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Auditing and Accounting Cases Investigating Issues of Fraud and Professional Ethics 4th edition Jay Thibodeau, Deborah Freier - Solutions
Consult Paragraphs 14-15 of PCAOB Auditing Standard No. 13. If you were auditing Waste Management, what type of documentary evidence would you require to evaluate the propriety of a top-side adjusting journal entry?
Consult Paragraph 14 of PCAOB Auditing Standard No. 5. Based on the case information, do you think this paragraph relates to the use of top-side adjusting journal entries at an audit client like Waste Management in any way? Why or why not?
Consult Paragraphs 26-27 of PCAOB Auditing Standard No. 5. Do you believe that the period end financial reporting process should always be evaluated by auditors as a significant and material process during an audit of internal control? Why or why not?
Consult Paragraphs 71-72 of PCAOB Auditing Standard No. 12. Identify one specific control procedure that could be designed to prevent or detect a misstatement related to a top-side adjusting journal entry.
Consult Paragraphs 4-8 of PCAOB Auditing Standard No. 15. Based on your understanding of audit evidence, did Arthur Andersen rely on sufficient appropriate audit evidence in auditing the valuation assertion related to FOF’s natural resources assets? Why or why not?
Consult Paragraph 10 of PCAOB Auditing Standard No. 15. Next consider the series of comparisons prepared by the Denver office of Arthur Andersen of prices charged by the King group to FOF, King affiliates, and other knowledgeable industry purchasers. Can you think of any additional evidence that
Consult Paragraphs 24-27 of PCAOB Auditing Standard No. 14. Based on the case information presented, do you believe that the management of FOF exhibited bias in their estimates? Why or why not? Next, if they did exhibit bias, please identify two steps that you would take if you were auditing FOF.
Do you believe Andersen had a duty of client confidentiality to KRC that would prohibit the firm from disclosing to FOF any relevant knowledge it may have had related to KRC’s costs? Why or why not?
Based on your understanding of the information presented in the case, how did Enron’s Chewco SPE fail to meet the outside equity requirement for non consolidation? Did Enron meet the control requirement for non consolidation?
Consult Paragraphs 4-8 of PCAOB Auditing Standard No. 15.Based on your understanding of audit evidence; did Arthur Andersen rely on sufficient appropriate audit evidence in its audit of the Chewco transaction? Why or why not?
Consult Section 401 of SARBOX. How would Section 401 apply to the Enron audit? Do you think Section 401 would have improved the presentation of Enron’s financial statements? Why or why not?
Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. Identify one or more relevant financial statement assertions about at least one financial statement account related to the Chewco transaction. Provide adequate support for your answer.
Consult Paragraphs13-21 of PCAOB Auditing Standard No. 15.What is meant by a restructuring reserve? As an auditor, what type of evidence would you want to examine to determine whether a company was inappropriately accounting for its restructuring reserve?
Consult Paragraphs 29 and 32 of PCAOB Auditing Standard No. 5. As an auditor, do you believe that the different components of the restructuring reserve might be subject to significantly differing levels of inherent risk? Why or why not?
Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. Identify at least one relevant financial statement assertion related to the restructuring reserve account. Why is it relevant?
This case describes a situation where a company overstated its recorded expenses in 1996 (as compared to understating recorded expenses). Why would a company choose to overstate its expenses and understate its net income?
Describe specifically why the up-front revenue recognition practices for sales of IRUs by Qwest were not appropriate under Generally Accepted Accounting Principles (GAAP).
Consult Paragraphs 4-6 of PCAOB Auditing Standard No. 15.Based on your understanding of audit evidence; did Arthur Andersen rely on sufficient appropriate audit evidence in its audit of Qwest’s up-front revenue recognition processes? Why or why not?
Consult Paragraphs 28–30 of PCAOB Auditing Standard No. 5. Identify one relevant financial statement assertion related to revenue recognized for IRU sales by Qwest. Why is it relevant?
Consult Paragraphs 39-41 and Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5. For the assertion identified in Question 3, identify a specific internal control activity that would help prevent or detect a misstatement related to the practice of up-front revenue recognition of IRUs by
Consult Paragraphs 4-6 of AU Section 334. Explain why gains recorded on transactions with related parties would have greater inherent risk of being overstated in the financial statements.
