such differences could be troublesome for auditors of transatlantic entities containing parents or subsidiaries in each continent, where legal resource and allowable liability limits differ. the purpose of this article are to discuss the abandoing of interpretation 101-16/ describe some effects of interpretation 507-8 and compare and contrast global approaches to limiting accountants ' liability throug the use of engagement letter. rule 101 interpret thta indemnification agreements remove a major stimulus to objective and unbiased consideration of problem encountered in an egagement. regulator wants to retain the right to pursue recovery of losses against auditors of failed institutions ' safety and soundness.
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The person performing the audit should have come across consignment documentation and as a result should have requested to see that inventory.
3. The retail consumer electronics industry was undergoing rapid and dramatic changes during the 1980s. Discuss how changes in an audit client 's industry should affect audit planning decisions. Relate this discussion to Crazy Eddie.
In the early 1980 the consumer electronics industry was growing at an explosive pace. Between the 1981 and 1984 the total sales for the industry doubled. To support increasing sales massive amounts of inventory has to be procured, marked up and sold to consumers. Inventory becomes the biggest asset a retailer has. As part of the audit planning processes the inspection of the inventory system and verification of the actual inventory numbers should have been a priority. Crazy Eddie was able to inflate its financial results by fraudulently altering its inventory counts and was able to conceal these activities from the auditors for several years.
4. Explain what is implied by the term lowballing in an audit context. How can this practice potentially affect the quality of independent audit services?
The term lowballing in an audit context implies that the auditor is pricing its auditing services way below competition in order to get the business. The quote for the auditing services may be at or even below
There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.
2. Evaluate Andersen’s claim that their problems on the Enron audit were due to a few “bad partners” in the organization. If you disagree with this claim, discuss what you think were the root causes of the problem. I do not believe Andersen’s claim. I believe that they had full knowledge of what was happening at Enron. I believe that Enron was paying off the auditors (staffers) in the Houston office. I believe they were
Most of the criticism directed at Crazy Eddie's auditors stemmed from their failure to uncover the huge overstatement of the company's inventory and the related understatement of accounts payable. Third parties who failing to thoroughly investigate numerous suspicious circumstances they discovered. If I was a member of the Crazy Eddie audit team in 1986 and assigned to test the client's year-end inventory cutoff procedures. I selected 30 invoices entered in the accounting records near year-end; 15 in the few days prior to the client's fiscal year-end and 15 in the first few days of the new year. Assume that Client personnel were unable to locate 10 of these invoices. Since not having 10 invoices out of 30 requested in the end and beginning of the fiscal year should be pretty suspicious and should surely be noted in the final audit report. However to proceed with the audit I
Sloan and Spencer Auditing Firm during phase III of Apollo Shoes audit plan, we will focus in two key cycles, which are the following: inventory and warehouse cycle and cash cycle. It is important to understand that are six types of transactions in the inventory and warehouse cycles which are: receive raw materials, store raw materials, process purchase order, and process of goods, store completed goods, and ship completed goods. In addition, it is important understand that cash is chiefly important and exceedingly vulnerable to fraudulent activity this is why an
Analyze the audit opinion formulation process and suggest at least one (1) improvement to the process to strengthen audit opinions. Provide a rationale to support your suggestion.
2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets,
What happened: Millions of dollars in losses were split among the 129 stores and put as an expense on each stores balance sheet ->. In order to balance the expenses, management had to boost its assets by inflating inventory -> The auditor Coopers&Lybrant checked only 4 stores out of 129 in order to safe their money. In addition, they told senior management which stores they will check -> Phar-Mor prepared the inventory in accordance with its balance sheet -> The auditing firm was unable to uncover the fraud.
2) Much of Crazy Eddie’s fraud can be attributed to the overstatement of inventory and the understatement on accounts payable, not to mention the vast number of executives who were involved in the scheme. Specific audit procedures, if performed, could have led to the detection of the following accounting irregularities:
On top of all that, Cardozo and Co, Inc.’s new CEO has requested for the accountant to not comply with summons or subpoenas of information related to the company. To analyze what the small accounting firm can be charged with or sued for, there are a few facts that need to be taken into consideration. While preparing the registration statement, the accountant discovered irregular entries he believed to be bribes that he ignored. There was also errors he did not discover, such as the overstatement of net sales and net profits. First, I will cover the common law liabilities, followed by the statutory liabilities, then explain the accountant-client
As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count finished goods, copper rod, and plastic inventories, and determine actual increase of inventories at year end. Also, they should select items from the inventory ledger and locate them and reconcile the quantity. Second, for completeness, the auditors should make sure that all existing inventories have been recorded completely , go around the warehouse and ensure all the inventories are recorded in the inventory ledger. Third, for valuation or allocation, the auditors should make sure that Laramie Wire manufacturing sticks with one valuation method(For inventory items, valuation is based on the lower of cost or market value, with several alternative methods for calculating cost), find out if there is any scrap inventory that needs to be recorded and written off ,and ask about obsolescence items. Fourth, for rights and obligations, the auditor should ask them if there is any consigned inventory at their warehouse. If there is, those inventories should not be recorded in the company's inventory ledger. Finally, for presentation and disclosure, the auditors should review the company's financial
The retail consumer electronics industry was undergoing rapid and dramatic changes during the 1980’s, so did Crazy Eddie’s business. A factor in the Crazy Eddie case had to do with the inventory being overvalued. A small reason for why the inventory was overvalued is due to the rapidly decreasing prices in electronics due to constant improvements in technology. Electronics are out dated very fast if not sold upon arrival, they are always being improved on, and therefore electronic stores need to have a high inventory turnover. If not, then there is a chance that the inventory can become overvalued if the auditor does not stay up on the latest in electronics. Another change was with how Crazy Eddie was able to buy in such large amounts that he was able to sell via drop-shipments, this is something that the auditors are not used to because it is not a common occurrence. The drop-shipments would affect sales, but it should not affect inventory. As seen in this case, it required special attention because same store sales were increased by the way drop-shipments were recorded as revenue.
The inherent risks in an extremely competitive industry or sub-industry may include inappropriate revenue and expenses recognition, aggressive competing strategies, and unethical management in order to manipulate the financial situation and statements of the company. For example, management may try to improperly increase sale/revenue numbers by pushing merchandises to customers before year-end cut off or management may refuse to write off large obsolete inventory accounts which have decrease in value which in turn falsely exaggerates asset accounts. These risks may greatly affect the audit planning process. Auditors should pay more attention to audit procedure in testing cut off sale and expenses. Furthermore, auditors should determine the audit procedures to spend more time and resources to examine the client’s inventory accounts and the fair value of
The audit procedures that an auditor is supposed to perform are there to help protect from fraud that may occur. The falsification of inventory count sheets could have been prevented if the auditor would have verified the information that was on the sheets. Crazy Eddie executives were excellent at staying one step ahead of the auditor because they knew in advance which stores the auditors would visit, then they would ship merchandise to those specific stores.
4. Identify and briefly explain each of the principal objectives that auditors have to accomplish by preparing audit workpapers. How were these objectives undermined by Deloitte’s decision to alter North Face’s 1997 workpapers?
This difference is also tied to the movement of globalization by way of the internal customs from around the world. Based on these practices the account standards around the world are created from a different basis. In the U.S, accounting standards are based on “bright lined rules.” Whereas, in most of the world accounting standards are based off of principles, with the emphasis on principles the international rules focus on the heart of the law. Rather than in the U.S these “bright lined rules” have been created as a result of the multitude of industries located here. The rules however, do not reflect the heart of the law; rather they create a line to be maintained.