audit hws and worksheet
Evolution of Auditing: From the Traditional Approach to the Future Audit
"Evolution of Auditing: From the Traditional Approach to the Future Audit", emphasizes the historical connection between the creation of legislature and improvement of accounting standards in response to fraudulent activities. For example, only after the discovery of fraudulent activities at McKesson and Robbins in 1939, the AICPA issued SAP no 1 mandating auditors to inspect a company's inventories and receivables. Additionally, only after the equity funding corporation scandal of 1973 did the EDP audit mandating auditing through the computer come to fruition. The PCAOB and many regulations on internal control and auditor opinion mandates became regulations after the Enron and WorldCom scandals. Through these examples in history, it seems such improvements in auditing efficiencies and accuracies only result after large frauds occurred that harmed many stakeholders.
secrets and agents assignment
-2007 washington new rule - firms banned from checking job applicants credit scores (to make labour market more fair/equality) ie more likely an individual with bad credit score poor/black/young. Since then 10 other states have followed this but two economists robert clifford and daniel shoag studied the bans and found they left blacks and young with even fewer jobs Late 1960s george akerlof "the market for lemons" but rejected by leading journals at the time , thogut his insights trivial but published a few years later Idea: If buyers in the used car market value good cars ``peaches" at 1k adn sellers at slightly less. A malfunctioning used car "lemon" worth only $500 to buyers. If buyers can tell lemons and peachers apart, trade in both flourishes . In reality buyers might struggle to tell the difference i.e. scratches can be touched up, engine problems undisclosed etc. To account for risk, a car is a lemon, buyers cut offers - might be willing to pay $750 for a car given a chance could be either. Deals who know they have a peach will reject this offer so only those selling a lemon would accept this Smart buyers then will only offer 500, but peaches stay in the garage since they cannot be sure of the car's quality. Info asymmetry kills the market Won nobel prize for this paper This made models of many mainstream economics redundant
Case 3 Wilson =senior associate with several years of banking and financial services audit experience including work in challenging audit areas ie ALL (allowance for loan and lease losses) -assigned KHAN's ALL accou
-2020 company recognized $1 million ALL based on the company's ALLL methodology , applied on a quarterly basis -company determines reserve of ALL by segmenting company's loan portfolio into groups of similar loans and calculating historical loss rate for each group, adjusted for current conditions -wilson submitted requests and received documentation for k-h's preliminary accounting for ALL, wilson tested reliability of the reports used, calculated historical loss factors, tested clerical accuracy of loss factor calculations, qualitative adjustments to historical loan loss rates etc.--> this generated questions Wilson planned to ask CCO ie qualitative factors CCO used in measurement/recognition , asked CCO about inputs into ALLL analysis, qualitative adjustment to historical loan loss rate etc , delinquency for HELOCs 9%, 3x level of delinquencies at prior year end and 150 bps adjustment. CCO says determined 150 bps based on charge off rate company experienced during economic downturn but wilson observed charge off rate based on commercial real estate, not residential (believes crystals estimate is low should be at least 175 Instead of waiting for engagement manager brian to review his work , wilson approach brian with his findings and brian agreed partly but said wilson had not factored in subsequent events → actual charge off of heloc loans at rate of 250 bps (understated by 100 bps)
timeline 1960s through today
-auditape allowed nontechnical auditors increased ability to audit through computer and creation of GAS programs late 1960s-late 1970s ----equity funding coproation scandal of 1973 as single most significant event in EDP aduit history- committed fraud bw 1964-1973, created false insurance poliies and commission income, inflated profits/stock price . determined that an EDP audit would uncover fraud much sooner, instrumental in mandating shift to auditing through computer During the next 25 years many auditing info system events pertained to refienement of automation, effectiveness/efficiency focus , advancement of technologies -SOX in 2002 imposed sweeping changes on publicly traded companies and the accounting profession -the future audit that relies upon leveraging of technologies and processes has capability to expand analyses of a firm's operating activies and thus provide improved audit quality -estimated that total global fraud losses over $2.9 trillion in 2009
brent dorsey case intro
-brent dorsey graduated 6 months ago with masters in accounting and began working for large accounting firm -daily working with han choi and megan mills (both second year staff anticipating promotion in next year) and john peters (senior auditor - has been working there for 5 years, senior for three and end of this year rumor that promoting only some of the 7 seniors to managers, remainder either asked to transfer or counselled out of firm is rumor)- john feels he is on the bubble as far as promotion due to recent performance evaluations saying he lets his job get out of control, him and his wife live in portland and do not want to transfer -this current engagement at northwest steel is one of the offices biggest clients, this engagement will make a difference Brent finishes audit work on north west's biggest cash account 5:45 friday and felt much needed day off ahead to clear the air with his wife who is an attorney and also demanding job Brent started uploading audit work to a cloud based workpaper system, when han tells him to meet in 15 minutes that John wants. Brent calls his wife (who has not been getting along well with recently) and she says she doesn't know how much more of this she can take - that she barely sees him anymore (only just got married over a year ago and first child on the way) John says so far on this project already 30 hours over budget, he needs to make some of this time up and can't miss the deadline. Says looked over AP which is 42 hours budgeted but wants it completed in 35 hours and wants it wrapped up by monday afternoon John Says although he said before thought could all take saturday off, changed his mind because again can't miss budget and will see everyone first thing tomorrow (saturday) morning
