ACCO 465 Lecture Notes - Lecture 18: Financial Audit, Financial Statement, Control Risks

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7 Aug 2018

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From: audit manager for mcdowell & company chartered accountants. Subject: recommendations on engagements for tundra diamonds (tundra) As you asked me after the board meeting this morning, here is the report summarizing all of the potential engagements that tundra wants us to perform. This report contains all the issues related to those engagements as well as my opinion on whether we should accept them or not. This report focuses primarily on the independence and conflict of interest issues regarding those engagements. The the code of ethics of chartered professional accountants has been used as a reference, with an emphasis on rule 204. Tundra diamonds has been mcdowell"s largest client for a few years. Tundra has already been approved, there should be no issue with accepting this engagement. #2 financial statements audit or review of cape. The audit or review of cape should be accepted. There is no threat of independence if mcdowell accepts the engagement.

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The New York state attorney general's office and the UnitedStates Securities and Exchange Commission have been investigatingTyco (a publicly owned company) and its audit firm. DennisKozlowski (the former chief executive officer), Mark Swartz (theformer chief financial officer), and the former chief counsel(i.e., top lawyer who was an employee of the company) are all saidto have received millions of dollars of money from the company,above the millions of dollars and buckets of shares and/or stockoptions which were approved by the company's board of directors onthe advice of the board's compensation committee. According to newsreports, Dennis Kozlowski personally transferred some of his ownmoney to the head of the board's compensation committee, and alsoallowed that same individual to lease an aircraft from the companyfor one dollar per year. Consequently, one issue being investigatedis whether any members of the board of directors were bribed.Beyond that one issue, the chief counsel received money from thecompany which was labeled as a "relocation loan," which he used tobuy a fancy house in Utah. At various times, the company hadexecutive offices in two states in the northeastern U.S., butnothing in Utah. One or both of Dennis Kozlowski and Mark Swartzreceived money labeled as relocation loans, and used it toconstruct a fabulous housing compound in Florida--but the company'sheadquarters were never in Florida. Payments to employees tend toshow up in the payroll records under an employee's Social Securitynumber and/or employee identification number. For reimbursementsfor travel expenses and other such items, an employee might also beset up as a vendor and be paid through the accounts payable system;those vendor ID numbers are usually alphabetized. Finally, someonemight be paid through the issuance of a check request, but thatalso goes through the accounts payable system and the relatedvendor ID number. Thus, each of these three employees is likely tohave had both an employee ID number and a vendor ID number, withall payments from the company to them being made under those twonumbers, regardless of what general ledger account the paymentswound up in. The SEC claims that those payments were not approvedby the board and were not reported in any of the filings thecompany made with the SEC. The SEC claims that the individualauditors on the engagement had a duty to report this to the board,and that if the auditors did not know about this, then either thefailure to know was willful or else the auditors were not competentto perform an audit. In any case, it seems that materialinformation has been discovered which either the auditors did notknow about, or did not correctly handle, when they rendered theiropinion. Based on the price reaction in the company's securities,that information was clearly material to investors, and if Tycopaid company money by means of company checks, then clearly Tycoknew of the payments and should have reported them. Moreover, thepayments were not correctly classified in Tyco's accounts, whichviolates the Foreign Corrupt Practices Act.

1. Does the audit firm have any obligation to do anything nowabout those earlier audit reports? Cite the authoritativeprofessional literature.

2. Design an audit program for asserted and unasserted claimsagainst this client company. Cite the authoritative professionalliterature related to the claims, and show how your audit programfulfills your professional responsibilities.

Case Study#1 WALITAN CONSTRUCTION COMPANY

Ashley Wesley is the assistant controller at the WalitinConstruction Company. Walitin is headquartered in Miami, Florida,and has a general contractorâs license in 30 differÂent states. Itis a privately held company with about 5,000 stockholders, with themajority of the stock being owned by the Walitin family.

Roberta Walitin has been the CEO of Walitin Construction for theprevious 12 years. Everyone considers her an excellent leader withexcellent business skills. She has an undergraduate degree from theUniversity of Illinois in engineering and an MBA from the sameschool with a concentration in accounting.

Roberta has always insisted on ethical business practices, sotwo years ago she worked
with Ashley to set up an ethics hotline, which Ashley personallymanages on a daily
basis. Anyone either inside or outside of the company can submittips anonymously by e-mail, telephone, or a special Web page shehad set up. There is a prominent link to the hotline on the homepage of the companyâs Web site.

Since Ashley set up the hotline, she has received three tips,all via the Web. In every case, the tip was about a subcontractoroverbilling the company for services renÂdered. In two of thecases, she was unable to confirm or disconfirm whether there wasfraud, mainly because it is almost impossible to investigate thework of a subÂcontractor on a job that has already been completed.But in the other case, she caught a roofer billing for fictitiouswork. She did not report the fraud to authorities, but Roberta didimmediately replace the subcontractor with another roofing company.Ashley reports to Bob Benson, Walitinâs controller. Heâs been withthe company for many years and works very closely with Roberta. Hismain interest seems to be producing the financial statements andworking with her to obtain new clients. Roberta and Bob spend largeperiods of their time going to lunches with clients, participatingin civic meetings, and helping in small community-serviceconstrucÂtion projects.

Because Bob is busy so much of the time with outside activities,Ashley pretty much runs everything in accounting on her own exceptfor the software and hardware, which Bob manages in conjunctionwith the head of the IT department.

Bob is not interested in details, and anytime Ashley tries toexplain something to him, he simply waves a hand and says, âDonâtworry me with operational issues. Just take care of it.â Ashley haslearned to live with his hands-off approach.

Overall, Ashley runs everything smoothly. Her main problem isthat Betty Grabber, the senior accountant reporting to her, wantsAshleyâs job. To make things worse, Betty is a niece of RobertaWalitinâs husband.

Betty is a very wily person. Her goal is to have Ashley fired,and sheâs been using her family connections to get the message toRoberta that Ashley is scheming to have Bob Benson, the controller,fired. Ashley also suspects that Betty has been spreading a rumorthat sheâs planning to go to work for a competitor if she is notsuccessful in takÂing over Bobâs job.

Ashley is unsure as to whether Bob is aware of the rumors. Heseems to be avoiding her recently, and there seems to an edge inhis usually friendly voice. Ashley is feeling depressed justthinking about it. Sheâs heard that Bob is having serious maritalprobÂlems. Perhaps those problems are affecting the way heacts.

This morning Ashley had a major surprise when she startedreading her e-mail, which contained a new anonymous tip. Someonehad submitted it last night via the Web, and it had automaticallybeen forwarded to her via e-mail. The tip read as follows:

To: Walitin Tip System

From: http://[email protected]

Sent: Tuesday 8/1/2015

Ms.Wesley,

Iâm sending this tip to help you. I understand what you aregoing through. Youâre working for a liar and a thief. Bob Benson ishacking the accounting system to produce fraudulent financialstatements. Heâs doing it in such a way that youâll get the blame.Itâs going to be a big mess.

What should Ashley do? Should she tryto investigate? Should she report the tip to Roberta?

Evaluate Walitinâs hotline and make recommendations for itsimprovement.

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ACCO 465 Lecture Notes - Lecture 18: Financial Audit, Financial Statement, Control Risks

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