The WorldCom bankruptcy is one of the largest in U.S. economic history. Much of the fraud was carried out by capitalizing operating expenses, such as payments to other companies for line rental, as fixed assets. Adjusting journal entries were made at the company's headquarters in Mississippi even though property accounting records were located in Dallas.
a. Would it be considered unusual to find debits to fixed assets coming from a journal entry source rather than a purchase journal? Explain.
b. Would it be considered unusual to find entries to accumulated depreciation and depreciation expense to come from a journal entry source rather than another source?
c. Assume you were auditing WorldCom, and in your sample of debits to fixed assets, you find an entry for $500,000 with the following notation: "Capitalization of line capacity per CFO, amounts were originally incorrectly recorded as an expense."
Explain what you would do to complete the audit of this item.
How might the professionally skeptical auditor respond? What evidence would you need to see to either corroborate or question the entry?