alart - pcaob requirement with due professional care , why mgt can achieve fraud more easily
-pcaob also requires auditor to exercise due professional care in planning and performing audit and in preparing audit report = requires auditor to exercise professional skepticism -company management has unique ability to penetrate fraud bc has ability to beat control and manipulate accounting records → must use professional skepticism through ie modifying audit procedures to obtain more reliable evidence , obtaining appropriate evidence, ie third party confirmation -auditor's often challenged in meeting fundamental audit requirement - important for them to be alert to unconscious human biases and other circumstances/pressures/incentives like keeping audit costs low, providing unqualified audit opinion prior to issuers filing deadline, achieving high client satisfaction ratings etc Auditors must remember duty to put interest
what did will do after? and epilogue
-selected 20 ticket revenues. 18 good, one of the two cash payments did not make it into that day's bank deposit or in later in the week. Asked jess bc was showing up as paid on sheriffs computer/daily receipts voucher. Jess' response was casual, saying if he gives her ticket number she can look for it when she gets through the report. Next morning jess claims money is all here, deposit had fallen in bw two cabinets and found it, money was there too and could tell in jess' handwriting, noticed entry in receipt book in black ink though and envelope in blue, doesn't make sense bc should've been completed at same time... then sees this is new money printed in 2006 when 2005 cash receipt date -will has to pick up baby bc has a fever but calls his boss vince and tells him what he found -when vince boss arrives he and will put 8 more tickets marked as paid with cash and five of 8 showed the same pattern.. Went back to office to decide how to proceed Epilogue Two weeks later jess was arrested Nacho, his best friend, calls him, asks if she did it. Will basically says yes Theft amount was 21k over 2 years , jess adamant that she had not stolen anything, nacho had not spoken to will since Jess says controls so week that any employee could have been stealing the cash,insisted only replaced missing 320 with her own money bc was in charge of cash receipts and wanted to save her job -jess trial, received sentence of 5 years jail and one week into sentence broke down and admitted to the crime, admitted has a gambling addiction, judge released her so on house arrest bw 7pm and 6am for next 5 years and restitution payments
Case 4.5 xerox corporation, everything up to investigation
-xerox company in connecticut , sold and leased document imaging products services and supplies to customers in US and 130 other countries In 2000 employed 92,000 people worldwide and reported revenues of 18.7 billion dollars Technology has impacted document industry - from paper to electronic documents and color capable devices, Intense price competition from overseas rivals late 1990s compounded changing business environment problems Foreign competitors advanced color and digital copying tech > xerox Pressure on xerox to generate increased revenue and earnings growth during this period , ie meeting wall street projections so stock price doesn't decrease , also wanted strong credit rating , compensation of senior management directly linked to erox ability to report increased revenues and earnings CEO in 1998 announces restructure to further strategies, productivity improvements etc COO adds that xerox had led major transformation in market, etc However, desired turnaround was a disappointment , revenues and earnings down, management letter to shareholders stated disappointment but prepared to beat back challenges w strengths
cases 1-4 with heuristic
1- availaiblity 2. confirmation/overocnidence 3. anchoring 4. confrimation
auditors vs consulting article 1. How much are public accounting firms earning for consulting revenues as compared to performing financial statement audits? What are the concerns with this relative level of accounting services?
1. How much are public accounting firms earning for consulting revenues as compared to performing financial statement audits? What are the concerns with this relative level of accounting services? Last year, public accounting firms earned $56 billion from consulting and advisory and only $47 billion from auditing services. Five years earlier auditing revenues were $46 billion and consulting and advisory revenues were $39 billion, exemplifying the $17 billion dollar growth within only five years while auditing revenues remain stagnant. The concerns with this relative level of accounting services are the potential conflicts of interest concerning the big four having both auditing and consulting practices. The concern also is that the growth from consulting services could result in big four firms taking their "eye off the ball" of auditing practices and instead focusing on their consulting growths. The question is if there is a way to better ensure auditor independence through having the big four consulting firm's split off, thus creating "audit-only" firms.
