix fraud of each of the three fraud conditions. The Fraud Triangle is one of the most well-known theories, taking a look at motivation, opportunity, and rationalization. The first factor, motivation, can also be seen as an incentive or pressure. Motivation can include personal failures, gaining status, or poor relations between an employer and employee. The second factor of the fraud triangle, opportunity, builds upon an individual’s desire and pressure to commit fraud. Without a perceived opportunity to do so, the individual most likely will not act upon his or her motivation. An opportunity can be the awareness of the company’s poor internal controls and the individual’s access to the information, as well as the technical skills needed to actually commit fraud. Rationalization, the third aspect of the fraud triangle, revolves around how the individual justifies committing fraud. Usually, individuals who commit fraud are first time offenders, so rationalization plays a key component. Examples range from unfair treatment, to the intent to reverse the fraud after some time. With regards to the Comptronix fraud, the three individuals who committed fraud are Hebding (chairman and CEO), Shifflett (president and COO), and Medlin (controller and treasurer). Looking at the three fraud conditions...
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...assessing inherent risk of the financial statements at Comptronix was the fact that it is an electronics company. Electronics companies are not a stable industry as shown by previous losses from Comptronix in the 1980’s. This could influence inherent risk. Electronic companies also usually have technology that is rapidly changing. This can cause inventory obsolescence, and become outdated very quickly. Managers may try to hide inventory they can’t easily get rid of, so this could increase inherent risk. Another factor was the unexpected fluctuations of the differences in the PP&E account of the financial statements each year. The fact that Mr. Hebding and Mr. Shifflett were known in the community as less reputable fellows and were buying luxury homes, cars, boathouses, etc. should’ve raised some suspicions with the auditor. An auditor should’ve been aware that usually one factor of a fraud involves someone wanting to maintain their lifestyle. The fact that quarterly filings were unaudited might make an auditor at least set inherent risk at high. Shareholders equity nearly doubling in 1991 might have been a sign that the financial statements were misstated. The fact that management was only run by three people who had questionable reputations increases financial statement fraud, and increases inherent risks. The board of directors even approved a loan to Paul Medlin to repurchase shares in 1989. Since Paul Medlin served as Comptronix controller and treasurer this would make the transaction...
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...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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...accounting fraud and auditor legal liability c a S eS inc lu de d in t hiS Se ction 4 89 99 4.1 Enron Corporation and Andersen, LLP Analyzing the Fall of Two Giants . . . . . . . . . . . 4.2 Comptronix Corporation 4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . Identifying Inherent Risk and Control Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 111 119 127 137 Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . . 4.4 Waste Management, Inc. 4.5 Xerox Corporation 4.6 Phar-Mor, Inc. Manipulating Accounting Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluating Risk of Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounting Fraud, Litigation, and Auditor Liability instructor resource Manual — do not coPy or redistribute instructor resource Manual — do not coPy or redistribute enron corporation and andersen, llP analyzing the fall of two giants inS tr uc t ional o b je c t ive S [1] c a s e 4.1 Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt [2] [3] To help students understand what happened at Enron Corporation and how Andersen’s involvement with Enron led to the accounting firm’s downfall. To enhance students’ appreciation of the importance of understanding an audit client’s core business strategies. To develop students’...
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...Case 4.6 Phar-Mor, Inc. 6. A) Other high profile cases where a company has committed fraud by misstating inventory include Comptronix Corporation and Bristol-Meyers Squibb Company. B) It is particularly difficult to detect intentional misstatements of inventory because manual checks of inventory only occur semi-annually, management’s ability to alter these checks, and the cheer ability to miscount items due to sheer volume. Phar-Mor was capable of misleading their external auditors because the auditors of a retail store are not required to physically examine the inventory in each store. The auditing firm only examined inventory in four of the one hundred and twenty nine stores that existed. Phar-Mor also knew in advance which locations were going to be audited which allowed them to be able to fool Coopers & Lybrand for several years. C) Audit procedures such as implementing additional random visits to Phar-Mor stores to examine inventory, verifying shipments from suppliers and conducting an inquiry of individual store management could have helped prevent or detect the overstatement of inventory. 7. A) Factors that would have contributed to a high inherent risk assessment of Phar-Mor include their excessive growth in a highly competitive market, the motivation from management to maintain that growth, rapid expansion, results from previous audits, their involvement with related parties, inventory being their biggest account, and the random, flamboyant behavior of...
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...Executive summary Table of content (a) Explain the audit risk and each component of the audit risk model and how the audit risk works Audit risk is the auditor might give an incorrect or inappropriate opinion the financial statements. (Taylor, 2008). The audit risk model expresses the relationship among the audit risk components as follows: PDR = AAR IR x CR PDR = planned detection risk AAR = acceptable audit risk IR= inherent risk CR= control risk The four risks in the audit risk model are appropriately important to valuable detailed discussion. All four risks are discussed briefly in this section o provide an overview of the risks. Planned detection risk (PDR) is a measure of that audit evidence for a segment will fail to detect misstatements exceeding an acceptable amount, should such misstatements exists. (James, 2001) PDR is a function of the effectiveness of an audit test and of its application by the auditor. Decreases in PDR will require the auditor to increase the competence and sufficiency of audit evidence collected. (Taylor, 2008). Inherent risk (IR) represents the auditor’s assessment of the susceptibility of an assertion to a material misstatement assuming there are no related internal controls. (Boynton, 2001). If the auditor concludes that there is a high likelihood of misstatements, ignoring internal control, the auditor would conclude that inherent...
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...Auditing Cases An Interactive Learning Approach FIFTH M F S D E D ITIO N S. B A. B M. G F. P Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Acquisitions Editor: Stephanie Wall Editorial Project Manager: Christina Rumbaugh Senior Managing Editor: Cynthia Zonneveld Production Project Manager: Carol O'Rourke Senior Operations Supervisor: Diane Peirano Printer/Binder: BindRite Graphics, Robbinsville Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text. Copyright © 2012, 2009, 2006, 2003, 2000 by Pearson Education, Inc., publishing Prentice Hall. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290. Many of the designations by manufacturers and sellers to distinguish...
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...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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...Current Issues in Auditing Volume 8, Issue 1 2014 Pages I1–I10 American Accounting Association DOI: 10.2308/ciia-50775 INSTRUCTIONAL RESOURCE ABC Electronics: An Instructional Case Illustrating Auditors’ Use of Preliminary Analytical Procedures Paul M. Clikeman and Jamie Diaz SUMMARY: This instructional case demonstrates auditors’ use of analytical procedures during the planning/risk assessment phase of a financial statement audit. An Excel spreadsheet enables instructors to embed up to seven operating problems or potential accounting issues into a fictitious consumer electronics manufacturer’s current year financial statements. Questionnaires from students at two universities indicate that the case is effective at helping undergraduate auditing students understand (1) auditors’ use of analytical procedures during the planning stage of the audit, and (2) the types of accounting issues and operating problems that might be identified using analytical procedures. Keywords: analytical procedures, audit planning. INTRODUCTION Professional audit standards require auditors to perform analytical procedures during the planning and final review stages of each financial statement audit (AICPA 2012, AU 329; PCAOB 2012, AS 12). This instructional case focuses on analytical procedures performed during audit planning. The purpose of performing analytical procedures early in the audit is to enhance the auditor’s understanding of the client’s business and identify...
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