Case 1.4 AMRE, Inc.
1. Generally, ethics refer to moral principles and values. Random House Webster’s College Dictionary notes that ethics are “the rules of conduct recognized in respect to a particular class of human actions or governing a particular group, culture, etc.” An individual 's ethics generally define what that individual believes to be right and wrong. Professional ethics are typically expressed by a code of conduct adopted by an organization that represents a profession. Professions adopt such codes to encourage moral conduct among their members.
Following is a list of the individuals involved in the AMRE case:
Robert Levin, Chief Operating Officer
Dennie Brown, Chief Accounting Officer
Walter Richardson, Vice
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Although he may have lost his job, he would have avoided being sanctioned by the SEC. Most important, this course of action would have prevented innocent parties, such as potential AMRE investors and creditors, from being harmed by the fraudulent scheme.
4. The relevant accounting concept in this context was the matching principle. The matching principle requires that expenses be matched with the revenues they produce. A cost can be deferred--treated as an asset--when it is expected that the cost will produce future economic benefits (generally, revenue). It seems reasonable that a portion of AMRE’s advertising costs benefited future periods and, thus, could be appropriately deferred. Nevertheless, AMRE’s policy of deferring all of the advertising costs related to unset leads was very aggressive and probably resulted in the booking of assets that would provide no future benefits for the company.
5. Listed next are key audit risk factors that were present during the 1988 and 1989 AMRE audits. a. AMRE 's management had a strong incentive and desire to maintain the company 's stock price at a high level.
b. AMRE’s unset leads increased dramatically during 1988.
c. The company’s inventory also increased significantly during 1988 and increased much more rapidly than the company’s sales.
d. The efforts of AMRE’s executives to influence important audit planning decisions should have been of concern
Ethics are of a special importance to practicing professionals. Professions such as lawyers, teachers, doctors and engineers have a bigger responsibility as to making sure there jobs are done right and ethically. Though in order to achieve this goal individuals must understand what ethics really means. Ethics is basically the rules of conduct which is recognized in respect to a particular group, culture, or class of human actions. The decision to behave ethically is a moral one.
Ethics is the moral principles that govern a person's behavior or the conducting of an activity. It is the moral values that a person believes in. The way that a person interacts with others. The golden rule of treating others how you would like to be treated. Having good ethics is a basis for having a successful business.
Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”
According to Merriam-Webster, ethics is defined as an area of study that deals with ideas about what is good and bad behavior. Some would argue that definition is rather vague. A more complete understanding of ethics would suggest that it is more than just an area of study but rather a way of life; moral principles that govern a person's or group's behavior. If one is ethical and has good moral standards, it is usually seen in that person. Simply put, ethics could be considered the standards of behavior as to which society accepts.
The high sales growth can be attributed to increasing SSS (same store sales) and also opening of new stores. The company is enjoying financial growth and high profitability as seen from ROS, ROA and ROE. All the ratios are showing an average upward trend and that too, over a period of several years. As far as liquidity is concerned, the company is extremely liquid and is enjoying a quick ratio of more than 2. So, it is able to easily meet its short term debt obligations and currently faces no financial difficulties. As far as inventory is concerned it is a very small part of the liquidity and thus does have any significant effect on liquidity.
They discovered that since there had been a modified opinion of the 2006 financial statements, where the auditors raised questions of going concern. The company had suffered persistent losses and the lack of cash flow was impairing their ability to secure financing. They also learned that subsequent auditors had been dismissed also for apparently coming to the same conclusion as the predecessor firm. Upon further investigation the team found that a million dollar loan covenant had been violated by neglect to keep a minimum balance due to the fact that the owner had withdrawn $500,000.00 out of the company account to place a down payment on his home. The next time the covenant was broken the bank started foreclosure on the loan.
With these aspects of the audit plan in mind, Deloitte seemed to have enough evidence but did not enforce the evidence enough. Although there is no mention of (2) an established materiality in the case, the amount of contention over the discount rate by GM’s management should have been a reason for higher concern with the audit team. Also, the variable effect that the discount rate had on GM’s financial
2. Being in accordance with the rules or standards for right conduct or practice, especially the standards of a profession (Dictionary.com, n.d.). Ethical includes: Morals, values, tolerance, and discipline with all these terms sometimes used interchangeably with ethics (A. Puente, personal communication, November 17, 2015). In a Senior Non-Commissioned Officer (SNCO) academy course, Ethics is described as the study of what we understand to be good and right behavior and the study of how we judge those behaviors based on a set of standards of conduct that guide decisions and actions (Ethical Leadership, 2012).
Ethics refer to the values that guide a person, organization or society - - the difference between right and wrong, fairness and unfairness, honesty and dishonesty.
“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).
The audit committee’s responsibility was to look over the accounting and financial reporting process as well as the financial statement audits; appoint, compensate and oversee the external auditor; and to ensure that the company has a whistleblower program. (p. 52) At first glance the committee could notice that something was not right with the company’s financial records. But nothing was done and nothing was said.
Professional ethics are the standards set by people in their professions. By setting standards in the form of professional ethics, people in their professions work together to uphold their positions and reputations. An organization expects theirs employees to represent them ethically as they are part of the organization. Policies are another type of standards or code of ethics set by the organization and everyone who is part of it is expected to constitute them. Professional ethics is also defined as what professional choose to do when they face a problem at work that involves a moral issue. . These ethics turn out to be the guiding principles for to make an individual well-disciplined and highly successful in his personal life which may include all of his family, friends, acquaintances, relatives etc. These are the specific set of moral principles that help a certain individual or an organization to develop their attitude and behavioural aspects that are most probably likeable by others.
Furthermore, according to GAAS, AU-C 300.06-07, Ernst & Young should have planned and performed further audit procedures whose nature, timing, and extent are based on, and are responsive to, responsive to the assessed risks of material misstatement. While designing the further audit procedures, Ernst & Young should have obtained audit evidence to determine whether the controls are operating effectively. If the auditors assess higher control risk, the more persuasive audit evidence is required.
reflect the auditor’s constraint over management’s reporting decisions (Lawrence et al, 2011). Becker et al.