xerox - a.For each accounting manipulation identified, indicate the financial statement accounts affected. b. for each accounting manipulation identified, indicate an audit procedure the auditor could have used to assess the appropriateness of the practice. Acceleration of lease revenue from lease price increases and decreases: Increases in the residual values of leased equipment: Acceleration of revenues from portfolio asset strategy transactions: Manipulation of reserves manipulation of other incomes failure to disclsoe factoring transactions
Acceleration of lease revenue from lease price increases and decreases: revenues (overstated), (off balance sheet financing ) finance receivables? b)financial statement auditing, examination of off-balance sheet items -test accounting records and inspection/observation of dates or renegotiation of terms of lease contracts compared to where the unearned revenue/revenue is located/amounts. Increases in the residual values of leased equipment: cost of sales (understated), b) again examination of residual values of leased equipment, inspecting dates to ensure that residual value was not increased Acceleration of revenues from portfolio asset strategy transactions: revenues (overstated if no disclosure made) b) examination of financial statements to ensure all disclosures made in accordance with gaap and that xerox disclosed change of selling revenue streams to investors from rental contracts) Manipulation of reserves: operating expenses (understated), net income (overstated), b)examinations of reserves to account for these unrelated business expenses and identify/evaluate if they actually belonged in the reserved account/what these expenses were, dates, relevance, etc. Manipulation of other incomes: interest income (understated 1995-1996 and overstated 1997-2000) b)analysis /observations of dates on the refund taxes → interest income and corresponded revenues Failure to disclose factoring transactions: cash (overstated), AR b) ) examination of financial statements to ensure all disclosures made in accordance with gaap and that xerox disclosed such selling of future cash streams from receivables/impact of increasing cash.
What do the accounting firms say is the benefit of providing these nonaudit services to their clients?
Accounting firms say that not providing these nonaudit services to clients would undermine the progress and goal of strengthening audit quality. Having both under the same roof allows auditors the ability to utilize certain technologies and expertise's in order to better understand their clients. Industry says helps to have auditing and consulting under same roof , auditors easier access to technology and expertise about clients businesses audit only firms would undermine progress to strengthen audit quality After enron SOX banned firms from providing many counseling services to their audit clients -unclear whether supearting would work in the US , had not been any significant regulatory push for this
conversations with the big four- what did they say on sate of future public company auditing profession? auding research/education/conversgence
Asked CEOs to discuss most significant challenge facing pblic company auditing profession- most often challenge stated was ability to attract and retain high quality people in profession, but also challenges related to globalization -next asked the CEO's about looking-forward ideas relating to ie fraud detection. Theme of cooperation>competition relating to fraud detection innovation. Purpose of white paper was to start a dialogue around ie reporting model. Cooperation among the firms to catch fraud in the best way, pool resources Asked the ceo's to common on present/future relationship between firm and pcaob. Theme that evolution in relationship as pcaob and firms continue to collaborate to better audit processes and outcomes Auditing practice, research, and education -asked ceos to comment on global convergence of accounting and auditing standards - consensus that convergence is more of a when question than an if question Some state think opportunity to have one set of globally accepted auditing standard (what about LIFO THO) Flynn states global convergence is necessary, says will not happen overnight but will impact every part of system
traditional audit vs automating the audit
Audit engagement includes risk assessment, audit plan delineating scope of audit objectives à auditors collect and anayze audit evidence, from opinions regarding controls. Formal report with opinion at end High costs and time delays * Automating the audit Resistance to change is a universal phenomenon, advancement will likely be more tractable approach which may result in greater support for expansion of automated audit practices Argument that low cost solutions for automation include CAATS for data extraction/analysis, programs to obtain better understanding of business ops but disadvantage that tools in this do not operate on continuous basis , batch process programs activated periodically, training issues should also be addressed to improve audit functions
brent dorsey case - what are the alternatives?
