PRIN.OF AUDITING+OTHER...(LL) >CUSTOM<
21st Edition
ISBN: 9781260824308
Author: WHITTINGTON
Publisher: MCGRAW-HILL HIGHER EDUCATION
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 2, Problem 38ITC
Hide-It (HI), a family-owned business based in Tombstone, Arizona, builds custom homes with special features, such as hidden rooms and hidden wall safes. Hide-It has been an audit client for three years.
You are about to sign off on a “clean” opinion on HI’s current annual financial statements when Art Hyde, the VP-Finance, calls to tell you that the Arizona Department of Revenue has seized control of a Hide-It bank account that includes about $450,000 of company funds; the account is not currently recorded in the accounting system and you had been unaware of it. In response to your questions about the origin of the funds, Art assures you that the funds, though not recorded as revenue, had been obtained legitimately. He explains that all of the money came from separately billed but unrecorded change orders to items in contracts completed before you became HI’s auditor, and before he or any members of current management became involved with the company. You subsequently determine that there is insufficient evidence to allow you to reconstruct the nature of these cash transactions, although the following analysis is available from the Arizona Department of Revenue:
Art also informs you that HI has agreed to pay a combined tax and penalty of 12 percent on the total funds deposited within 120 days as required by a recently enacted rule that provides amnesty for tax evaders. Furthermore, he states that negotiations with the Internal Revenue Service are in process.
Required:
- a. The professional standards define errors as unintentional misstatements or omissions of amounts or disclosures in the financial statements. Is the situation described an error?
- b. The professional standards state that fraud relates to intentional misstatements or omissions of amounts or disclosures in the financial statements. Misstatements due to fraud may occur due to either (1) fraudulent financial reporting or (2) misappropriation of assets. Does the situation appear to be fraud? If so, is it fraudulent financial reporting, misappropriation of assets, or both?
- c. The professional standards outline certain auditor responsibilities relating to identifying client noncompliance with laws and distinguish between laws with a “direct effect” on the financial statements and other laws. Does the situation herein relate to noncompliance with laws as discussed within the auditing standards? If so, is the noncompliance related to a law with a direct effect on the financial statements or another law.
- d. Should the CPA firm resign in this situation? If the decision is not clear-cut, what additional information would you desire before deciding?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Mid-Pacific Tennis Courts (MPTC), a small family-held corporation, hired Leroy Jacob as a salesperson. Jacob devised a scheme to defraud MPTC. Using MPTC customer leads, Jacob entered into contracts with potential customers to build tennis courts without informing MPTC. Jacob accepted checks from potential customers made payable to MPTC. Jacob then deposited those checks in his personal bank account with Peoples Bank & Trust Co. (Peoples Bank) without indorsement or permission by MPTC. Jacob took the money and disappeared.
When MPTC learned of the fraud and discovered that the checks were accepted for deposit by Peoples Bank in Jacob’s personal account, MPTC sued Peoples Bank to recover the amount of the checks in question. Did Peoples Bank properly accept the checks for deposit?
Pick the phrase the completes the sentence
The Uniform commercial Code (UCC) has the following requirements for instrument to be negotiable: the instrument must be in writing, the instrument must…
The accounting firm involved in this case wants to know if their independence will be
questioned by the BOA. You have been asked to submit an analysis and conclusion.
2.
Franklin Rosario is an audit manager in the Salvador & Santos accounting firm. He has just been
assigned to the audit of the Starex Money Market Fund. Franklin has maintained a money market
account with SMMF since it opened in 2008. All his savings, amounting to 75 percent of his total assets,
are in this account, which pays the highest interest available in money market funds. However, his
account constitutes only .00001 percent of the fund's assets.
"Dennis Jones, an old college friend, contacted you last week. Dennis owns several car washes, and he believes that financial statement fraud may be occurring. (He pays each car wash manager a bonus if a certain level of profits is earned and is worried that some managers are overstating profits to earn a higher bonus.)Dennisiscomingovertoday to see whether you can help him determine if his suspicions are valid. He is bringing along the financial statements for each car wash (income statements, balance sheets, and cash flow statements) for the last five years.1.What kind of financial statement analysis could you perform to help Dennis detect possible fraud?"
