You are engaged to audit the financial statements of Sebastian Construction Company. The company specializes in the construction of medical clinics. The percentage-of-completion method is used by Sebastian to account for all construction projects. As Sebastian completes a project, the building and property are sold to the clinic operator, who makes a 20% down payment and gives an installation note for the balance. Sebastian discounts the note with First State Bank and receives the proceeds minus the bank discount. Sebastian remains contingently liable of the discounted notes. With the economic downturn, sixty percent of the notes are now in default and Sebastian has constructed virtually nothing within the last 10 months. When you arrive to discuss the upcoming audit, you notice that the parking lot, which was full last year, is nearly empty. The CFO assures you that the slowdown is merely temporary and that the company is starting to get in new contracts every day. In fact, the CFO brags that they have hired new crews to begin five new projects next week.
As you begin the audit, you notice the following:
1. Of the 250 requests for confirmations of accounts receivable that were mailed, only 30 were returned after two mailings.
2. A number of the general ledger transactions lacked documentary support.
3. The company’s property and equipment ledgers for depreciation could not be reconciled to the general ledger.
4. The internal control report represented and signed by the CFO as “Excellent” showed a significant number of compliance deviations.
(a) Based on this information, discuss the circumstances demanding special risk assessment attention.
(b) Use the information found to discuss the most important assertions in this case.
(c) Based on the Sarbanes-Oxley Act of 2002, what corporate responsibility for financial reports does the CFO appear to have violated?