Diamond Food

The risk of management fraud needs to be considered when determining tolerable misstatement because the risk of fraud directly affects the risk of misstatement. Smith & Jones has a percentage that tolerable misstatement thresholds should not exceed, which is adjusted tolerable misstatement guidelines, with low risk of management fraud misstatements should balance each other out. However, when high risk of management fraud is likely misstatements will likely skew the company’s numbers to overstate the company’s income (ex. overstating income and understating expenses). If numbers are fraudulently misstated with the goal of increasing income, the chance of highly material misstatements drastically increases.

The cash basis of accounting records revenues when cash is received and expenses when cash is paid out. The accrual basis of accounting records revenues when they are earned and expenses when resources are used.

) There was a lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals. This resulted in an audit adjustment of $3,578,000. The benchmark for overall materiality is $3,508,000, I would consider the audit adjustment of $3,578,000 a material misstatement. Control environment, principle 2 the board of directors and management exercise oversight of development and performance of internal controls. Due to the severity and material weakness of lack of adequate cutoff procedures to ensure timely recording of period end accruals. Management and the board of directors should evaluate performance of internal control activities including adherence to standards of conduct and expected levels of competence. In

* Diamond is the strongest natural mineral known by a man. It is a crystalline form of carbon.

al, 2012, p. 214). Therefore, a material misstatement may not be detected during the audit. In addition, the audit may not detect errors under the materiality level, whether resulting from error, fraud, or misappropriation of assets. Anderson, Olds, and Watershed may decline to express an opinion or issue a report if the firm is unable to complete the audit for any reason.

The audit team focused on preforming groundwork analytical procedures. A comparison of the performance of Smackey’s Dog Foods Inc to other similar industries was used to validate the original assessment of the risks. Performing the procedures helped detect areas that pose a high risk of the material misstatements. Another important part of the planning of the audit was to set a balance of materiality that is appropriate. The situations that

material, but don’t really affect the financial statements then the opinion given by the auditor may be a qualified opinion with explanations; if the limitations are so material that the financial

The prices of the deferral option and option to switch are zero and £0.11 million respectively. The total NPV of the upgrade is £8.32 million. The incremental earnings per share of the upgrade is £ 0.0172, the payback period is 4.23 years, and the internal rate of return is 24.3%.

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

The chief executive of the company was closely working with the vendors whose confirmations were vital in the auditing work and hence they could have submitted false confirmations. The auditing firm established a national risk management program for its clients and so national reviews were done to identify the high risk items in the financial statement. The vendor allowances were particularly high but they were not documented. As such, the auditors were supposed to demand for the documentations and compare them with the real figures. It is however noted that most of the documentations received were non-standard and this could have led to a different audit report given that vendor allowances were earlier identified as a high risk area. Inventory management was found to be poor especially in the allowances for inventory reserves. The audit firm was therefore obliged to carry out a thorough evaluation of the inventory reserves and determine whether it was reasonable. The valuation was also supposed to include all classes of inventory but for the case of the company, the evaluation excluded instances where no sales had been made. Hence, this evaluation could not accurately represent the position of the inventory reserve in the company. (Waters,2003)

d. “The auditor's reliance on substantive tests to achieve an audit objective related to a particular assertion may be derived from tests of details, from analytical procedures, or from a combination of both. The decision about which procedure or procedures to use to achieve a particular audit objective is based on the auditor's judgment on the expected effectiveness and efficiency of the available procedures. For significant risks of material misstatement, it is unlikely that audit evidence obtained from substantive analytical procedures alone will be sufficient (PCAOB, AS 2305.09).”

B) I think the auditors should have equal responsibility for detecting material misstatements due to error and fraud. It’s their job to make sure the financial statements are as accurate as possible. Although it may be hard to check all the information from a company it’s the responsibility of the auditor to sign off that everything is in check.

That being said, we would agree with the Treasury Staff to realize inflation, but with a different method.

After having to restate both its 2010 and 2011 financials in 2012, it was discovered that the company was operating at a net loss of $86,336,000 and earnings (loss) per share of $3.98. During 2012 the company’s stock price dropped significantly by about 54 percent from $21.50 in early November to $12.50 in late November (U.S. District Court for the Northern District of California, 2012, In re Diamond Foods Inc., Securities Litigation: Complaint). On November 14th, 2012 Diamond restated its financial statements which reduced its 2012 first, second, and third quarter earnings. This also reduced the company’s 2011 and 2010 earnings by 57% to $29 million and 46% to $23 million respectively (Mintz, 2013). Mendes and Neil with the assistance from Deloitte had such a tight control, making the ability to detect the fraud difficult. This caused the fraud to be concealed, which led to serious financial implications, and the need to restructure the company’s top management.

ABSTRACT: Diamond Foods is America’s largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case presents financial reporting issues around the commodities cost shifting strategy used by Diamond’s management to falsify earnings. By delaying the recognition of a portion of the cost of walnuts acquired into later accounting periods, Diamond Foods materially underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The primary learning goal