Brent stressed about how he and Han will finish AP in 35 hours (rumor that last year's team ate time to get it done within budget), last year it took over 45 hours . Megan says there has never been problems with payables in the years they've been auditing them to her knowledge . says should change the audit plan and instead of pulling 60 invoices should just pull 30 to cut time. Brent says the program step says I have to pull 60 again. Asks megan if they can make that decision to only pull 30? Megan says "i don't see why not" if they have to work on saturday and they are told to finish on time Brent asks Han for his advice . han says that in times like this ust have to work until it gets done .. basically implying need to do it ethically. Says to put in a full day tomorrow (saturday ) and then come in early monday, acknowledges will not get done in 35 hours, maybe not even 40 0r 45 hours, but then report to john that took budgeted amount of hours - so the work gets done and look good on performance evaluations Brent unsure what to do.. Old seaman's about auditors duty to public and importance of integrity seemed so far removed, had a lot to think about
future audit, future automation
CAATS contains capabilities to enhance audit effectiveness and efficiency but they do not operate on a 24/7 continuous basis and fial to construct continuous auditing environment where exceptions and anomalies may be identified as occurred Do not wor with real time data streems Real time solutions are needed, and those who use CAATS should consider more advanted programs -organizations should consider extent to which data automated and identified manual enterpirse data might reasonably be converted to more automated state prior to implementation of tools Optimize audit quality thorough automation Embedded audit modules EAM Approach involving installation of files or code segments within host system, records then processed such that only auditor created master files are affected
Case 4 -gcorp provider of IT services , several acquisitions over past few years ie epitome two years ago -with each acquisition forecasted sales growth due to ie market capabilities and synergies For goodwill hired third party valuation specialist ABC
Company performed impairment test of goodwill by surpassing initial qualitative assessment and proceeding directly to step 1 and determined for gopros reporting units using DCF method Also gave abc inputs for epitome reporting unit valuation: no change in epitome info tech solution road maps, budgets and projected financial performance reflecting growth rates/date revenue, statements gcorp made to public on future of business, projected financial info Abc based on the above developed assumptions relating to the discount rate and terminal value, estimated that fair value of epitome reporting unit exceeded carrying amount by 25% Fiona- gorp audit team senior manager , determined abc valuation report and step 1 goodwill analysis reasonable, agreed that step 2 impairment test not required Naseem g corp lead engagement partner when reviewed, noticed ABC and his team did not consider impact of company risk factors disclosed elsewhere , g corp indicated in 10k that since acquisition 2 years ago epitome had not met revenue or cash projections and financial performance had declined . ABC analysts noticed that implied multiples of acquisition in epitome's sector had declined since alternative technologies, equity prices had declined too -naseem determined FV of epitome most sensitive to changes in expected growth rates over remaining period and decline in expected growth rates would result in decline of FV epitome Naseem developed independent estimate indicating carrying value of epitome reporting unit would exceed estimated fair value, informed mgt of g corp that step 1 analysis not reasonable , would need to be updated and step 2 would need to be performed
flash cont competition mgt discussion gross margin report
Competition - states competes with manufacturers of flash memory and related products . several of these competitors supply company with raw material ie electronic components so these competitors have lower costs than the company since higher levels of integration Flash expects comp to increase in future , lower prices and gross margins from increased competitive pressure Management discussion of financial condition Sales increased from 6m 2014 to 37.8m 2017, NI increased from 442k 2014 to 2017 4.9m Sales increased to about 37.8m 2017 from 12.4m 2016 due to increased sales volume flash memory Gross margin increased to 14.2m 2017 from 5.6m 2016. As percentage of sales GM decreased due to increase in cost of electronic components used in products , expects lower GMs with future contract manufacturing services than those form sale of flash memory Report of independent accountants - prior year's report so march 2017 Claims conducted audits in accordance with pcaob standards States flash operates in conformity (reasonable assurance) with GAAP
flash tecnologies cacts of the case
Flash Technologies, Inc. designs, manufactures, and markets PC cards including ExpressCards for portable and desktop computers. The Corporation sells its products primarily to original equipment manufacturers. In 1994, the organization was incorporated and started growing and commercializing font cartridges for laser printers. In 1999, Flash Technologies started switching its focus on font cartridges to the developing PC card market. In spite of a small player in the industry, the Corporation has obtained significant success. The stock price of the company has developed 300% over the last 5 years. In 2003,Flash Technologies' stock was trade on the New York Stock Exchange. Sales increased to $37.8 million in fiscal 2008 from $6.3 million in fiscal 2005. Net income increased to $4.9 million in fiscal 2008 from $442,000 in fiscal 2005.The Corporation has determined to terminate its current external auditors,Adams & Adams LLP. A new audit firm has recently been engaged by Flash to perform the audit of financial statements for the year 2008. The successor auditors have discussed the prior audits with Adams & Adams auditors. The new audit firm has decided that additional analytical procedures are needed to be performed before finalizing the engagement's details.
