Case Study Question Unit 3

This $490 million came from the netting manipulation when they offset their expenses with unrelated gains on the sale of assets. The geography manipulation allowed them to move millions of dollars to different sections of the income statement to “make the financials look the way we want to show them” said James Koenig, one of the primary forces behind the scandal. However, none of the fraudulent activities would have gone unknown for so long without the aid of the auditors, Arthur Anderson LLP, involved with Waste Management.

Overall, there were three “red flags” E&Y was not aware of during the audit. First, they neglected the 500% net income increase from 1999-2001. This should have raised awareness because revenues only increased by 5% during that same period. Second, the internal auditors were denied access to some of the corporate ledgers. E&Y should have seen this as being one of the largest red flags. Third, the audit team failed to properly investigate employee complaints.

Arthur Andersen (AA) contributed to the Enron disaster when it has failed to the management by failing to have Enron establish and enforce its own internal control. There has been flaws to AA‘s internal control. There has been assumption that AA partners were too motivated by revenue recognition thus, overlooking several criteria when providing their services to Enron. Additionally, AA also recognised the retention of audit clients as vital and a loss of any clients would be disadvantaged to an auditor’s career. In AA internal control, the person who is able to make most of the decisions is the person who is most concerned about the revenue or losses of the client’s company.

[pic]s a senior in a professional services firm, you have been assigned to plan the financial statement audit of a private company named Toy Central Corporation (TCC). In addition, the partner on the engagement has asked you to identify business risks that could adversely affect TCC’s sustained profitability, so that they can be brought to the attention of the company’s board of directors. These tasks will require you to draw on your knowledge of supply chain management, marketing, internal controls, audit assertions, and financial accounting.

E & Y was consulted and they should have provided an evaluation to ensure that Lehman Brothers was remaining US GAAP compliant. Jennings (2011) notes how E & Y failed to evaluate the official judgements of the United Kingdom law firm and normally consider using an opinion from a law firm outside the United States is not ethically prudent (p. 38). However, when E & Y was officially confronted during the audit with this new practice, E & Y is responsible to investigate and properly report its

4. The depreciation method used for all equipment was changed from the declining balance to the straight line method.

The adequacy of the confirmations as evidence is underminded by the knowledge that the client told the suppliers how to respond. In reality, the auditor should have verified the confirmed balances using alternative procedures. There is no discussion of alternate procedures for nonresponses or the resolution of six responses that were not reconciled to Grande’s records.

3. In your opinion, which of Brent’s alternative courses of action would provide the best outcome and why? What should Brent do? How would you handle the ethical issues involved in this situation?

When Deloitte modified the 1997 workpapers but failed to document the revisions that undermined the first objective. They altered the original workpapers, which, in part, deleted original findings by the audit team for the 1997 audit pertaining to the barter agreement. The changes to the 1997 workpapers directly affected the decisions made on the 1998 audit. The auditors of the 1998 audit depended on the decisions from the 1997 audit that created the improper handling of the barter transaction recorded in January 1998.

■ The audit manager recently conducted an interview with management in order to obtain an understanding of EC/SS’s control environment. This interview dialogue is what students rely on to assess EC/SS’s control environment.

The heads of the Fixed Income & Commodities division sat across from us. I feverishly took notes as Jon proceeded to dig deep into the numbers, pressing for more information at every opportunity. The room felt tense. It was near this time last year that he and the company’s board made the decision to cut roughly a quarter of this division’s workforce on the back of several disappointing earnings results and a challenged backdrop across Wall Street. As his questions slowed to a halt and we finished reviewing the numbers, Jon bellowed, “Alright, you knew this was coming! Three themes: what are they? What’s the story for the quarter? Why should anyone care? Why should

Describe how IT may effect internal controls, evidential matters, the understanding of internal controls, and the assessment of control risk.

[pic]s a senior in a professional services firm, you have been assigned to plan the financial statement audit of a private company named Toy Central Corporation (TCC). In addition, the partner on the engagement has asked you to identify business risks that could adversely affect TCC’s sustained profitability, so that they can be brought to the attention of the company’s board of directors. These tasks will require you to draw on your knowledge of supply chain management, marketing, internal controls, audit assertions, and financial accounting.

Additionally, Gateway reported a significant increase of revenues in third quarter of 2000 as a result of loans to high risk customers accounting for $30 million of revenue. Gateway failed to disclose the fact the substantial increase in revenue, outpacing competitors, was comprised of said loans. Such a significant increase in loan receivable balances should have been detected by auditors as an indication of potential fraudulent activities. As the bank employee informed Gateway of the potential of catastrophic losses exceeding 50%, such accounts should have not been classified as current assets. Consequently, no indication of PwC auditors questioning and reporting such information is evident; an inherent accounts receivable risk, which should be discovered during the audit.

The executives of Waste Management, in order to save their jobs and keep/increase their personal bonuses, manipulated financial records in order to give the appearance to investors that certain earnings targets were