a.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: The statement of company contained any material weakness or not.
b.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: If the report filed by the company of internal control over financial reporting with SEC was accurate or not.
c.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: The material weaknesses that existed in the fraud committed by company DF.
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Auditing: A Risk Based-Approach (MindTap Course List)
- Diamond Foods, Inc. (LO 8, 9) In February 2012, the Wall Street Journal reported that Diamond Foods, Inc. fired its CEO and CFO, and would restate financial results for two years. The restatement was required after the company found that it had wrongly accounted for crop payments to walnut growers. The investigation focused primarily on whether payments to growers in September 2011 of approximately $60 million and payments to growers in August 2010 of approximately $20 million were accounted for in the correct periods. Shareholders suing the company allege the payments may have been used to shift costs from a prior fiscal year into a subsequent fiscal year. In a February 2012 filing with the SEC, the audit committee stated that Diamond had one or more material weak nesses in its internal control over financial reporting. In January 2014, the SEC charged Diamond Foods and two former executives for their roles in the accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. Diamond Foods agreed to pay $5 million to settle the SEC’S charges. a. Does the restatement suggest that the company’s internal controls contained a material weakness? Explain your rationale. b. In September 2011, the company filed its annual report with the SEC for its fiscal year ended July 31, 2011. As part of that filing, the company maintained that it had effective internal controls over financial reporting as of its year-end date. Do you believe that management’s report on internal control over financial reporting was accurate? c. In February 2012, the audit committee indicated that the company had ineffective internal controls. What types of material weaknesses do you think might exist at Diamond?arrow_forwardNorma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. a. On December 20, 2020, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote. b. Bonuses to key employees based on net income for 2020 are estimated to be $150,000. c. On December 1, 2020, the company borrowed $600,000 at 8% per year. Interest is paid quarterly. d. Accounts receivable at December 31, 2020, is $10,000,000. An aging analysis indicates that Baylor’s expense provision for doubtful accounts is estimated to be 3% of the receivables balance. e. On December 15, 2020, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2021. f. During the year, customer…arrow_forwardEastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2016 financial statements are issued on March 15, 2017. a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2017, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. b. In November 2015, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2017, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that…arrow_forward
- At the beginning of current year, Zamba Company announced the decision to close the factory located inZamboanga and terminate all 150 employees as a result of economic downturn.The entity shall pay P30,000 per employee upon termination.However, to ensure that the windup of the factory occurs smoothly and all remaining customer orders arecompleted, the entity needs to retain some employees until closure of the factory in nine months.As a result, the entity announced that employees who agree to stay until the closing of the factory shallreceive P80,000 payment at the end of nine months in addition to receiving their current wage throughoutthe period of closure instead of the P30,000.Based on this offer, the entity expected to retain 20 employees until the factory is closed.REQUIRED:12. Compute the total benefit under the termination plan.13. Compute the amount of termination benefit.14. Compute the amount of short-term benefit.arrow_forwardYou are the audit supervisor of Maple & Co and are currently planning the audit of an existing client, Sycamore Science Co (Sycamore), whose year-end was 30 April 2015. Sycamore is a pharmaceutical company, which manufactures and supplies a wide range of medical supplies. The draft financial statements show revenue of $35.6 million and profit before tax of $5.9 million. Sycamore’s previous finance director left the company in December 2014 after it was discovered that he had been claiming fraudulent expenses from the company for a significant period of time. A new finance director was appointed in January 2015 who was previously a financial controller of a bank, and she has expressed surprise that Maple & Co had not uncovered the fraud during last year’s audit. During the year Sycamore has spent $1.8 million on developing several new products. These projects are at different stages of development and the draft financial statements show the full amount of $1.8 million within…arrow_forwardWilliams-Santana Inc. is a manufacturer of high-tech industrial parts that was started in 2002 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years. a. A five-year casualty insurance policy was purchased at the beginning of 2014 for $35,000. The full amount was debited to insurance expense at the time. b. On December 31, 2015, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system. c. The company changed inventory cost methods to FIFO from LIFO at the end of 2016 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2015. d. At the end of 2015, the company…arrow_forward