flash technologies
Flash technologies engaged your firm to perform annual audit for year ending dec 31 2017 Flash determined current auditors could not provide international support flash requires with increased investment in Korea and canada. Partners from your firm discussed prior audits with prior auditor and everything in order Met with flash excs and verbal/informal agreement regarding fees iming etc CEO of flash emanuel schwimez Began developing/commercializing for cartridges for laser printers, 2008 began shifting focus to growing market for flash memory cards, USB flash drives and solid state hard diives Company's stock price has grown 300% over last five years , currently "strong buy" from stock analysts Found posts on a review website negative about Mr. Chwimez, calling him a pathological liar, said he did wrongdoings . CFO had heard similar allegations but says he is aggressive/successful businessman but not everyone likes him Q4 2017 released "flashwall 2017", computer encryption . costs of these <20$ but sell for about $300, all sales of flashwall 2017 made to one customer ccb computers to which flash has a good relationship with. President of CCB will be joining flash's board of directors soon December 23rd audit manager met with flash at one of their manuf facilities , says impressed with organization and efficiency of facility, appeared well trained employees , faulty wels- when weld failed inspection team member indicated most of time casing could be reweldd without spoilage
case 2 - Miguel has over 10 yrs experience auditing construction, building, and real estate companies including real estate /funds, engagement quality review partner on other real estate companies including GGM properties (miguel is lead engagement partner)
GGM activities includes installation of normal tenant improvements, clean up and routine maintenance , usually 4-8 weeks per project on activities Acquisitions typically recognized as business combinations where net assets acquired measured at their acquisition date fair value , determine FV of properties based on internally developed income measurement approach, based on expected future income streams of the property While ggm competitors often rely on market or cost approach with valuing real estate or land, the company believes that an income measurement approach is more appropriate valuation technique -GGM believes over time certain industrial properties can be improved by converting them into mixed office use and business properties for rent to florida focusing on below market industrial properties → believes can add revenue by converting industrial space as market demand allows CFO of GGM met with miguel to give him an overview of details associated with the first acquisition of property in florida, shelly tells miguel company's 15 month plan to renovate property and land in order to convert it into mixed use 10 story office property -5 tenants signed multi year market rate lease agreements for 7 and 10 stories Selly also tells miguel would account for acquisition of florida property as income measurement technique - discounted cash flow approach to determine FV of property -miguel knows determining initial FV acquired real estate complexes/judgemental but accustomed to evaluating similar transactions. Other GGM valuation matters were well reasoned (relies upon this experience to inform his review), a few days later tells shelly company's recognition/measurement approach seems reasonable After company announces transaction when year ended, tracy GGM partner reviewed audit team work papers, questioned whether audit team exercised sufficient professional skepticism in auditing procedures ie with initial measurement of florida property - should use market measurement approach Team also did not develop an independent estimate of FV to corroborate the company's income approach measurement. The Audit team conducts an estimate after this- determines the amount estimated by the company exceeded FV by an amount in excess of materiality.
flash technologies cont
In employee dining overhead employees talking about pressure to ship customer items Flash close to sealing a deal with AT&T for satellite tracking system that could be worth +$300m, schwimez indicated this could boost stock price higher , no agreement has been anounces but he has been disclosing this info to investors CFO informed auditor SEC reviewing flash's financial statement filings Flash annual report year end 2017 States overview then states sells flash memory primarily to OEMs original equip managers- market served by company has rigorous demands for quality products, tech service etc States types of products flash serves , to over 250 poems etc 2017 agreement to form flash technologies (korea) limited -provide manuf services for third parties, will acquire 51% interest in flash korea for 1.25$ million in cash , remaining 49% help by unaffiliated company Jan 2018 flash purchased majority interest in design circuits Company believes DCI adnf lash korea may benefit form company's existing supply relationships Technologies and industry background - recent years industry computing /processing expanded beyond desktop comp system boundaries to include broader electronic systems ie mobile communication systems cellular telephones etc etc Flash memory characteristics better med requirements of these emergic applications than hard drive storage, states which industries company targets Customer sales and marketing- targets industrial and commercial apps for flash memory in communications transportation media and mobile computing industries Manufacturing-states includes programming production assembly ultrasonic welding cleaning final assembly labeling packaging , two shift five day per week basis Goes into manufacturing flexibility, product quality/testing, manufacturing efficiency Sources of supply-company has experienced shortages in components to manufacture flash memory and expects such supply shortages to continue sign purchase from single source vendors, no alternative sources, no LT supply agreements with vendors
requirements 2 fraud triangle xerox
Incentives: Pressure on xerox to generate increased revenue and earnings growth during this period , ie meeting wall street projections so stock price doesn't decrease , also wanted strong credit rating , compensation of senior management directly linked to erox ability to report increased revenues and earnings Opportunities: Senior management directed/approved manipulations under protest form field managers , viewed them as accounting opportunities so they had ability to override controls and not as risky because having others perpetrate this fraud at their direction Attitudes: may unethical individuals, value extrinsic rewards over faithful representation
"Conversations with the Big 4 Accounting Firm's Chief Executives"
Ira Soloman asks all four CEO's to comment on global convergence of accounting and auditing standards, to which their answers agree that global convergence is necessary and bound to happen eventually. In terms of SOX, CEO's general consensus states accelerated transformation within profession, add additional value with stronger control environments Went from self-regulations to being regulated through SOX, increased quality, public trust, and integrity of capital markets. -when asked CEO's to comment on auditor's responsibility for detection of financial statement fraud, alls aid it was an issue and difficulties existed. Ie limitations of abilities to detect collusive fraud, criticality of fraud detection in the profession, building models/technological advances that assist in fraud detection
people with insurance moral haazard info asmmetry
People who buy insurance are more likely to take risks, health ins encourage unhealthy eating/drinking=moral hazard- occurs when incentives go haywire, in a transparent world won't worry about incentivizing someone bc use a contract to specify behavior . when info asymmetric and cannot observe what doing , must worry about interests This poses principal agent problems (ie principal manager agent employee) ie how can he get the employee to behave how he wants when he cannot monitor him all the time? Could pay efficiency wages world of information asymmetry, "good behaviour is driven by earning a surplus over what one could get elsewhere," according to Mr Stiglitz. The wage must be higher than what a worker can get in another job, for them to want to avoid the sack; and firms must find it painful to lose customers when their product is shoddy, if they are to invest in quality. In markets with imperfect information, price cannot equal marginal cost
pcaob staff practice alert, importance of prof skepticism, firms quality control systems help with what
Professional skepticism is essential to performance of effective audits under pcaob and requires each individual to apply professional skepticism (an attitude that includes a questioning mind and critical assessment of audit evidence), pertinent in auditor's consideration of fraud in an audit and in significant management judgments Firms' quality control systems can help engagement teams improve professional skepticism application ie proper tone at the top emphasizing the need (engagement partner ust emphasize), establishing procedures to ensure appropriate documentation and senior engagement team members must plan/direct other team members to require auditi attention -assess risks of material misstatement, perform tests of controls, substantive procedures
What is the basis of the disagreement between PwC and the FDIC regarding the amount of damages that PwC is accepting responsibility for?
PwC claimed that they do not believe the FDIC is entitled to recovery of any of the damages. PwC asserts that a number of employees at Colonial actively and substantially interfered with their audits and thus do not take responsibility. They also urged the judge to cap the lawsuit amount they are responsible for at $307m. The FDIC thinks that PwC should be responsible for paying them $1 billion due to their negligence and lack of following applicable professional standards in their audit work.
xerox- auditor responsiblity
Regarding accounting reserves established by company management, auditors have the responsibility of checking these to ensure that they are not betraying public trust by approving such reserves. They should test the reasonableness of accounting reserves by following SEC regulations of the audit and making sure they are not just being used to get out of charges impacting the bottom line - that they are legit. Additionally, conduct examinations of reserves to account for these unrelated business expenses and identify/evaluate if they actually belonged in the reserved account/what these expenses were, dates, relevance, etc.
case 1 - -fox and beck company produces/distributes broad range of equipment used in manufacturing activities
Sales of equipment recorded when evidence of arrangement exists, sales price fixed, risks/rewards ownership transferred to purchased ie in US etc when equipment is delivered When revenue record by company no significant uncertainty exists around purchaser's obligation to pay, no right of return Q3 of prior year request from largest customer B&W to modify certain manufacturing equipment, would require 6 mo significant changes to company's production facilities and time required to produce/deliver +5months, agreed to new contract , signed in Q4 prior yr Company completed necessary capital improvements required to support new equipment orders by end of Q2 current yr, sales from these 15% of all revenues current year Jonas: F&B audit engagement partner aware of this arrangement, during team discussion discussed audit procedures performed related to new arrangement Mila F&B audit engagement manager, several years of experience in F&B audit performed past three years, familiar with ocmpays' revenue/recognition policies . primary focus of prior year auditing procedures has been on existence and whether or not equipment delivered Bert: notes company will continue to follow current revenue recognition policy for the customize equipment ie recognize revenue at point of delivery bc time bw delivery of equipment and installation would never exceed 30 day requirement detailed in the contract -->bert believes bc of this , timing is immaterial as to whether PO fulfilled and risk of loss transferred )represents 50% total revenue recognized under new sales contract in current year Mila is persuaded by this given Bert's explanation . joas questioned appropriateness of company's revenue recognition of new sales contrast- says substance was important , new multiple deliverable arrangement (new contract) requiring additional accounting analysis and audit procedures to determine whether installation separately recognized deliverable -jonas determined through some additional audit procedures and sensitivity calculations that the company's revenue recognition policy related to the sales under new contract would recognize revenue too early (if recognized when goods delivered but before installed- would result in revenue recognized materially overstated)
senior mgt xerox case, net impact, implications, fines, kpmg
Senior management directed/approved manipulations under protest form field managers , viewed them as accounting opportunities Discussion with kpmg and them did not persuade management to do differently so kpmg allowed xerox to continue these practices with minor exceptions Net impact on pretax earnings of manipulations 1997 405 m 1998 656 m 1999 511 m 2000 -55m bc could no longer hide declining performance and not enough revenue inflating adjustments 1997-1999 xerox publicly announced earning success story and revenues growth each quarter→ $5 million performance based compensation to senior management and $30 m profits sale of stock After questionable accounting practices made public xerox stock dropped from 60$ a share to $5 a share . april 2002 agreed to pay 10$ m fine and create a committee for the company's accounting controls . june 2003 paid 22$ m to settle with sec, execuites not found guilty but resigned PwC replaced KONG as xerox's auditor 2001, 2005 kpmg agreed to pay sec 22 m for alleged fraud and partners each civil penalties . 2008 xerox paid 670 and kpmg 80 m
Spence "job market signaling" 1973 - labour market signalling car insurer facing two customers ailrinles
