Oak Industries Case Sample Answers

676 Words Mar 3rd, 2012 3 Pages
Oak Industries, Inc. Case – sample answer

1. Is it unethical for a company to intentionally understate its earnings? Why or why not?

Yes, it is clearly unethical to intentionally understate earnings since the management makes representations that the financial statements are complete and accurate. It is obvious that intentionally understating earnings is done to allow the company to later overstate earnings by using falsified reserves to cover the inadequate current period earnings. These manipulations and misrepresentations do not allow fair comparisons of the results of operations between years. In this case the misrepresentation gave a totally false picture of the success of its subscription television systems
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Analytical procedures can often point to areas that are out of sync with the prior results of the firm. Auditors should look closely at changes in the gross profit ratio and unusual changes in revenues or expenses. Once unusual results have been identified, auditors must search for reasonable explanations. If the explanations provided seem implausible then the auditor must expand the scope of testing and obtain additional corroborating evidence. 3. What would you have done if you had been the controller and had made recommendations to disclose the reversal of the reserves?

The controller should have refused to comply with the demands of the executives and should have reported the matter to the audit committee of the board of directors. By doing this the controller would have fulfilled his professional responsibilities as a CPA, but would probably have lost his job. However the controller would have preserved his reputation and prevented innocent parties from being harmed by the fraudulent management scheme. 4. What responsibilities do a company’s controller and other accounting employees have when interacting with the firm’s independent auditors? Do these responsibilities conflict with other job-related responsibilities of a company’s accounting employees? Explain.

Accounting employees have a duty to be