Hrm 531 Week 2 Financial Statement Analysis

The following provides high-level information about auditing a fictional entity, called Sofitec Computers, created for this case study. This case does not include a complete description of the entity or the industry, nor does it provide comprehensive information on auditing; it is only intended to provide the information that will be necessary and helpful in completing this case study and answering discussion questions.

Problem Identification: How should a company report, if at all, cash and non-cash transactions owed to an entity’s financial subsidiary?

By securitizing the receivables, a larger organization can convert its accounts receivable into cash at once. Hence, individual receivables are combined into a new security and are then sold as an investment instrument. Since securities are backed by a liquid form of collateral, a securitization can result in an extremely low interest rate for the issuing entity. Criterions in ASC 860 states that, transfers in securitization transactions must be evaluated for sale accounting treatment. In addition, they must be evaluated for consolidation by the GAAP criteria, set fourth at ASC 810. Moreover, Securitizations are popular because investors want to acquire collateralized securities and firms with large amounts of receivables have incentives to

The purpose of this document is to describe how to link the TradeShift invoices and the scanned documents and to allow them to bypass the audit functions and process into the APGO History screens.

One topic that has generated much discussion and even some “bad blood” in the accounting profession and business community as a whole is variable interest entities, formerly known as “special purpose entities.” One common definition of a variable interest entity is a legal business structure which does not have enough capital to support itself due to its lack of equity investors. The financial support for the variable interest entity is provided by an outside source, such as another corporation. A variable interest entity is often created by a corporation to serve as a holding company, which will hold assets or debt for the creating corporation. A corporation can use such a vehicle to finance an investment

* the Directors' report produced by Ayala Land, Inc. to ensure that it is prepared in accordance with the requirements of Financial Reporting Framework;

For authoritative guidance on accounting rules, one must turn to the Financial Accounting Standard Board’s Codification. Since 2009, FASB has arranged the generally accepted accounting principles (GAAP) into an easier to access format, known as the Codification. One of these pronouncements is FASB 235- Notes to Financial Statements (FASB, ASC 235-10, 2009). In this pronouncement, the overall required structure of disclosure notes is discussed.

We will conduct our audits in accordance with auditing standards generally accepted in the United States of America (“GAAS”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether caused by error or fraud. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The procedures selected depend on our judgment, including the assessment of the risks of material

Originally, it appears that initially Enron was using Special Purpose Entities appropriately by placing nonenergy-related business into separate legal entities. What they did wrong was that they apparently tried to manufacture earnings by manipulating the capital structure of the Special Purpose Entities; hide their losses, did not have independent outside partners that prevented full disclosure and did not disclose the risks in their financial statements. Or to put it another way, they got greedy. Any system can be abused and misused. If management uses nonpublic SPEs as a way to hide debt and manipulate earnings, it will lead to Enron-type disasters.

Trade allowances, amounts collected on behalf of third parties and net of returns comprise the revenue. Revenue is recognised as sales revenue, interest income and dividend receivable. Sales revenue is recognised when the considerable risks and rewards of the ownership have been transferred to the buyer. Interest income is recognised on an accrual basis, while dividend receivable recognition occurs when it is declared or received.

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In additional, Enron used special purpose entities to fund or manage risk as well as achieve financial reporting objective (page 11, Paul, 2003). For example, when they wanted to remove a significant investment in their financial statement, they used one of its entities which were joint venture with them to acquire it (Chewco case, ISDA, page

To enhance the perceived value of financial report audits, the IAASB has set out the public issuance of Key Audit Matters (KAM) or audit commentaries in the Proposed New Audit Report. Although some investors have expressed receptiveness to this proposal, reactions from auditors and their clients have been mixed. I personally believe that there are merits to the disclosure of KAM given the auditor’s strong understanding of the entity’s business, however it is debatable whether the benefits outweigh the costs of auditors potentially overstepping independence requirements and clients risking to face increased audit fees.

Guidelines are needed in every sector of an economy, firm and even households to prevent and control unethical practices. Therefore, financial reporting is not LEFTOUT as standards of authentication are set; these accounting standards play vital roles in the direct and effective functioning of businesses and capital markets. They provide shareholders, other users and the general public of financial information with key elements of a company’s financial control and systems which have been reported and assessed on.

As for the level and quality of transparency of financial statements, companies operating under the standards of their local Generally Accepted Accounting Principles (GAAP) may continues to present information that may be false and asymmetric. However, other companies that are committing to the IFRS will continue to present information that is clear and understandable (Horton, Serafeim and Serafeim, 2008). The adopted reporting standards require information that is more qualitative and quantitative to be attached to the disclosure of financial statements, which was not highly required by local GAAP (Wright and Hobbs, 2010, p. 23). To increase transparency, “it requires companies to disclose accounting policies, judgements and estimates, as well as additional qualitative and quantitative information related to significant accounting transactions” (Wright and Hobbs, 2010, p. 22). Reporting the substance of transactions by commenting on the realities of what the entities or companies present regarding information about