Spence "job market signaling" 1973 - labour market- employers may struggle to tell which job candidates best and top workers might signal talents ie through college degrees but only works if this is credible since low productivity workers found it easy to get a degree. Turns idea of conventional wisdom around - education thought to benefit society by making workers more productive but if is merely signal of talent , returns to investments flow to students who earn higher wage at expense of less able or universities Signalling helps explain what happened when states stopped obtaining job applicants credit scores. Credit history is a credible signal i.e. hard to fake . when firms could no longer access credit scores put more weight on other signals like education and experience - which is even rarer among disadvantaged groups Also signalling ie paying dividends - signals strong company Can also screen ie customers The car insurer faces two customers - high risk and low risk - only the customer knows whether he is a safe driver. In competitive market insurers cannot profitably offer same deal to both groups -sooo car insurer must offer 2 deals, ensuring each attacks only customers it's designed for . offer pricey full insurance deal with alternative cheap option with sizeable deductible This is not happy resolution since good drivers stuck with high deductibles Airlines want to mil rich customers with high prices without driving away poor ones . sooo have to take standard cabin uncomfy to nudge those towards pricier ticket sinc don't know wealth of customers in advance
Explain why the new 2007 Washington state rule aimed at making the labour market fairer ended up having the opposite effect.
The 2007 washington state rule aimed at making the labour market fairer and more equitable by banning the checking of job applicants' credit scores. Since then, 10 other states have followed this, but economists Robert Clifford and Daniel Shoag concluded that this rule leaves blacks and the young with even fewer jobs. The reason for this relates to the market for lemons as well as signalling. Credit history is a credible signal, as it is very difficult for an individual to fake their credit score. However, because firms can no longer rely on checking credit scores to signal a possibly productive and successful individual, they rely on other signals like education and experience on a job applicant's resume. These signals are even more rare among blacks, the young, and the poor, resulting in the Washington state rule having the opposite effect.
Colonial Bank and PwC What are the facts of this case? Who are the parties to this lawsuit? What was the judge's 2017 ruling?
The FDIC sued PwC in 2014 in a $1 billion lawsuit for failing to catch the long running fraud that caused Colonial Bank to go under. The fraud involved Colonial's largest client: Taylor Bean and Whitaker Mortgage Corporation, whose chief executive recorded billions of dollars of bad loans as assets. The FDIC claims that PwC is guilty of negligence in that they failed to exhibit skepticism regarding major holes in colonial's balance sheet. If PwC had complied with applicable professional standards the FDIC asserts that PwC would have caught such frauds. The FDIC lost $2.8 billion as a result of the bank's downfall. The judge's 2017 ruling ordered PwC to pay $625m in its role for the fraud, and both PwC and Crowe denied responsibility for this. PwC asserted that they will appeal this decision and believe that the FDIC is not entitled to any recovery amount.
how could the team have mitigated stressors what should brent do
To better handle the demands of career and family life and manage work/life balance, John, Brent, and other auditors could plan ahead better. Everyone on the engagement knows the budget and deadlines in advance, so if John keeps better track of hours over budget on a daily basis, less drastic changes and adjustments will need to be made, keeping engagements from getting "out of control". Additionally, Brent could ask John if he comes in early every day, if he could get off Friday night to have dinner with his wife. Lastly, John could have sat Brent, Megan, and Han down when the engagement started and planned out ways to maximize efficiency within the team so that they would not need to work saturdays. Brent should go to an experienced mentor about his dilemma and ask them for their advice. This situation happens often in the accounting world and there are many who have dealt with this situation ethically. I believe that Brent should talk to John about this issue after and tell him that the 35 hour goal is unrealistic. From there, he could propose his idea for the team to meet and find other ways to cut hours reasonably so that they can still make the budget.
What are the rules regarding auditor detection of fraud? Are auditors responsible to detect fraud? What are fraud examiners? What are their tasks and responsibilities? How does fraud examination differ from auditing?
