Diamond Food

3863 Words Aug 31st, 2014 16 Pages
Diamond Food Case Project

Requirement 1

1. Manipulation of commodity cost. As a common practice in the company, management would instruct related accounting employee to decrease the commodity costs by a small incremental at a time, until the desired earning numbers for that period was achieved.
2. Special accounting treatment of grower payments. Diamond made “continuity payment” and “momentum payment” to manipulate cost to growers. These payments were claimed to be advances for multi-year supply from growers, hence the company delay the recognition of these amounts as costs in later periods. However, payments to growers were actually for the crop in prior year although Diamond insisted the payments were for current year; and
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Accrual basis ensures that a company record events in the period during which the events occur, but Diamond didn’t comply with it. In conclusion, recording of “continuity” and “momentum” payments did not comply with GAAP.

Requirement 3
(a) No, we don’t agree with the junior auditor. Auditors should consider the risk of fraud in the company and the inherent risk in the financial statement when deciding overall materiality. Tolerable misstatement should be determined as 50-75 percent of overall materiality in order to reduce the possibility that the total of uncorrected and undetected misstatements would result in material misstatement. According to AU Sec. 312A-11, “as a result of the interaction of quantitative and qualitative considerations in materiality judgments, misstatements of relatively small amounts that come to the auditor's attention could have a material effect on the financial statements.” An adjustment of 20 million of grower payables should have been considered material since this single misstatement accounts for 1.63% of the total asset, which was intolerable. In addition, this adjustment could have increased cost of goods sold by 20 million and reduced net income to six million from 26 million. From the perspective of net income, the adjustment was indeed material.

(b) According to SAB 108, “rollover approach quantifies a misstatement based on the amount

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