Chapter 2 Solutions
PRIN.OF AUDITING+OTHER...(LL) >CUSTOM<
Ch. 2 - Prob. 1RQCh. 2 - Prob. 2RQCh. 2 - Prob. 3RQCh. 2 - Prob. 4RQCh. 2 - Prob. 5RQCh. 2 - Prob. 6RQCh. 2 - Prob. 7RQCh. 2 - Prob. 8RQCh. 2 - Prob. 9RQCh. 2 - Prob. 10RQ
Ch. 2 - Prob. 11RQCh. 2 - Prob. 12RQCh. 2 - Prob. 13RQCh. 2 - Prob. 14RQCh. 2 - Prob. 15RQCh. 2 - Prob. 16RQCh. 2 - Prob. 17RQCh. 2 - Prob. 18RQCh. 2 - Prob. 19RQCh. 2 - Prob. 20RQCh. 2 - Prob. 21RQCh. 2 - Prob. 22RQCh. 2 - Prob. 23RQCh. 2 - Prob. 24RQCh. 2 - Prob. 25QRACh. 2 - Prob. 26QRACh. 2 - Jane Lee, a director of a nonpublic corporation...Ch. 2 - Prob. 28QRACh. 2 - Prob. 29QRACh. 2 - Prob. 30AOQCh. 2 - Prob. 30BOQCh. 2 - Prob. 30COQCh. 2 - Prob. 30DOQCh. 2 - Prob. 30EOQCh. 2 - Prob. 30FOQCh. 2 - Prob. 30GOQCh. 2 - Prob. 30HOQCh. 2 - Prob. 30IOQCh. 2 - Prob. 30JOQCh. 2 - Prob. 30KOQCh. 2 - Prob. 30LOQCh. 2 - Prob. 31OQCh. 2 - Prob. 32OQCh. 2 - Prob. 33OQCh. 2 - Prob. 34OQCh. 2 - Prob. 35OQCh. 2 - Joe Rezzo, a college student majoring in...Ch. 2 - Prob. 37PCh. 2 - Hide-It (HI), a family-owned business based in...Ch. 2 - Prob. 39RDC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Nino Moscardi, president of Greater Providence Deposit & Trust (GPD&T), received an anonymous note in his mail stating that a bank employee was making bogus loans. Moscardi asked the bank’s internal auditors to investigate the transactions detailed in the note. The investigation led to James Guisti, manager of a North Providence branch office and a trusted 14-year employee who had once worked as one of the bank’s internal auditors. Guisti was charged with embezzling $1.83 million from the bank using 67 phony loans taken out over a three-year period. Court documents revealed that the bogus loans were 90-day notes requiring no collateral and ranging in amount from $10,000 to $63,500. Guisti originated the loans; when each one matured, he would take out a new loan, or rewrite the old one, to pay the principal and interest due. Some loans had been rewritten five or six times. The 67 loans were taken out by Guisti in five names, including his wife’s maiden name, his father’s name,…arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Gateway. After reading the paragraphs, list the journal entries you think would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. On September 21, 2000, Gateway's sales representative sent an e-mail to the consumer leasing company confirming that the consumer leasing company would issue a purchase order for $16.5 million of PCs, for which it would receive a 5% discount, that the consumer leasing company would be billed by September 30, 2000 and would take the PCs by October 31, 2000.arrow_forwardIn a financial fraud case, city employees in Brooklyn, New York, accessed digital databases to defraud the city of $20 million. Several employees, in collusion with the former deputy tax collector, completely erased or reduced $13 million in property taxes and $7 million in accrued interest that taxpayers owed. In exchange for this service, the taxpayers paid the employees involved bribes of 10 to 30 percent of their bills. Required Discuss the control techniques that could prevent or detect this fraud.arrow_forward
- An employee of JHT Holdings, Inc., a trucking company, was responsible for resolving roadway accident claims under $25,000. The employee created fake accident claims and wrote settlement checks of between $5,000 and $25,000 to friends or acquaintances acting as phony “victims.” One friend recruited subordinates at his place of work to cash some of the checks. Beyond this, the JHT employee also recruited lawyers, whom hepaid to represent both the trucking company and the fake victims in the bogus accident settlements. When the lawyers cashed the checks, they allegedly split the money with the corrupt JHT employee. This fraud went undetected for two years.Why would it take so long to discover such a fraud?arrow_forwardIn 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…arrow_forwardAn employee of JHT Holdings, Inc., a trucking company, was responsible for resolving roadway accident claims under $25,000. the employee created fake accident claims and wrote settlement checks of between $5,000 and $25,000 to friends or acquaintances acting as phony victims. One friend recruited subordinates at his place of work to cash some of the checks. Beyond this, the JHT employee also recruited lawyers, whom he paid to represent both the trucking company and the fake victims in the bogus accidents. When the lawyers cash the checks they allegedly split the money with the corporate JHT employee. This fraud went undetected for two years Answer the following true or false questions concerning the fraud. Frauds that are perpetrated with multiple parties in different positions of control make detecting fraud more difficult. Claims should be authorized and verified before payment is made. The employee made sure each claim had a phony victim. Corrupt lawyers were bought into the fraud…arrow_forward
