Case 2
A few years ago, there was a large oil refining company (based in New York) whose top executive was convicted of financial statement fraud. One of the issues in the case involved the way the company accounted for its oil inventories. In particular, the company would purchase crude oil from exploration companies and then process the oil into finished oil products, such as jet fuel, diesel fuel, and so forth. Because there was a ready market for these finished products, as soon as the company would purchase the crude oil, it would record its oil inventory at the selling prices of the finished products less the cost to refine the oil (instead of at cost). Although there was fraud in the case, this type of accounting was also questioned because it allowed the company to recognize profit before the actual sale (and even refining) of the oil. This method was even attested to by a large CPA firm. If you were the judge in this case, would you be critical of this accounting practice? Do you believe this "aggressive" accounting was a warning signal that fraud might be occurring?
Want to see the full answer?
Check out a sample textbook solutionChapter 2 Solutions
Fraud Examination
- Q1. You are the PR officer of a major MNE in the chemicals industry. The national press in your home country alleges that your company is covering up an environmental disaster caused by your subsidiary in India,in which several people died. How do you react?arrow_forwardNoda plc (‘Noda’) is a large company which your firm has justaccepted as a new client. You are the audit manager for Nodaand are planning the audit for the year ended 31 December20XY. The principal activity of the company is the manufactureand sale of mobile phones and associated software. Noda isbased in the UK but manufactures the phones in China andsells its product all over the world.You are conducting initial planning and risk assessment workand have discovered the following information:i. Draft Figures for the Year Ended 31 December 20XYManagement accounts indicate that the revenue for the yearhas fallen by 25% compared with the previous year followingconcerns that Noda is using an operating system for its phonesthat is unpopular with customers. Noda has entered into acontract with the operating system supplier that lasts foranother two years. Withdrawal from the contract could meanthat Noda would have to make significant penalty payments tothe operating system supplier.ii.…arrow_forwardNoda plc (‘Noda’) is a large company which your firm has justaccepted as a new client. You are the audit manager for Nodaand are planning the audit for the year ended 31 December20XY. The principal activity of the company is the manufactureand sale of mobile phones and associated software. Noda isbased in the UK but manufactures the phones in China andsells its product all over the world.You are conducting initial planning and risk assessment workand have discovered the following information:i. Draft Figures for the Year Ended 31 December 20XYManagement accounts indicate that the revenue for the yearhas fallen by 25% compared with the previous year followingconcerns that Noda is using an operating system for its phonesthat is unpopular with customers. Noda has entered into acontract with the operating system supplier that lasts foranother two years. Withdrawal from the contract could meanthat Noda would have to make significant penalty payments tothe operating system supplier.ii.…arrow_forward
- Accounting treatment for contingencies Analyze the following independent situations. Weaver, Inc. is being sued by a former employee. Weaver believes that there is a remote chance that the employee will win. The employee is suing Weaver or damages of $40,000. Gulf Oil Refinery had a gas explosion on one of its oil rigs. Gulf believes it is likely that it will have to pay environmental Clean-up Costs and damages in the future due to the gas explosion. Gulf cannot estimate the amount of the damages. Lawson Enterprises estimates that it will have to pay $75,000 in-warranty repairs next year. Determine how each contingency should be treatedarrow_forward. Read the following scenario and answer the questions that follow: Goldie PLC is a global company incorporated in the UK, that extracts valuable minerals from the earth. Mining is a risky business with a death toll averaging 100 deaths per annum in the UK. Goldie has recently had a coal mine collapse killing two men and trapping four others for three days. The accident made the national news and made Goldie well known. Goldie is financed by equity and has a large cash balance and no debt. It has come to the attention of the board that the future price of coal is forecast to fall, as renewable energy sources become more reliable. Required: For each of the following risks for Goldie PLC, identify the level/severity of risk and explain your classification. Financial risk Project risk Reputation riskarrow_forwardMINISCRIBE (LO 1, 2) As reported in the Wall Street Journal (September 11, 1989), MiniScribe, nc., inflated its reported profits and inventory through a number of schemes designed to fool the auditors. At that time, MiniScribe was one of the major producers of disk drives for personal computers. The newspaper article reported that MiniScribe used the following techniques to meet its profit objectives: • An extra shipment of $9 million of disks was sent to a customer near year-end and booked as a sale. The customer had not ordered the goods and ultimately returned them, but the sale was nor reversed in the year recorded. • Shipments were made from a factory in Singapore, usually by air freight. Toward the end of the year, some of the goods were shipped by cargo ships. The purchase orders were changed to show that the customer took title when the goods were loaded on the ship. However, title did not pass to the customer until the goods were received in the U.S. • Returned goods were recorded as usable inventory. Some were shipped without any repair work performed. • MiniScribe developed a number of just—in—time warehouses and shipped goods to them from where they were delivered to customers. The shipments were billed as sales as soon as they reached the warehouse. For each of the techniques described, identify the audit evidence that might have enabled the auditor to uncover the fraud.arrow_forward
- Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firms controller. Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I dont understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault. Chuck: I cant agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really dont see any significant waste in the plant. Leonard: After talking with some other managers at a recent industrial convention, Im not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called activity drivers to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing. Chuck: I doubt it. For one thing, I dont see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling activity drivers is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldnt worry about it. Ill bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years agoit was 2 years before it straightened out. Required: 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning. 3. Do you think that Chuck was well informedthat he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chucks case?arrow_forwardThe auditor worked for this client for years. But before accepting or continuing with the client, What are the reasons the auditor or audit firm should or should not retain this existing client this time around using the information below about the client? What risks could the client, its business, and its environment pose to the auditor or audit firm? The client: Although client cash flows have been stable, the disruption caused by the 2020 global pandemic made it difficult for retail lessors to pay their rent on time. Due to the company's tenant-friendly approach, retail clients were allowed to renegotiate their lease and temporarily pause rent payments between June 2020 and July 2021, shifting those payments to the last 12 months. Most of these leases will expire in the next two years, including all retail companies unable to pay their rent. However, they estimate that they will receive all the lost cash flow from these tenants within a couple of years. Currently, the company is a…arrow_forwardCase Analysis 1. in 1982, XYZ cement company began its plant operation in Pampanga. Local residents were very happy because of the economic benefits they got from the plant especially the 400 local residents employed. After a few years of operation, Local Residents noticed the constant vibration and loud noise coming from the plant. Local residents filed a suit against the company asking the court to issue an injunction to close the plant. The residents claimed that the loud noise and the vibrations posed dangers to their health and damaged their property. The company was using the best available technology in their operation. The court refused to issue the injunction arguing that closing the plant would mean more harm than good to both parties. The court instead ruled that the company should pay the residents a one-time fee to compensate them for the damages done. The amount was computed based on the fair market price residents would receive if they were inclined and able to rent…arrow_forward
- 1. During the time frame that Intel was making exclusivity payments to Dell, Dell’s business model was being adversely affected by the increasingly competitive nature of the PC industry. What responsibility, if any, do auditors have to analyze a client’s business model? Do auditors have a responsibility to track and analyze key developments in a client’s industry? Defend your answers. 2. What ethical issues do exclusivity agreements such as that between Dell and Intel raise? Are there analogous ethical issues faced by audit firms and their clients? Explain.arrow_forwardCompany BackgroundRajawali Airlines is air transport services sector, though the company has already had a few other clients in the transportation sector. The company was founded 7 years ago. Rajawali Airlines issued shares through an initial public offering (IPO) seven years ago and has been traded on the Indonesia Stock Exchange. Rajawali Airlines wants to hire Auditor to issue an it audit opinion and obtaining help to optimise their recently installed new IT system and the integrated IT-controls. As Rajawali Airlines wants to aggressively expand from a national to regional market, Rajawali Airlines plans to use capital from a loan or share capital in the course of a second public offering. Since the implementation of a new IT System, there have been ongoing difficulties with the company's new accounting system. The representatives of Rajawali Airlines note that the earnings vary considerably in recent years, but Rajawali Airlines enjoys a good reputation and high acceptance among…arrow_forward1. You are working as accounting information system (AIS) expert in H&H, a Multinational Entity (MNE) for couple of years in Spain. One of its subsidiaries in an emerging country of Asia is developing their AIS. Management selected you for this expatriate assignment for the next three years. Your boss will have a meeting with you next week. What would you discuss with your boss? 2. You are working as the head of human resource department in an oil company. The high ups of your company asked you to select 12 expatriates to go to work in Iraq. You started working on it, nonetheless, you are concerned about the safely issues there. How do you proceed?arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningBusiness Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:CengageManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
- Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub