Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors
Question:
Auditors perform a variety of procedures to gather and evaluate information that will help them identify possible material misstatement. One potential audit procedure is to analyze a company’s cost variances, which might be caused by error or fraud.
REQUIRED
A. For each of the following variances, describe in detail a possible error that could cause a variance even when no variance actually exists: Direct materials price, direct materials efficiency, direct labor price, direct labor efficiency, variable overhead spending, variable overhead efficiency, fixed overhead budget, and production volume.
B. Suppose a material amount of raw materials inventory theft took place during the past year.
Which of the variances in part (A) would most likely reflect this fraud? Explain.
C. Discuss possible reasons why variance analysis might not uncover the theft described in part (B).
D. Suppose a production manager fraudulently entered a fictitious employee into the payroll system during the past year. The fictitious employee’s paychecks are deposited directly into a bank account that is then accessed by the production manager. Which of the variances in part (A) would most likely reflect this fraud? Explain.
E. During the current year, suppose an accountant accidentally records large equipment repair as an addition to property, plant, and equipment. Assume that equipment repairs and equipment depreciation are both recorded in variable overhead costs. Which of the variances in part (A) would most likely reflect this accounting error? Discuss how this error would affect the variance during the current year. Discuss how this error would affect the variance during the next year.
F. Suppose a company’s managers want to report higher earnings on the income statement. Describe in detail a possible way that the managers could improve reported earnings by intentionally misapplying accounting principles for variances.
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott
Question Posted: