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Auditing and Accounting Cases Investigating Issues of Fraud and Professional Ethics 4th edition Jay Thibodeau, Deborah Freier - Solutions
Consult Paragraph 14 of PCAOB Auditing Standard No. 5 and Paragraph 68 of PCAOB Auditing Standard No. 12. Based on the case information, do you believe that Enron had established an effective system of internal control over financial reporting related to the contract revenue recorded in its
Consult Paragraphs 4–8 of PCAOB Auditing Standard No. 15.As an auditor, what type of evidence would you want to examine to determine whether Enron was inappropriately recording revenue from the Sithe Energies contract?
Consult Paragraphs 1–2 of Ethics Rule 102 (ET 102). Next, consider the role of the Enron employee who was responsible for applying MTM accounting rules to electric power contracts like the Eli Lilly contract. Assuming the employee knew that the use of MTM accounting was beyond the scope of the
Consider the principles, assumptions and constraints of Generally Accepted Accounting Principles (GAAP). Define the matching principle and explain why it is important to users of financial statements.
Based on the case information provided, describe specifically how WorldCom violated the matching principle. In your description, please identify a journal entry that may have been used by WorldCom to commit the fraud.
Consult Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5. Do you believe that WorldCom had established an effective system of internal control over financial reporting related to the line cost expense recorded in its financial statements? Why or why not?
Consult Paragraphs 13–21 of PCAOB Auditing Standard No. 15.As an auditor at WorldCom, what type of evidence would you want to examine to determine whether the company was inappropriately releasing line costs? Please be specific.
Consult Paragraphs 1–2 of Ethics Rule 102 (ET 102). Next, consider the actions of David Schneeman and Charles Wasserott. Do you believe that these employees should have recorded the journal entries as directed by Senior Vice President and Controller David Myers? Why or why not?
Define a Ponzi scheme. Next, describe why the Madoff fraud is considered a Ponzi scheme. Please be specific in your explanation.
Describe what is meant by a “split-strike” strategy. Do you believe that this strategy is viable? Why or why not?
Consider the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the Act, the PCAOB now has authority to inspect the work of audit firms auditing broker-dealer firms. Do you believe that this provision is going to make a difference? Why or why not?
Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 appears to be driven in part by the Madoff Ponzi scheme. Indeed, after the SEC’s investigations failed to detect the Madoff fraud (see Case 1.12), many sections of Title IX sought to improve the performance of the
Consider the principles, assumptions and constraints of Generally Accepted Accounting Principles (GAAP). Define the revenue recognition principle and explain why it is important to users of financial statements. Discuss briefly.
Describe specifically why the revenue recognition practices of Dex were not appropriate under GAAP.
Consult Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5 and Paragraph 68 of PCAOB Auditing Standard No. 12.Do you believe that Qwest had established an effective system of internal control over financial reporting related to the revenue recorded by Dex in its financial statements? Why
Consult Paragraph 25 of PCAOB Auditing Standard No. 5. Next, consider the impact of the pressure exerted by Qwest’s senior management team to meet aggressive revenue and earnings targets. Comment about why such a “tone at the top” would have a pervasive effect on the reliability of financial
Consider the role of an upper manager at Dex. Do you believe that a “point of publication” method of accounting is allowable under Generally Accepted Accounting Principles? Whether you do or not, please make an argument that supports the recognition of revenue related to the Colorado Springs
What is auditor independence, and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? Based on the case information, do you believe that Arthur Andersen violated any principles of auditor independence? Why or why not?
Consider that both KRC and FOF, including its NRFA, were audited by Arthur Andersen. In addition, Arthur Andersen audited King’s personal accounts. Do you believe these relationships impaired the independence of Arthur Andersen? Why or why not?
Would your answer change if different partners were assigned to both the KRC audit and the NRFA audit? Assume that both audit teams were completely different. Why or why not would your answer be different?
Refer to Sections 201, 203, and 206 of SARBOX. Based on your understanding of the FOF audit, do you believe these sections were needed? Why or why not? Be specific.
Consult PCAOB Ethics and Independence Rule 3520. What is auditor independence, and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact?
Refer to Section 201 of SARBOX. Identify the services provided by Arthur Andersen that are no longer allowed to be performed. Do you believe that Section 201 was needed? Why or why not?
Refer to Sections 203 and 206 of SARBOX. How would these sections of the law have impacted the Enron audit? Do you believe that these sections were needed? Why or why not?
Refer to Section 301 of SARBOX. Do you believe that Section 301 was important to maintaining independence between the auditor and the client? Why or why not?
What is auditor independence, and what is its significance to the audit profession? In what ways, if any, was Arthur Andersen’s independence potentially impacted on the Waste Management audit?
Consult Paragraphs 3-6 of Quality Control Standard No. 20 (QC 20).Considering the example in the Waste Management case, please explain why a review by the practice director and audit division head is important in the operations of a CPA firm. In your opinion, was this review effective at Waste
Consult Paragraph 7 of PCAOB Auditing Standard No. 13.Do you believe that Andersen’s final decision regarding the PAJE’s was appropriate, under the circumstances? Would your opinion change if you knew that all of the adjustments were based on subjective differences (such as a difference in the
Refer to Sections 203 and 206 of SARBOX. How would these sections of the law have impacted the Waste Management audit? Do you believe that these sections were needed? Why or why not?
Consult PCAOB Ethics and Independence Rule 3520. What is auditor independence, and what is its significance to the audit profession? Based on the case information, do you believe that Andersen violated this rule? Why or why not?
Consult Paragraphs 5-7 of PCAOB Auditing Standard No. 13.Given the reluctance of WorldCom’s management team to communicate with Andersen, do you believe that Andersen exercised due care and professional skepticism in completing the audit? Why or why not?
Consult Paragraphs 13-21 of PCAOB Auditing Standard No. 15.In terms of audit effectiveness and efficiency, briefly explain the difference between substantive analytical procedures and substantive test of details. Do you believe it was appropriate for Andersen to rely primarily on substantive
Consult Paragraphs 14 and A8 (in Appendix A) of PCAOB Auditing Standard No. 5. Provide an example of both a preventive control and a detective control that could address the risk that a fraudulent top-side adjusting journal entry could be made by a member of management.
Consult Paragraphs 3-6 of Quality Control Standard No. 20 (QC 20).Explain why an accounting and auditing research function (like Andersen’s PSG) is important in the operations of a CPA firm. What role does the function play in completing the audit?
Consult Section 103 of SARBOX. Do you believe that the engagement leader of an audit (like David Duncan on the Enron audit) should have the authority to overrule the opinions and recommendations of the accounting and auditing research function (like the PSG)? Why or why not?
After Carl Bass was removed from the Enron account, he indicated to his boss that he did not believe Enron should have known about internal discussions regarding accounting and auditing issues. Do you have the same opinion with Bass’s position? Why or why not?
Consult Section 203 of SARBOX. Do you believe that this provision of the law goes far enough? That is, do you believe the audit firm itself (and not just the partner) should have to rotate off an audit engagement every five years? Why or why not?
Consult Paragraphs 4-8 of PCAOB Auditing Standard No. 15. Next, consider the alleged accounting improprieties related to increased expenses from the 1996 audit. If you were auditing Sunbeam, what type of evidence would you like to review to determine whether Sunbeam had recorded the litigation
For the excessive litigation reserves and excessive cooperative advertising amount, identify the journal entry that is likely to have been proposed by Andersen to correct each of these accounting improprieties. Why would Sunbeam be interested in recording journal entries that essentially reduced
Consult Paragraphs 17-23 of PCAOB Auditing Standard No. 14.As discussed in the case, during both the 1996 and 1997 audit, Phillip Harlow allegedly discovered a number of different accounting entries made by Sunbeam that were not compliant with Generally Accepted Accounting Principles (GAAP).
Consult Sections 204 and 301 of SARBOX. In the post-Sarbanes audit environment, which of the issues that arose in 1996 and 1997 would have to be reported to the audit committee at Sunbeam? Do you believe that communication to the audit committee would have made a difference in Harlow’s decision
Refer to the Fundamental Principles governing an audit. Under the Responsibilities Principle, auditors are required to exercise due care and maintain professional skepticism throughout the audit. Based on the case information, discuss the ways in which the BLMIS auditor, David Friehling,
Consider the charges brought against the BLMIS auditor, Friehling, regarding his failure to complete certain audit steps. If you were auditing BLMIS, what type of evidence would you like to review to determine whether BLMIS had truly purchased, sold and maintained proper custody of investment
Consider an auditor’s common law liability to third parties. Please describe the difference between the three levels of failure to exercise professional care, ordinary negligence, gross negligence and fraud. Based on the case information, please comment on the possible level of failure that was
Consider Section 24 of the Securities Act of 1933 and Section 32 of the Securities Exchange Act of 1934. Do you believe an auditing firm should be held criminally responsible for a fraud committed by its client’s management team? Next, based on the case information, do you believe that the BLMIS
Consult Paragraph 2 of PCAOB Auditing Standard No. 3. Define audit documentation. Why is it important for an auditor to retain audit documentation for a specific period of time?
Refer to Section 103 of SARBOX. Do you believe that this provision of the law goes far enough; that is, do you believe that the law is adequate related to audit documentation requirements? Why or why not?
Consult Paragraphs 4-6 of PCAOB Auditing Standard No. 3. In your own words, describe what is expected to be documented in the audit work papers for each relevant financial statement assertion.
Consult Paragraphs 14-15 PCAOB Auditing Standard No. 3. Do you believe that the shredding of documents acquired during the audit process still occurs? Why or why not?
Consider the actions of Andersen lawyer Nancy temple and practice director Michael Odom. Do you believe that their actions were appropriate under the circumstances? Why or why not?
Consult Paragraph 9 of PCAOB Auditing Standard No. 5. Based on your understanding of inherent risk assessment, identify three specific factors about IOS and/or FOF that would be likely to impact your audit procedures if you were conducting an audit of IOS and/or FOF.
Consider the memo illustrated in Exhibit 3.6.1. If you were auditing FOF, would this memo impact your planned audit procedures? If so, what is the financial statement assertion that would cause you the greatest concern? Why?
Consult Paragraphs .04-.06 of AU Section 334. Given that all of FOF Prop’s investments in natural resources had also been owned (or were currently owned) by a member of the King group, comment on why the existence of related parties (such as King Resources and FOF) presents additional risks to an
Consult Paragraphs .09-.10 of AU Section 334. If you were auditing one of the transactions between King Resources and FOF, what type of evidence would you seek to examine to determine whether the transaction was consummated on an arm’s length basis?
Consult Paragraph #7-10 of PCAOB Auditing Standard No. 12.Based on your understanding of inherent risk assessment and the case information, identify three specific factors about Enron’s business model in the late 1990s that might cause you to elevate inherent risk at Enron.
Consult Paragraphs5-7 of PCAOB Auditing Standard No. 13.Comment about how your understanding of the inherent risks identified at Enron (in Question 1) would influence the nature, timing, and extent of your audit work at Enron.
Consult Paragraphs 28–30 of PCAOB Auditing Standard No. 5. Next, consider how the change in industry regulation and Enron’s resulting strategy shift would impact your risk assessment for the relevant assertions about revenue. Finally, identify the most relevant assertion for revenue before and
Consult Paragraphs # 52-53 of PCAOB Auditing Standard No. 12.Consider how a revenue recognition fraud might occur under Enron’s strategy in the late 1990s. Next, identify an internal control procedure that would prevent, detect, or deter such a fraudulent scheme?
Consult Paragraphs 5-8 of PCAOB Auditing Standard No.8 and Paragraphs 7-10 of PCAOB Auditing Standard No. 12. Based on your understanding of inherent risk assessment, identify three specific factors about BFA that might cause you to elevate inherent risk. Briefly provide your rationale for each
Consult Paragraphs 4-6 of AU Section 334. Comment on why the existence of related parties (such as ALO and New Church Ventures) presents additional risks to an auditor. Do you believe that related party transactions deserve special attention from auditors? Why or why not?
Assume you are an investor in BFA. As an investor, what type of information would you be interested in reviewing before making an investment in BFA? Do you believe that BFA should have been exempt from Arizona banking laws? Why or why not?