Consult Paragraphs 23-25 of PCAOB Auditing Standard No. 12. Define what is meant by a company’s control environment. Comment on the impact that BFA’s related party disclosure practices would have on an auditor’s assessment of BFA’s control environment.
Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. What is the most relevant financial statement assertion(s) about the related party transaction activity at BFA? Why? Please provide support for your answer.
Consult Paragraphs 39-41 and Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5. For the assertion identified in Question 3, identify a specific internal control activity that would help prevent or detect a misstatement connected to the related party transaction activity at BFA.
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 (i.e., the fraud triangle)? Based on the information provided in the case, which of these three conditions was most
Consult Paragraphs 26-27 of PCAOB Auditing Standard No. 5 and Paragraph 41 of PCAOB Auditing Standard No. 13. Do you believe that the period-end financial reporting process deserves special attention from auditors? Why or why not?
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 the management team at Waste Management?
Consult Sections 302 and 305and Title IX of SARBOX. Do you believe that these provisions will help deter fraudulent financial reporting by a top management group such as that of Waste Management? Why or why not?
Describe why the recognition of revenue for IRU swaps for fiber-optic assets that were not actually needed by Qwest is inappropriate under GAAP. As an auditor, what type of evidence would allow you to determine whether the recognition of this revenue would be appropriate under GAAP?
Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. Identify one relevant financial statement assertion related to the revenue account that is impacted by an IRU swap. Why is it relevant?
Consult Paragraphs 39-41 and Paragraph A5(in Appendix A) of PCAOB Auditing Standard No. 5. For the assertion identified in Question 2, identify a specific internal control activity that would help prevent a misstatement related to the recognition of revenue for IRU swaps.
Next, for the assertion identified in Question 2, identify a specific internal control activity that would help detect a misstatement related to the recognition of revenue for IRU swaps.
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?
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 agree 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? Discuss.
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.
Paragraphs 5-7 of PCAOB Auditing Standard No. 13. Comment about how your understanding of the inherent risks identified at Enron (in Question 13) 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 inherent risk assessment for the relevant assertions about revenue. Finally, identity the most relevant assertion for revenue
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? Discuss.
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? Discuss.
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 to an internal control audit at Enron.
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 is needed? Why or why not?
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? Discuss.
Consult Sections 302 and 305 and Title IX of SARBOX. Do you believe that these new provisions could help deter fraudulent financial reporting by an upper management group? Why or why not?
Based on your understanding of the information presented in the case, how did Enron’s Chewco SPE fail to meet the outside equity requirement for non consolidation? Did Enron meet the control requirement for non consolidation? Discuss.
Consult Paragraphs 4-8 of PCAOB Auditing Standard No. 15. Based on your understanding of audit evidence, did Arthur Andersen rely on sufficient appropriate audit evidence in its audit of the Chewco transaction? Why or why not?
Consult Section 401 of SARBOX. How would Section 401 apply on the Enron audit? Do you think Section 401 would have improved the presentation of Enron’s financial statements? Why or why not?
Consult Paragraphs 28-30 of PCAOB Auditing Standard No. 5. Identify one or more relevant financial statement assertions about at least one financial statement account related to the Chewco transaction. Provide adequate support for your answer. Discuss.
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 SEC approval parameters, do you believe that the employee had
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 rewere needed? Why or why not?
Refer to Section 301 of SARBOX. Do you believe that Section 301 is important to maintaining independence between the auditor and the client? Why or why not?
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.
Consider the Sithe Energies contract described in the case. Does the accounting for this contract provide an example of how Enron violated the revenue recognition principle? Why or why not? Please be specific. Discuss.
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 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? Discuss.
What is auditor independence, and what is its significance to the audit profession? In what ways was Arthur Andersen’s independence potentially affected on the Waste Management audit, if any?
Consider the practices of basketing and bundling. Briefly explain why each practice is not appropriate under GAAP.
Consult Paragraphs 6–7 of PCAOB Auditing Standard No. 13.Describe why netting write-offs against other gains would be effective for Waste Management’s management team in trying to cover up their fraudulent behavior. Discuss.
