UTSTARCOM, INC.
(LO 2, 3, 4, 5, 6, 8)
UTStarcom is a global leader in the manufacture, integration, and support of networking and telecommunications systems. The company sells broadband wireless products and a line of handset equipment to operators in emerging and established telecommunications markets worldwide. The following excerpt was obtained from the 2004 10-K of UTStarcom. Inc., which reported material weaknesses in the company’s internal controls. In describing the company’s remediation efforts, the company stated that “planned remediation measures are intended to address material weaknesses related to revenue and deferred revenue accounts and associated cost of sales.”
These material weaknesses were evidenced by the identification of six separate transactions aggregating approximately $5 million in which revenue was initially included in the company’s fourth-quarter 2004 financial statements before all criteria for revenue recognition were met. In addition, there were other transactions for which there was insufficient initial documentation for revenue recognition purposes but which did not result in any adjustments to the company’s fourth-quarter 2004 financial statements. If unremediated, these material weaknesses have the potential of misstating revenue in future financial periods. The company’s planned remediation measures include the following:
- “The Company plans to design a contract review process in China requiring financial and legal staff to provide input during the contract negotiation process to ensure timely identification and accurate accounting treatment of nonstandard contracts.”
- “In March 2005, the Company conducted a training seminar regarding revenue recognition, including identification of nonstandard contracts, in the United States and, in April 2005, the Company conducted a similar seminar in China. Starting in May 2005, the Company plans to conduct additional training seminars in various international locations regarding revenue recognition and the identification of nonstandard contracts.”
- “At the end of 2004, the Company began requiring centralized retention of documentation evidencing proof of delivery and final acceptance for revenue recognition purposes.”
b. Using the previous disclosures as a starting point, identify challenges regarding internal controls that a company may face in doing business internationally.
c. The company had disclosed its planned remediation efforts for 2004. How might the auditor have used that information in planning the 2005 audit?
d. Considering potential analytical procedures relevant to the revenue cycle, identify analytics that the auditor might use in 2005 to provide evidence that the problems detected in 2004 have been remedied.
e. Considering potential substantive tests of revenue, identify procedures that might be applied in 2005 to provide evidence that the problems detected in 2004 have been remedied.
Want to see the full answer?
Check out a sample textbook solutionChapter 9 Solutions
ACP AUDITING - RISK BASED APPROACH
- Carinal Ltd. specializes in the development of electronic components within quite a competitive environment causing concerns for marketing and pricing. Its non-current assets primarily include IT software, property, and investments, and there have been additions to these during the year. As audit manager, you are conducting a preliminary analytical review and associated risk analysis for this client for the year ended June 30 2022. You have been presented with the following draft financial information about Carinal with incomplete ratios and percentages calculation. INCOME STATEMENT Year ended June 30 2022 2021 $'000 $'000 Revenue Cost of sales 22450 18675 8475 8055 Gross Profit 13975 10620 Distribution costs 4245 3120 Administrative expenses 1276 2134 Selling expenses 5555 512 Profit from operations 2899 4854 Net interest receivable 1245 495 Profit before tax 4144 5349 Income tax expense 2145 2345 Net profit 1999 3004 Retained profits 1325 2105 Dividends paid $1250 $1049arrow_forward1. 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_forward4. Years ago, the company purchased a software package that was used by other companies in the same industry (it was not a specially made software). It was sold by a leadingsoftware company known for their highly rated products.Which management assertions apply to this control? Existence & Occurrence, Rights, Completeness, Valuationarrow_forward
- Ascendex Sdn Bhd is an online company that supplies a range of IT products. Its product line includes IT hardware and software. Their main customers are government agencies and private company. The company employs a combination of manual procedures and a networked accounting system with distributed terminals in several departments. After years of satisfactory performance, however, Ascendex Sdn Bhd is now experiencing operational inefficiencies and accounting errors. Your firm has been hired to evaluate Ascendex’s business processes and internal controls. Ascendex’s expenditure cycle is described in the following paragraphs. PURCHASE SYSTEM PROCEDURES Ascendex’s transactions are initiated when the purchasing department clerk reviews the inventory file for items that need to be replenished. The clerk selects a vendor, adds a record to the digital purchase order (PO) File, and prints four hard copies of the PO. One copy is filed in the department; the second copy is sent to the receiving…arrow_forwardLamar LLC is in the process of updating its revenues and receivables systems with the implementation of new accounting software. James Loden, Inc. is an independent information technology consultant who is assisting Tamar with the project. James has developed the following checklist containing internal control points that the company should consider