Consult Paragraph 7 of PCOAB Auditing Standard No. 9.Consider the planning phase for the audit of BFA’s trust department operations. As an auditor, what type of evidence would you want to collect and examine to determine whether BFA was meeting the U.S. Treasury regulations for nonbank passive
Consult Paragraphs 7-10 of PCAOB Auditing Standard No. 12. Based on your understanding of risk assessment and the case information, identify three specific factors about WorldCom’s strategy that might cause you to elevate the risk of material misstatement.
Consult Paragraphs 5-7 of PCAOB Auditing Standard No. 13.Comment about how your understanding of the risks identified at WorldCom (in Question 1) would influence the nature, timing, and extent of your audit work at WorldCom.
Please consult Paragraph 33 and Paragraph B10 (in Appendix B) of PCAOB Auditing Standard No. 5. If you were conducting an internal control audit of WorldCom, comment about how WorldCom’s acquisition strategy would impact the nature, timing, and extent of your audit work at WorldCom.
Consult Paragraphs # 65-66 of PCAOB Auditing Standard No. 12.Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (that is, the fraud triangle)? Based on the information provided in the case, which of these three conditions appears
Consult Paragraphs 5-8 of PCAOB Auditing Standard No.8 and Paragraphs 7-10 of PCAOB Auditing Standard No. 12. Based on your understanding of inherent risk assessment and the case information, identify three specific factors about Sunbeam that might cause you to elevate inherent risk.
Consult Paragraphs 8-10 of PCAOB Auditing Standard No. 13.Comment about how your understanding of the inherent risks identified at Sunbeam (in Question 1) would influence the nature, timing, and extent of your audit work at sunbeam.
Consult Paragraphs 29 and 32 of PCAOB Auditing Standard No. 5. Next briefly identify the types of revenue earned by Sunbeam. Do you believe that any of the different types of revenue earned by Sunbeam “might be subject to significantly differing” levels of inherent risk? Why or why not?
Consult Paragraphs 52-53 of PCOAB Auditing Standard No. 12. For one of Sunbeam’s revenue types (please choose one), brainstorm about how a fraud might occur. Next identify an internal control procedure that would prevent, detect, or deter such a fraudulent scheme.
Consult Paragraphs 65-66 of PCOAB Auditing Standard No. 12.Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs(that is, the fraud triangle)? Based on the information provided in the case, which of these three conditions appears to
Consult Paragraphs 5-8 of PCAOB Auditing Standard No.8 and Paragraphs 7-10 of PCAOB Auditing Standard No. 12.Based on your understanding of inherent risk assessment and the case information; identify three specific factors about Qwest’s business model that might cause you to elevate inherent risk
Consult Paragraphs8-10 of PCAOB Auditing Standard No. 13.Comment on how your understanding of the inherent risks identified at Qwest (in Question 2) would influence the nature, timing, and extent of your audit work at Qwest.
Consult Paragraphs 29 and 32 of PCAOB Auditing Standard No. 5. Next consider revenue earned in the construction services and the communication services businesses. Do you believe that any of the different types of revenue earned by Qwest might be subject to significantly differing levels of
As stated in the case, until an investigation into his company in 2006, Madoff had not registered as an investment advisor with the SEC. Please refer to the SEC website (www.sec.gov). Are all investment advisors required to register with the SEC? How can the investing public discover whether an
Consult Paragraphs 5–8 of PCAOB Auditing Standard No. 8 and Paragraphs 7–10 of PCAOB Auditing Standard No. 12. Based on your understanding of inherent risk assessment and the case information, identify three specific factors about Madoff Securities’ business model that might cause you to
Consider the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Explain the changes brought upon by this act to the hedge fund industry. Do you believe that the Act went far enough? Why or why not?
In August 2011, an appeals court ruled that Madoff’s customers were eligible to recover only the money that they had invested (estimated at $17.3 billion), not the fake profits that Madoff had promised (which totaled $52 billion). Do you agree with this decision? Why or why not?
Consult Paragraphs 5–8 of PCAOB Auditing Standard No. 8 and Paragraphs 7–10 of PCAOB Auditing Standard No. 12.Based on your understanding of inherent risk assessment and the case information; identify three specific factors about Waste Management that might cause you to elevate inherent risk.
Consult Paragraphs 29 and 32 of PCAOB Auditing Standard No. 5. Identify the types of revenue earned (a brief description will do) by Waste Management. Do you believe that any of the different types of revenue earned by Waste Management might be subject to significantly differing levels of inherent
Consult Paragraphs 8-10 of PCAOB Auditing Standard No. 13.Comment on how your understanding of the different types of revenue earned (in Question 2) would influence the nature, timing, and extent of your audit work at Waste Management.
Consult Paragraphs 52-53 of PCOAB Auditing Standard No. 12. For one of Waste Management’s revenue sources (please choose one), brainstorm about how a fraud might occur. Next identify an internal control procedure that would prevent, detect, or deter such a fraudulent scheme?
Consult Paragraphs 65-69 of PCAOB Auditing Standard No. 12.Based on your understanding of fraud risk assessment, what three conditions are likely to be present when a fraud occurs (the fraud triangle)? Based on the information provided in the case, which of these three conditions appears to have
Consult Paragraph 25 of PCAOB Auditing Standard No. 5. Define what is meant by control environment. Why is the control environment so important to effective internal control over financial reporting at an audit client like Enron?
Consult Paragraphs 21-22 of PCAOB Auditing Standard No. 5. Comment on how your understanding of Enron’s control environment and other entity-level controls would help you implement a top-down approach for an internal control audit at Enron.
Consult Sections 204 and 301 of SARBOX. What is the role of the audit committee in the financial reporting process? Do you believe that an audit committee can be effective in providing oversight of a management team like Enron’s?
Consult Sections 302 and 305 and Title IX of SARBOX. Do you believe that these provisions could help to deter fraudulent financial reporting by an upper management group? Why or why not?
What is the difference between an information technology general control and an automated application control? Provide an example of each in your response.
Consult Paragraphs B1-B6 (in Appendix B) of PCAOB Auditing Standard No. 12. Do you believe that information technology general controls have a pervasive effect on the reliability of financial reporting at an audit client like WMI? Why or why not? Please be specific.
Consult Paragraphs B28-B31 (in Appendix B) of PCAOB Auditing Standard No. 5. Define what is meant by a benchmarking strategy. Based on the case information, do you believe that a benchmarking strategy would have been appropriate during the first year audit at WMI? Why or why not?
Consult paragraph A4 (in Appendix A) of PCAOB Auditing Standard No. 5. Given the PCAOB’s view, do you believe that the audit firm should be providing assurance on the information contained in public company press releases? Why or why not?
Consult Paragraphs 23-25 of PCAOB Auditing Standard No. 12. Define what is meant by control environment. Based on the information provided in the case, explain why the control environment is so important to effective internal control over financial reporting at an audit client like the Baptist
Consult Sections 204 and 301 of SARBOX. What is the role of the audit committee in the financial reporting process? Can you provide an example of how the audit committee might have been helpful in the BFA situation?
Consult Paragraph 56 of PCAOB Auditing Standard No. 12.What is meant by the term whistleblower within the context of the financial reporting process? Do you think that all whistleblower complaints should go directly to the audit committee? Why or why not? Do you think that a whistleblower program
Consult Paragraph 5 of PCAOB Auditing Standard No. 10.Do you believe the Arthur Andersen auditors responded appropriately to the information received from BFA’s former accountant, Karen Paetz? Why or why not?
Please consult Section 401 of SARBOX. How would Section 401 apply on the BFA audit? Do you believe that Section 401 would have improved the presentation of BFA’s financial statements?
Consult Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5. Based on your understanding of WorldCom’s internal audit department, do you believe that the department could have been helpful in the internal control process at WorldCom? Why or why not?
Consult Paragraph 56 of PCAOB Auditing Standard No. 12 and Sections 204 and 301 of SARBOX. Based on the case information, do you believe that WorldCom’s audit committee was effective in its management of the internal audit department? Why or why not?
Consult Paragraphs 4-8 of AU Section 322. Do you believe that auditors should be allowed to use the work of other professionals as evidence to support their own internal control audit opinion? Why or why not?
Consult Paragraphs 18-19 of PCAOB Auditing Standard No. 5. What factors must the external auditor consider before using the work of other professionals as evidence to support an internal control opinion? Please be specific.
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