What are the rules regarding auditor detection of fraud? Are auditors responsible to detect fraud? Auditors are not necessarily liable for detecting fraud, as long as they are following professional auditing standards and procedures and are applying professional skepticism to their work and practicing independence to further public trust. 4. What are fraud examiners? What are their tasks and responsibilities? How does fraud examination differ from auditing? An auditor's task is to utilize independence and professional skepticism to ensure reasonable assurance over a company's financials to further public trust. A fraud examiner looks at a company's financials in relation to the fraud triangle to determine whether a fraud occurred. Their responsibilities include interpreting financials, interviewing possible suspects involved in the financials and audits, and ultimately concluding whether fraud has been committed or not
Adverse selection
When sellers have information that buyers do not, resulting in them overpricing low quality products that are disguised as high quality products and smart buyers only accepting low quality items at low prices. For example, a smart buyer will only spend $500 to knowingly purchase a lemon since they know that the seller would not price a peach at that low cost. Buyers do not trust that the high priced items are true "peaches" and thus they are left unbought.
SEC initiated investigation in june 2000 when xerox notified sec of potential accounting irregularities in mexico unit - found them to inflate earnings form 1997-1999: 7 things
acceleration of lease revenue recognition from bundled leases - majority of xerox's equipment sales generated from LT lease agreements , xerox accelerated lease revenue recognition by allocating higher portion of payment to equipment instead of service/financing activity By reallocating revenues from finance /service activities, xerox was able to recognize greater revenues in the current reporting period instead of deferring revenue recognition to future periods Acceleration of lease revenue from lease price increases and extensions - in some countries xerox renegotiated terms of lease contracts, recognized revenues from lease price increases and extensions immediately instead of over remaining lease life Increases in residual values of leased equipment- cogs derived by equipment cost - residual value when lease signed. Xerox sometimes increased expected residual value of previously recorded lease equipment Acceleration of revenues from portfolio asset strategy transactions - xerox had difficulty using sales type lease agreements in brazil so switched to rental contracts , which could not be recognized immediately so sold these to investors to allow immediate recognition but did not disclose Manipulation of reserves- gaap rescues reserve establishment for loss contingencies - xerox established acquisition reserve for own business risks and then recorded unrelated business expenses to reserve account to inflate earnings Manipulation of other incomes - recognized interest income years later than shouldve Failure to disclose factoring transactions - xerox sold future cash streams from receivables to local banks for immediate cash
evolution of auditing from traditional approach to future aduti - timeline through early 1960s
formal practice of auditing relatively short existence and historically emphasis on backward approach so events may not be identified until long after occurrence. Recent technologies facilitated a movement away from this to more proactive approach = evolution of auditing Timeline below: Industrial revolution à explosion in growth of business activity SEC 1934 created- authority of creating auditing standards, gaap eventually created to assist with this Any of auditing during this time not conducted independly and relied upon info provided by management 1939 SAP no 1 created after fraudulent activities uncovered at mckesson and robbins Following this sap no 1 issued by AICPA requiring auditoirs inspect inventories and confir receivables Auditors did not begin to seriously consider auditing in computerized context in early 1960s Because electric data processing and auditing book published and IBM released IBM 360 making computing more affordable than ever
kpmg penalties, what happened with 2 scandals
kpmg paying $50 million penalty for illicit use of pcaob data dn cheating on training exams The SEC charged kpmg with altering past audit work after receiving stolen info about firm inspections by pcaob, found numerous audit professionals cheated on internal training exams, improperly shared answers and manipulated test results Kpmg agreed to settle charges by paying $50 million penalty and complying with punishments ie independent consultant to review/assess firms controls and ethics, compliance Sec chairman: "kpmg's ethical failures are simply unacceptable" -5 former kpmg officials charged last year in case alleging schemed to interfere with pcaob's ability to detect audit deficiencies at kpmg, these senior personnel sought/obtained confidential pcaob lists of inspection targets, oversal program to reduce likelihood of deficiencies -kpmg audit professionals passing training exams sent answers to colleagues including lead audit engagement partners sending to other partners and subordinates Some kpmg audit professionals also manipulated an internal server hosting training exams to lower score required for passing - could pass while answering <25% answers correctly Sooo kpmg penalty and required to evaluate quality controls relating to ethics/integrity, identify audit professional who violated these within past 3 years and cease-desist order
skepitiscim case - who,what happened and how did will respond
will stallard - wife, baby, staff auditor at DB&H in alabama, in positive mood -when in college he worked as a plumber, attended local university, and had taken 7 years to reach his goal of graduating and passing the cpa exam. Switched jobs 4 months ago to decrease travel as baby's due date approach -on route to first location on his own at DB&H -had been doing the audit at this firm the past four years and had never had problems, controls could be tighter but town of rosedale (the firm) was a small municipality so not going to be perfect -three days into job will was very stressed as first engagement, wanted to call boss vince numerous times (called him twice over first four days of audit but wanted to more, felt uncertain) -his best friend nachos' wife jess was secretary at this firm but boss did not see this as breach of independence -work jess very different from jess that he knew, she seemed all business here, didn't act welcoming -noticed for 90% documents he traced found no problems but 10% may be missing signature but document turned up when looked , if misstatement unintentional or immaterial -skepticism vs time management