- A Public Corporation states in an annual SEC disclosure that its product, the xWatch, is extremely profitable, and should generate 51 billion. The company omits, though, that it took pre-orders for the watch, and that most of the $1 billion was earned in the prior year. Most investors reading this Document would form the mistaken belief that the $1 billion was all earned in the current year, causing them to be misled in overvaluing the corporation's health and profitability. If an injured i investor sues under 10(b): The corporation is liable if the statement lacked material information The corporation is not liable because it has no duty to disclose information to the SEC after its IPO The corporation is not liable because the contested statement is factually accurate The corporation is liable only if the company is publicly tradedarrow_forwardOver the past two years, Kermit Stone, The comptroller of Hilton Company, Has been concerned that the company has been paying a large amount of money for state unemployment taxes. On reviewing the "unemployment file" with the head accountant, Deborah Martha, he learns that the companies tax rate is near the top of the range of the states experience-rating system. After calling the local unemployment office, stone realizes that the turnover of employees at Hilton company has had an adverse effect on the companies tax rates. In addition, after consulting with Murtha, he discovers that the eligibility reports that come from the state unemployment office or just signed and sent back to the state without any review. The eligibility reports or notices that an ex employee has filed a claim for unemployment benefits. By signing these reports "blindly", The company, in effect, tells the state that the employee is eligible for the benefits. Any benefits paid or charged by the state against…arrow_forwardDavid H. Brooks, a university graduate with an accounting degree and the former CEO of DHBIndustries, Inc., was charged in October 2007 with accounting and securities fraud for failing toreport the company’s inventory at the lower of cost or market. From 2001 to 2005, DHB purchasedlarge quantities of a material called Zylon and used it in making bulletproof vests that were sold tothe U.S. military and local law enforcement agencies. During this same period, DHB learned thatZylon deteriorated rapidly when exposed to light, heat, and body perspiration. DHB knew that oneof its competitors, Second Chance Body Armor, had stopped using Zylon in its vests and, eventually, discontinued its business because customer demand for its Zylon-based vests had evaporated.DHB did not write down its own inventory of Zylon and Zylon-based vests because it had a largecontract to supply the U.S. military with bulletproof vests. In its financial statements for the yearended December 31, 2004, DHB reported…arrow_forward
- Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2009 by two talented engineers with little business training. In 2021, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2021 before any adjusting entries or closing entries were prepared. The income tax rate is 25% for all years. A five-year casualty insurance policy was purchased at the beginning of 2019 for $36,500. The full amount was debited to insurance expense at the time. Effective January 1, 2021, the company changed the salvage value used in calculating depreciation for its office building. The building cost $612,000 on December 29, 2010, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000. On December 31, 2020,…arrow_forwardMargie Johnson is a staff accountant at ToolEx Company, a manufacturer of tools and equipment. The company is under pressure from investors to increase earnings, and the president of the company expects the accounting department to "make this happen." Margie's boss, who has been a mentor to her, is concerned that if earnings do not increase, he will be terminated. Shortly after the end of the fiscal year, the company performs a physical count of the inventory. When Margie compares the physical count to the balance in the inventory account, she finds a significant amount of inventory shrinkage. The amount is so large that it will result in a significant drop in earnings this period. Margie's boss asks her not to make an adjusting entry for shrinkage this period. He assures her that he will get "caught up" on shrinkage in the next period, after the pressure is off to reach this period's earning goal. Margies boss asks her to do this as a personal favor for him. What should Margie…arrow_forwardIn May of 2016, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2016, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2016 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2016, balance sheet of: a.$770,000. b.$900,000. c.$970,000. d.$1,170,000.arrow_forward
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