Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
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Textbook Question
Chapter 4, Problem 24FF
ToshIba, EY
(LO 1, 2, 3)
In 2015, the business press reported that Japan’s Toshiba Corp. over stated its operating profit by 151.8 billion yen ($1.22 billion) over several years through accounting irregularities involving top management. This overstatement represents approximately one-third of Toshiba’s pre-tax profits during the misstatement period. Toshiba had a corporate culture in which one could not go against the wishes of superiors. An investigation report noted that when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried our inappropriate accounting practices to meet targets in line with the wishes of their superiors. Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges, and such steps often led to even higher targets being set for divisions in the following period.
The report said much of the improper accounting, stretching back to fiscal year 2008, was intentional and would have been difficult for auditors to detect. The audit firm during this misstatement period was EY (Ernst & Young ShinNihon) who incurred significant reputational damage after they were accused of failing to detect the misstatement and fined $17.4 million by Japanese regulators.
The investigation into Toshiba’s accounting practices was initially limited to its home country. However, in 2016 the U.S. Justice Department and the Securities and Exchange Commission began looking into the case since part of the alleged fraud involved a Toshiba unit based in the US (Westinghouse Electric Company).
a. Based on this limited information, does this case represent a business failure, an audit failure, or both?
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. Under what law would the SEC be likely to pursue this case?
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1.
Company ABC reports a loss of $80,000 in 2007. In the past when the firm incurred a loss they first carried the loss back as far as they could to receive a refund from the IRS, and then carry forward the remainder to be used to offset future income. Assume the past seven-years of taxable income are as follows (and further that they are not using the current (new) tax law enacted in November 2017 to account for NOLs):
Year Income
2000 $50,000
2001 $30,000
2002 ($40,000)
2003 ($80,000)
2004 $30,000
2005 $50,000
2006 $30,000
Further assume that the current tax rate is 40% and is expected to decrease to 35% in the next period and remain at that rate for the foreseeable future. Finally, ABC is only able provide evidence that they will be able to earn $40,000 in the foreseeable future.
What is the amount of the Net Operating Loss (NOL) that ABC will carry forward into the future?
What is the DTA that ABC will record related to this NOL?
What (if any) journal entry…
Chapter 4 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
Ch. 4 - Prob. 1CYBKCh. 4 - Prob. 2CYBKCh. 4 - Prob. 3CYBKCh. 4 - Prob. 4CYBKCh. 4 - Prob. 5CYBKCh. 4 - Prob. 6CYBKCh. 4 - Prob. 7CYBKCh. 4 - Prob. 8CYBKCh. 4 - Prob. 9CYBKCh. 4 - Prob. 10CYBK
Ch. 4 - Prob. 11CYBKCh. 4 - Prob. 12CYBKCh. 4 - Prob. 1RQSCCh. 4 - Prob. 2RQSCCh. 4 - Prob. 3RQSCCh. 4 - Prob. 4RQSCCh. 4 - Prob. 5RQSCCh. 4 - Prob. 6RQSCCh. 4 - Refer to the Focus on Fraud feature “Moss Adams...Ch. 4 - Prob. 8RQSCCh. 4 - Prob. 9RQSCCh. 4 - Prob. 10RQSCCh. 4 - Prob. 11RQSCCh. 4 - Prob. 12RQSCCh. 4 - Prob. 13RQSCCh. 4 - Prob. 14RQSCCh. 4 - Prob. 15RQSCCh. 4 - Prob. 16RQSCCh. 4 - Prob. 17RQSCCh. 4 - Prob. 18RQSCCh. 4 - Prob. 19RQSCCh. 4 - Prob. 20RQSCCh. 4 - Prob. 21RQSCCh. 4 - Able Corporation decided to make a public offering...Ch. 4 - KPMG (LO 1, 2, 3) KPMG LLP served as the external...Ch. 4 - ToshIba, EY (LO 1, 2, 3) In 2015, the business...
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