General Information free essay sample

The issues to be discussed for the cases follow. Berkshire Hathaway – Tuesday, September 7, 2004 Background: The case captures the dynamics of auditor-client relations. The SEC has recently been critical of the audit profession, arguing that CPA firms are too ready to agree with clients questionable accounting decisions. This case demonstrates what can happen to an audit firm when it stands up to an audit client over an audit issue. Actors: Warren Buffett, Peat Marwick partner in 1983, KPMG partner in 1984 (assume a new partner was involved) 1. Consider the merits of each side’s position over the accounting treatment of the proportionate stock redemption (capital gain vs. dividend). Which position do you believe is correct? Explain why. (Note: a proportionate stock redemption is a transaction in which ownership interests are redeemed proportionate to the total shares outstanding. As a result, each shareholder owns the same percentage of the company after the redemption as before. For example, assume you owned 1000 shares of a company, representing 5 percent of the total shares outstanding. The company redeemed 10 percent of the shares. After the transaction, you own 900 shares, and they would still represent 5 percent of the total shares outstanding. ) 2. Do you think Peat Marwick made a good decision in demanding that Berkshire Hathaway account for the proportionate redemption as a capital gain? (Ignore whether you believe that the transaction should be treated as a dividend or capital gain. ) 3. Do you think Warren Buffett overreacted in firing Peat Marwick? Consider the quote from Warren Buffet in the Berkshire Hathaway annual report in your response. In analyzing this question, ignore whether you believe that the transaction should be treated as a dividend or capital gain. ) 4. Is GAAP a precise set of concepts? As an auditor, do you prefer precise accounting standards, or should companies have some flexibility in their application of GAAP? (The issue has sometimes been referred to as rule-based versus principle-based standards. ) 5. The audit firm reversed its pos ition regarding the proportionate stock redemption from 1983 to 1984. Why? Should the auditors have considered the potential for future transactions in their decision as to how to treat the proportionate stock redemption in 1983? 6. Was it necessary to restate the 1983 financial statements to be consistent with the 1984 treatment with respect to the recording of the proportionate stock redemption? 7. The dispute in this case was over an accounting principle. Would the outcome have been different if the dispute was over the amount of an accounting estimate (for example, the allowance for doubtful accounts)? Over Leigh Ann Walker Thursday, September 9, 2004 (Mark Dalton, Karen Siu, Luis Vasquez) Background: The case highlights the importance of ethics to the CPA profession. Actors: Leigh Ann Walker, Jackie Vaughan, Don Roberts (Group 1 – Mark Dalto, Karen Siu, Luis Vasquez) 1. Do you believe Walkers actions call into question her personal integrity as an auditor? Consider whether her actions suggest whether she is likely to kitchen-table (perform work without charging the time), or prematurely sign-off (indicate work is completed without performing it). 2. Ignore that Walker was caught in the lie. Do you think her decision to lie was understandable? How else could she have addressed questions about her performance on the CPA exam? 3. Assume that Walker’s intent was not to lie, but that she was merely caught off guard by Vaughn’s question. How could she have handled the situation? 4. Do you think Vaughn should have handled the situation differently? Explain. 5. Do you believe the firms response to the situation was appropriate? Explain. Are there other ways that the situation could have been successfully resolved? . Was it appropriate for the firm to promise Walker a good recommendation? Oak Industries – Thursday, September 16, 2004 Tuesday, September 21, 2004 Background: Auditors have historically been more concerned with overstatements than understatements of earnings. However, recent SEC rulings suggest that auditors need to also be concerned about understatements of earnings, particularly when they are used to manipulate ea rnings in future periods. Actors: Oak Industries CEO, CFO, and controller (Group 4 – Trine Juliussen, Sang Uk Jung, Laura Platler) . Some people would argue that creating â€Å"rainy day† funds is just conservative accounting. Why should investors and the SEC care about understatements of earnings? 2. Why did Oak Industries intentionally understate earnings? What other factors might motivate firms to understate their earnings? 3. Auditors have generally been more concerned about overstatements of earnings than understatements. Auditors have also normally only been concerned when those overstatements exceeded certain materiality limits, such as 5% of net income. Has this responsibility increased to extend to lower materiality limits and to understatements? Is this socially desirable? 4. As an auditor/investor, what sort of reported earnings would arouse your suspicions? Where would you look for manipulations of earnings? 5. The company’s executives rejected the controller’s recommendation to disclose the reversal of the rainy day reserves. What should the controller have done? Suppose you discovered a misstatement in a client’s earnings, but the manager and partner told you to ignore it. What would you do? ACC 476/726 – Fall 2004 Discussion Case Questions Regina Vacuum – Thursday, September 23, 2004 Background: Regina is one of many high profile frauds involving manipulation of receivables and inventory. Often, these types of frauds can be readily identified through analytical procedures. Actors: Don Sheelen, KPMG partner, Regina chairman (Group 8 – Liz Dwyer, John Orcutt, Chuck Sullivan) 1. Regina was sued for false advertising in an ad. Should that have affected how the auditors approached the audit? 