Consult Paragraph 10 of PCAOB Auditing Standard No. 15. As an auditor, what type of evidence would allow you to detect whether your client was engaging in behaviors that are designed to mask fraudulent behavior (such as basketing, bundling or netting)?
Consult Paragraphs 14-15 of PCAOB Auditing Standard No. 13. If you were auditing Waste Management, what type of documentary evidence would you require to evaluate the propriety of a top-side adjusting journal entry? Discuss.
Consult Paragraph 14 of PCAOB Auditing Standard No. 5. Based on the case information, do you think this paragraph relates to the use of top-side adjusting journal entries at an audit client like Waste Management? Why or why not?
Consult Paragraphs 26-27 of PCAOB Auditing Standard No. 5 and Paragraph 41 of PCAOB Auditing Standard No. 13. Do you believe that the period-end financial reporting process should always be evaluated by auditors as a significant and material process during an audit of internal control? Why or why
Consult Paragraphs 71-72 of PCAOB Auditing Standard No. 12. Identify one specific control procedure that could be designed to prevent or detect a misstatement related to a top-side adjusting journal entry. Discuss.
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 (i.e., the fraud triangle)? Based on the information provided in the case, which of these three conditions was most
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 such as that of Waste Management?
Consult Sections 302 and 305 and Title IX of SARBOX. Do you believe that these provisions will help to deter fraudulent financial reporting by a top management group such as that of Waste Management? Why or why not?
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
Consider the role of the Waste Management employee who was responsible for calculating depreciation expense and recording the proper amount in the financial statements. Assuming the employee knew that the consolidating entries in the fourth quarter recorded by upper management were fraudulent, do
Consider the decision by CFO James Koenig and Corporate Controller Thomas Hau to phase in the new GAAP method to capitalize interest expense over three years. Do you believe that this decision was in the best interests of the shareholders in the long run? Why or why not? Discuss.
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 are needed? Why or why not?
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 Waste Management violated the expense recognition principle. In your description, please identify a journal entry that may have been used by Waste management to commit the fraud. Discuss.
Consult Paragraph 2 and Paragraph A5 (in Appendix A) of PCAOB Auditing Standard No. 5. Do you believe that Waste Management had established an effective system of internal control over financial reporting related to the depreciation expense recorded in its financial statements? Why or why not?
Consult Paragraphs 5–6 of PCAOB Auditing Standard No. 15. As an auditor, what type of evidence would you want to examine to determine whether Waste Management’s decision to change the useful life and salvage value of its assets was appropriate under GAAP? Discuss.
Consider the principles, assumptions, and constraints of Generally Accepted Accounting Principles (GAAP). What is the specific definition of an asset?
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? Discuss.
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. Discuss.
Consult Paragraph 2 and 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 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. Discuss.
Consult Paragraphs 5-7 of PCAOB Auditing Standard No. 13. Comment about how your understanding of the risks identified at WorldCom (in Question 14) would influence the nature, timing, and extent of your audit work at WorldCom.
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 on 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
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? Discuss.
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? Discuss.
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 .04-.08 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 opinions? Why or why not?
Consult Paragraphs 18-19 of PCAOB Auditing Standard No. 5. What specific factors must external auditors consider before using the work of other professionals as evidence to support their own internal control opinions?
Consult Paragraphs 1–2 of Ethics Rule 102 (ET 102). Next, consider the roles of Ron Lomenzo and Lisa Taranto. Assume that these employees knew that the entries being proposed by Scott Sullivan were fraudulent; do you believe that Lomenzo and Taranto should have recorded the journal entries as
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 Paragraph 14 and Paragraph A8 (in Appendix A) of PCAOB Auditing Standard No. 5. Provide examples 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.
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.
Provide one specific example of how WorldCom violated the revenue recognition principle in this situation. 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 and Paragraph 68 of PCAOB Auditing Standard No. 12. Do you believe that WorldCom had established an effective system of internal control over financial reporting related to the revenue recorded in its financial statements?
Consult Paragraph 25 of PCAOB Auditing Standard No. 5. Define what is meant by control environment. Explain why the control environment is so important to effective internal control over financial reporting at an audit client like WorldCom.
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