Chapter 18, Problem 2SC

19. On December 23, Wyman, a lawyer representing First National Bank & Trust (defendant), wrote to Zeller (plaintiff) stating that he had been instructed to offer a building to Zeller for sale at a price of $240,000. Zeller had previously expressed an interest in purchasing the building for $240,000. The letter also set forth details concerning interest rates and loan fees. After receiving the letter, Zeller instructed his attor- ney, Jamma, to send Wyman a written counteroffer of $230,000 with interest and loan arrangements varying from the terms of the original offer. Jamma sent the written counteroffer as instructed on January 10. On the same day, Jamma telephoned Wyman and informed him of the counteroffer. Subsequently Jamma sent an acceptance of the original offer to Wyman. When Wyman refused to sell the property to him, Zeller brought an action to seek enforcement of the alleged contract. Decision?

In the Why It Matters feature “Examples of Theft and FinancialReporting Frauds” at the beginning of the chapter, we introduced youto the Koss Corporation fraud. In this problem, we provide you withfurther details about that fraud. During the fall of 2009, Koss Corporation,a Wisconsin-based manufacturer of stereo headphone equipment,revealed that its vice president of finance (Sujata “Sue” Sachdeva) haddefrauded the company of approximately $31 million over a periodof at least five years. Grant Thornton LLP was the company’s auditor,and the firm issued unqualified audit opinions for the entire period in which they worked for Koss. According to reports, Sachdeva’s theftaccelerated over a period of years as follows:FY 2005 $2,195,477FY 2006 $2,227,669FY 2007 $3,160,310FY 2008 $5,040,968FY 2009 $8,485,937Q1 FY 2010 $5,326,305Q2 FY 2010 $4,917,005To give you a sense of the magnitude of the fraud, annual revenuesfor Koss Corporation are in the range of $40 to $45 million…

Edward gives a check to Fund Investments to buy 100 shares of stock in GR8 Tech Corporation. The price of the shares is constantly fluctuating. Fund Investments asks Edward to leave the amount of the check blank and allow it to fill in the price when making the purchase. Edward agrees. Fund Investments buys the stock when the price is $4,000, but fills in the check for $5,000. The check is negotiated as payment for a $5,000 debt to Hasty Accounting Services, which takes the check in good faith and without no­tice of Fund Investments’ act. Hasty later learns that Fund Investments was not author­ized to fill in the check for $1,000 over the price. Is Hasty an HDC? If so, for how much?

Subsequently Discovered Facts. On June 1, Sidney Faultless of A. J. Faultless & Co., CPAs, noticed some disturbing information about the firm’s client, Hopkirk Company. A story in the local paper mentioned the indictment of Tony Baker, whom Faultless knew as the assistant controller at Hopkirk. The charge was mail fraud. Faultless made discreet inquiries with the controller at Hopkirk’s headquarters and learned that Baker had been speculating in foreign currency futures. In fact, part of Baker’s work at Hopkirk involved managing the company’s foreign currency. Unfortunately, Baker had violated company policy, lost a small amount of money, and then decided to speculate some more, lost some more, and eventually lost $7 million of company funds. The mail fraud was involved in Baker’s attempt to cover his activity until he recovered the original losses. Most of the events were in process on March 1, when Faultless had signed and dated the unmodified opinion on Hopkirk’s financial…

KPMG (LO 1, 2, 3) KPMG LLP served as the external auditor for some of the largest sub-prime mortgage lenders in the U.S. leading up to and during the housing market crisis of the mid to late-2000s. The audits of two of their largest lending clients, New Century Financial Corporation and Countrywide, ultimately led the firm to settle litigation charges in 2010 for $44.7 and $24 million, respectively. The business model of these two subprime mortgage lenders consisted of providing loans to borrowers with weak credit histories. The business model had begun to fail during 2007, when the economy weakened, borrowers began defaulting, and home prices declined drastically. New Century filed for bankruptcy and Countrywide was purchased by Bank of America, which subsequently suffered massive losses related to business failures at Countrywide. Just before the housing crash of 2007 put the companies in severe financial crises, KPMG had given both companies unqualified audit opinions. In both cases, KPMG was subsequently accused of violating professional standards, lacking independence, and being negligent. K PMG defended itself by arguing that its audits were not the cause of the financial woes at New century and Countrywide. Rather, the firm contended that the failed business model of the two companies led to investor losses. a. How does the economic environment affect the litigation risk faced by audit firms? b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect? c. What defenses do auditors use in response to litigation? d. What actions can auditors take to minimize litigation exposure?

Which of the following is NOT a method UCI's former executive VP and CFO used to embezzle 2.97 million?    options:   1) Charging personal purchases on UCI's corporate credit card, followed by arranging for UCI to pay the credit card statement by check   2) Preparing false expense reports and submitting them for reimbursement, resulting in payment to himself since nobody other than the accounts payable supervisor reviewed these reports   3) Adding family members to UCI's payroll and placing large checks into their bank accounts   4) Submitting unsupported check requests for personal credit card accounts and nonbusiness expenditures, such as construction work on his personal residence

59. A P100,000 check dated December 30, 2021 was drawn by the Company against BSA bank in favor of its BSMA bank account. Per ledger, BSA Account has a credit of the amount on December 30 and BSMA ledger account showed a debit of the same mount on the same date. Per bank statements, BSA deducted the amount on January 2 while BSMA added the amount on January 1 only. Based on the foregoing, which of the following is true? a. Cash is overstated because of the window dressing made. b. Cash is correctly recorded at its balance as there was no embezzlement technique was employed in the situation. c. Cash is overstated because of the kiting performed. d. Cash is understated because of lapping has occurred.