in this new implementation: Has the company identified an off‐site alternative computer processing location?arrow_forwardClamShell Security (CSS) is a division of a large, listed company, X3Cate Limited (X3L). The CSS Division produces software products to protect customer’s computers from infection from computer viruses and other malware. The sales of its products have been growing over the last few years as its products become more accepted in the market. The Board of X3L want to introduce a new product line that would specifically protect against Ransomware, a new security threat, particularly business customers. Each Divisional Manager can earn large bonuses on top of their base salaries if they maintain Return on Investment greater than 25% otherwise the bonus payments are halved. The following information is for the year that has just ended related to the CSS Division performance: Profit percentage (Return on Sales): 30% Sales revenue: $15 000 000 Average capital invested $18 000 000 Required:Using the same information provided for the past year, if X3l has a company-wide…arrow_forward
- Explain how risk of material misstatement should he assessed and what effect that assessment will have on detection risk for the following audit client:Kistra Corporationis one of several companies engaged in the manufacture of high- speed, high- capacity data storage devices. The industry is very competitive and subject to quick changes in technology. Kistra’s operating results would place the company in the second quartile in terms of profitability and financial position. The company has never been the leader in the industry, with its products typically slightly behind the industry leaders in terms of performance.arrow_forwardAccounting The internal audit group at Freshfield Inc., a produce wholesaler, has tested the company’s IT controls and found security weaknesses in its e-commerce system. This is an example of which type of enterprise risk? a) Strategic risk b) Compliance risk c) Operational risk d) Reporting risk.arrow_forwardExplain how risk of material misstatement should he assessed and what effect that assessment will have on detection risk for the following audit client:xyz Corporationis one of several companies engaged in the manufacture of high- speed, high- capacity data storage devices. The industry is very competitive and subject to quick changes in technology. MUHEET’s operating results would place the company in the second quartile in terms of profitability and financial position. The company has never been the leader in the industry, with its products typically slightly behind the industry leaders in terms of performance.arrow_forward
- QUESTION: Using the information below, propose and elaborate on control measures that Carico should adopt to minimize the likelihood of recurring fraud, while also outlining how each control would mitigate the associated risk. Carico Ltd, a manufacturer of construction blocks, operates with a fiscal year-end of June30th, 2021. With a trading history spanning over 25 years, Carico caters to a diverse range ofcustomers, including both large and small hardware stores nationwide.The company's operations encompass a manufacturing plant, five warehouses, and a centralhead office. Following the manufacturing process, the blocks are stored in one of thewarehouses until they are dispatched to customers. It is important to note that Caricocurrently does not possess an internal audit department.The following is a reflection of the sales system: Each customer is assigned a distinct customer account number, which is utilized toinput sales orders upon receiving written requests from customers. The…arrow_forwardOmitted Procedures and Subsequently Discovered Facts—Internet Exercise. From the “Inspections” section of the PCAOB’s website, access the most recent inspection reports for each of the Big Four firms (Deloitte, EY, KPMG, and PwC). Each inspection report contains the following information:∙ An introductory preface.∙ Inspection procedures and observations, which include specific findings related to issuers (clients) (Part I).∙ A summary of the inspection process.∙ The firm’s response to the inspection report.Occasionally, the PCAOB’s inspection process identifies situations in which necessary audit procedures were not performed or in which the auditors did not identify departures from GAAP. Required:a. What is the auditors’ responsibility with respect to subsequently discovered facts and omitted procedures?b. If one is provided, review and briefly summarize the firm’s response to the inspection report. Comment on whether you believe the firm’s response to omitted procedures and…arrow_forwardYou have been presented with the following draft financial information about Bata Ltd, a very successful company that develops and licenses specialist computer software and hardware. Its noncurrent assets mainly consist of property, computer hardware and investments, and there have been additions to these during the year. The company is experiencing increasing competition from rival companies, most of which specialize in hardware or software, but not both. There is pressure to advertise and to cut prices. You are the audit manager. You are planning the audit and are conducting a preliminary analytical review and associated risk analysis for this client for the year ended 31 July 2019. You have been provided with a summarized draft income statement which has been produced very quickly and certain accounting ratios and percentages. You have been informed that the company accounts for research and development costs in accordance with IAS 38 Intangible Assets. Required: (i) Based on the…arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningAccounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,