2. What aspects of the fraud were most difficult to detect? What procedures should have allowed the auditor to detect them? 3. Calculate gross margin, inventory turnover, and accounts receivable turnover. What specific problems do these ratios identify? 4. The auditors detected one ship-in-place transaction, but were informed by the client there were no additional ship-in-place transactions. What should the auditors have done? 5. A CPA firm official stated, Were only human, and prefer to trust the people we are auditing. What is the appropriate degree of reliance to place on client inquiries? 6. Were the sentences in the case appropriate? Explain. BarChris Construction Tuesday, October 12, 2004 Major discussion issue What financial figures/ratios did the judge determine to be materially misstated? What factors did the judge appear to focus on? Do you agree with the judge’s application of materiality? Actors: Judge McClean, Berardi, KPMG defense counsel (Group 2 – Matthew Grimm, Yongmei Wang, Kristen Yamane) 1. What do you consider the highest risk areas on this audit? What makes these high risk areas? 2. Ignore that the sale and leaseback was to a related party. The judge ruled that the gain on the sale and leaseback was improper, even though allowed under GAAP. Is the decision by the judge a reasonable standard for auditors? 3. Assume that you are Berardi, the senior in the case. Should he be regarded as responsible for the many problems on the audit? What actions could he have taken to prevent the problems? Crazy Eddie Thursday, October 21, 2004 Major discussion issue According to SAS #99, auditors are responsible for detecting material fraud in the financial statements. Should the auditors be held responsible for failing to detect the fraud at Crazy Eddie? Justify your response. Actors: Eddie Antar, underwriter, Sam Antar, Main Hurdman partner, Main Hurdman auditor, accounting critic (Group 5 Laura Chiu, Fred Qian, Steve Sluty; Group 3 – Jing-Yu Chen, Adfred De la Rosa, Jennifer Scarola) 1. Compute the gross margin ratio ([sales-cost of sales]/sales) and inventory turnover ratio (cost of sales/ending inventory). Note that cost of sales for a nine-month period must be annualized for the turnover ratio. Do these ratios provide any indication of problems? 2. What were the barriers to independence in this case? Are any of these violations of professional standards? 3. Assume you are a partner and have been offered the opportunity to audit Crazy Eddie just prior to the initial public offering. Would you accept the audit? Indicate factors favoring acceptance and factors favoring rejection. Howard Street Jewelers – Thursday, October 28, 2004 Major discussion issue – What major factors allowed this fraud to occur? What key factors should have helped prevent this fraud? Actors: Lore Levi, Julius Levi, Betty, Alvin Levi, accountant (Group 7 – David Black, Wei Lu, Patricia Rice; Group 10 Brett Bushinger, David Lustig, Tanisia Nieves) 1. Consider the longevity of this fraud. What allowed this fraud to go undetected for so long? Do you think that most similar frauds are detected? 2. How was this fraud detected? What other warning signals should the Levi’s have watched for? What accounts or ratios may have signaled that a problem was occurring? 3. Were the cash shortages directly related to the fraud? If there is no theft of cash, why are businesses more likely to have cash shortages than overages? 4. The external accountant did not perform an audit in this case. Do you believe he bears any responsibility for the fraud? ACC 476/726 – Fall 2004 Discussion Case Questions IFG Leasing Tuesday, November 16, 2004 Background and major discussion issue – For certain businesses, the allowance for doubtful accounts is a high risk account. This case involves a simple, but creative method of understating the allowance for doubtful accounts. Why do you think the auditors failed to detect the problems with the aging summaries? Actors: CEO, CFO, Touche Ross partner, junior auditor, experienced auditor (Group 6 – Joo Whan Lee, Jenny Ng, David Runyon; Group 11 Urooj Khan, Martin Oravec, Jennifer Thompson) 1. Ignore the problems with the accuracy of the aging. What factors should have indicated that the percentages used to determine the allowance were too low? What factors may have helped the auditors conclude the percentages used were adequate? How should allowance percentages be established? 2. There were two circumstances where staff auditors changed workpapers at the request of a partner. Do you think it was appropriate for the partner to ask the staff to make these changes? How would you react to the partners requests? 3. The adjustment recorded in 1982 was based on negotiation between the client and the auditors. Do you think this is unusual? 4. The audit staff was judged to be inexperienced. Do you think this is common? What actions could the staff person responsible for assessing the allowance account have taken? Bill DeBurger – Tuesday, November 30, 2004 Major discussion issue – Auditors need to evaluate large accounts based on sampling. This case illustrates the uncertainty that can arise in these tests. Actors: Bill DeBurger, Sam Hakes (Group 9 – Christopher Duffy, Diane Mai, Meredith Veith) 1. Why do you think that Bill was uncertain regarding the value of the inventory?