Handout #6 Learning objectives addressed by this exercise: Chapter 6-Learning Objective 1 1. During audit planning, assume an auditor obtained the following information about an audit client: 1. Management of Kardashian Inc., has recently begun employing a strong conservative bias in all estimates, assumptions, and financial reporting matters. 2. Walmarts board of directors includes a majority of directors who are not independent of management. 3. Cokes assets and revenues are based on significant estimates that involve objective judgments and most uncertainties that are relatively easy to corroborate. 4. Ford Motors Inc. bases their management stock compensation and bonus plan structure entirely on whether the company exceeds the consensus analyst forecast of earning per share. 5. Facebook and other firms in the technology industry do not follow new accounting pronouncements that have resulted in explanatory paragraphs for consistency because they note that strict compliance is unduly costly and the companys stockholders and board of directors have repeatedly voted against the adoption of the pronouncement. 6. WinCo has experienced high turnover in management, but not in its internal audit function. 7. General Electric consistently overstates liabilities and expenses in order to avoid paying out cash dividends in the short-run in order to ensure that they are financially viable and solvent in the long-run. 8. Toyotas management is amenable to proposed adjustments and quickly remediates accounting issues that their auditor identify as marginal or inappropriate accounting. 9. KMarts financial performance is threatened by a high degree of competition and market saturation. 10. The founder and CEO of Rocka Fella Records, Chay-Z, routinely uses the corporate petty cash fund to pay pedicures and baby food when he is low on cash. Chay-Z does not replenish the fund for the amounts because he owns 90% of the company and the amounts are immaterial, representing only 0.0001% of sales. Required: (1) Indicate whether the information indicates an increased risk for fraud (Yes or No); and (2) If the information indicates an increased risk of fraud, indicate which fraud triangle element is indicated: A. Opportunity B. Motivation C. Rationalization D. Not Applicable (if the answer for (1) was No) Example answer for hypothetical scenario information 11: No, D Learning objectives addressed by this exercise: Chapter 6-Learning Objectives 1 and 2 2. The following are activities that occurred at GoodenCo, a nonpublic company. 1. GoodenCos accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the financial statements. 2. GoodenCos controller prepared and mailed a check to a vendor for a carload of material that was not received. The vendors chief accountant, who is a friend of GoodenCos controller, mailed a vendors invoice to GoodenCo, and the controller prepared a receiving report. The vendors chief accountant deposited the check in an account he had set up with a name almost identical to the vendors. 3. The accountant recorded cash received in the first few days of the next accounting period in the current accounting period to avoid a negative cash balance. 4. Discounts on checks to GoodenCos largest vendor are never taken, even though the bills are paid before the discount period expires. The president of the vendors company provides free use of his ski lodge to the accountant who processes the checks in exchange for the lost discounts. 5. GoodenCo shipped and billed goods to a customer in New York on December 23, and the sale was recorded on December 24, with the understanding that the goods will be returned on January 31 for a full refund plus a 5 percent handling fee. 6. GoodenCos factory superintendent routinely takes scrap metal home in his pickup and sells it to a scrap dealer to make a few extra dollars. 7. GoodenCos management decided not to include a footnote about a material uninsured lawsuit against the company on the grounds that the primary user of the statements, a small local bank, will probably not understand the footnote anyway. 8. GoodenCos CEO routinely books flights the day before he travels despite the fact that substantial savings could be had if he booked travel further in advance. Additionally, the CEO books all flights in first class despite the fact that such flights are routinely twice as expensive as comparable business class fares. Required: (1) Identify which of these activities are frauds (Yes or No); and (2) For each fraud, state what type of fraud is occurring: A. Misappropriation of Assets B. Fraudulent Financial Reporting C. Not Applicable (if the answer to (1) is No) Example answer for hypothetical scenario information 11: No, C