- In a recent financial fraud case, city employees in Brooklyn, New York, accessed electronic databases to defraud the city of $20 million. Several employees in collusion with the former deputy tax collector completely erased or reduced $13 million in property taxes and $7 million in accrued interest that taxpayers owed. In exchange for this service, the taxpayers paid the employees involved bribes of 10 to 30 percent of their bills. Required Discuss the control techniques that could prevent or detect this fraud.arrow_forwardDave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend Juarez Foley asks him, “Doesn’t it bother you that your clients don’t look forward to seeing their auditors each year?” Dave responds, “Well, auditing is only one of several services we provide. Most of our work for clients does not involve financial statement audits, and our audit clients seem to like interacting with us.” Identify ways in which a financial statement audit adds value for clients. List services other than audits that Czarnecki and Hogan likely provides. Assume Czarnecki and Hogan has hired you as a consultant to identify ways in which they can expand their practice. Identify at least one additional service that you believe the firm should provide and explain why you believe this represents a growth opportunity for CPA firms.arrow_forwardRay, the owner of a small entity, asked Holmes, CPA, to conduct an audit of the entity’s records. Ray told Holmes that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditors’ report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing the controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and on summarizing the data in the accounting records that support Ray’s financial statements. The students followed Holmes’ instructions and, after two weeks, gave Holmes the financial statements, which did not include footnotes. Holmes studied the statements and prepared an unmodified auditors’ report. The…arrow_forward
- You are an audit manager in Smith & Co, a firm of Chartered Certified Accountants. You have recently been made responsible for reviewing invoices raised to clients and for monitoring your firm’s credit control procedures. Several matters came to light during your most recent review of client invoice files: Norman Co, a large private company, has not paid an invoice from Smith & Co dated 5 June 2007 for work in respect of the financial statement audit for the year ended 28 February 2007. A file note dated 30 November 2007 states that Norman Co is suffering poor cash flows and is unable to pay the balance. This is the only piece of information in the file you are reviewing relating to the invoice. You are aware that the final audit work for the year ended 28 February 2008, which has not yet been invoiced, is nearly complete and the audit report is due to be issued imminently. Wallace Co, a private company whose business is the manufacture of industrial machinery, has paid all…arrow_forwardJacqueline Mensah, manager of Expert Building Company, is a valued and trusted employee. She has been with the company from its start two years ago. Because of the demand of her job, he has not taken a vacation since she began working. She is in charge of recording collections on account, making the daily bank deposits, and reconciling the bank statement. Late last year, clients began complaining to you, the Managing Director, about incorrect statements. As Managing Director, you want to investigate this matter. Jacqueline tells you there is nothing to worry about. The problem is due to the slow mail: customers payments and statement are crossing in the mail. Because clients were not complaining last year, you doubt the mail is the primary reason for the problem. Required: What might be some of the reasons for the delay? What should be done to make sure the problems are avoided in the future?arrow_forwardRead the following information and then answer questions a & b below: Assume you are an internal auditor for a large, multinational, manufacturing organization with a division in Mexico. One of your responsibilities is to investigate allegations made on the company’s fraud hotline. When you arrive at work one morning you learn an anonymous tip was left on the hotline that alleges fraud involving the division manager. “Pat’s significant other is a fraudulent vendor,” was the anonymous tip left on your company’s fraud hotline. Pat is a division manager at your company. “Wow. I can’t believe this guy is so blatant,” you are thinking as you review some accounts payable invoices while following up on this anonymous tip. A quick search of the AP file reveals a total of three invoices like the one, all for identical amounts but on different dates. The division manager, Pat, has the authority to approve payment of invoices for less than $10,000. It is obvious to you that the manager has…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Computer Fraud; Author: Mitch Wenger (Accounting Systems & Tech);https://www.youtube.com/watch?v=-s82SCuMaTI;License: Standard Youtube License