Golden Bear Golf, Inc. 1)Which “management assertions” were relevant to Paragon’s construction projects? Describe an audit procedure that Arthur Anderson could have employed to corroborate that assertion for each. Professional auditing standards identify 5 “management assertions” that commonly underlie a set of financial statements. These 5 assertions are: occurrence, completeness, valuation/allocation, rights/obligations, and presentation/disclosure. With respect to the audit of Paragon’s construction project, some of these key assertions were overlooked by auditor Arthur Anderson. The main assertions that Anderson should have focused on for this audit include occurrence, valuation, and disclosure. Occurrence is a relevant …show more content…
Anderson should have also contacted clients regarding the various change in fees that Paragon had apparently incurred. Finally, disclosure was a very relevant assertion for the Paragon audit. Paragon failed to disclose much information regarding their switch to the “earned-value” method. Paragon continued billing its customers on a cost-to-cost basis while reporting financial results in the earned-value method. Arthur Anderson should have required Paragon to remain consistent and charge its customers based on the earned-value method. 2) Define what you believe the SEC meant by “Sullivan’s Audit Failures”. Do you believe Sullivan, alone, was responsible for the deficiencies that the SEC noted in the 1997 audit of Golden Bear? According to the SEC, Michael Sullivan was fully aware that the decision to use the earned value method would result in accelerating revenue by material amounts. It is very clear that the SEC believed that Sullivan acted in a very reckless manner throughout the audit and was very negligent to important audit procedures that are typically performed for the audits of construction companies. I think that by “Sullivan’s Audit Failures”, the SEC meant the Sullivan failed to perform these key audit procedures that are crucial to the audit of construction projects. Although I do agree that Sullivan acted recklessly during the audit, I do not believe that he, alone, was responsible for the deficiencies noted
An “audit failure” is a situation in which a professional auditor fails to detect a material error in the financial statements of the company they are auditing. The audit failure in the situation of Rita Crundwell the failure was exacerbated by the fact that the auditors continually signed off on the misstated statements for years. Crundwell is responsible for many of the deficiencies mentioned, such as the missing funds and the incorrect invoices. However, she is not the sole person responsible for this fraud. The lack of internal control is to blame, and this cannot be placed on a single person. The government should have separated duties and used
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.
Scott Sullivan went to Cynthia and her internal audit team to ask if they could hold off on reporting their findings to the company’s audit committee and that he would take care of the findings in the next quarter. Sullivan also yanked four hundred million dollars from John Stupka, who headed WorldCom’s wireless division so that Sullivan could use that money as an income boost for the company. It led me to believe that he was going to take care of the problem in the next quarter. Only his way of think was to shift funds around that he started to do with John Stupka, or he was going to find a way to fire Cynthia and her internal auditing team. If Cynthia had taken his warning at the hair salon she and her team would also be facing federal charges with having some connection with the fraud.
Brooks attempted to cover up several of the schemes by obstructing the flow of proper information to the audit process. Brooks and others submitted false reports to auditors and even
The one pattern within the data that appears to be inconsistent yet if the auditors had established an internal control systems would be Monus the founder moving so freely throughout every aspect of the company with no one checking his movements. From choosing what properties to purchase to purchasing supplies. In any company there should be segregation of duties. For example, the person making the deposits should not be the person writing the checks. Had there been stipulations made it would not have been so convenient to commit the
Compare the primary auditor objectives in auditing historical financial statements to auditing internal controls over financial reporting. Identify at least two (2) objectives that are the most significant in reducing the risk of reporting errors or misstatements in financial statements. Provide a rationale for your response.
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.
To conduct the audit, the firm must acquire sufficient understanding of the internal control processes to help determine the nature and timing of the audit. However, the audit is not designed to identify deficiencies in internal control or provide assurance. The firm will make the audit committee aware of any significant deficiencies that come to Anderson, Olds, and Watershed’s attention during the audit.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate (Louwers & Reynolds, 2007). We believe that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for our opinions.
This case established that an auditor could be sued by a primary beneficiary for damages from negligence. A primary beneficiary is a party that has a direct benefit from the audit. Non-privity parties could also sue for gross negligence. This increased the auditor’s legal exposure to third parties. The SEC of 1934 reflected these changes and many others; one significant change was that auditor’s had a much higher litigation risk due to their new responsibility to third parties.
A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the
4. Identify the generally accepted auditing standard violated by the E&Y auditors in this case. Briefly explain how each standard was violated.
Q1. First move of Jack Brennahan should be to investigate the reasons why did William Blackburt and the controller refuse to answer the questions asked by external auditors, followed by clearing out the uncertainties in the books which were a subject of concern to them.
For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate descriptions of Andersen’s involvement in Enron’s accounting and financial reporting decisions. Given this assumption, do you believe that Andersen’s involvement in those decisions violated any professional auditing standards? If so, list those standards and briefly explain your rationale.
The auditor did not identify or address the risk of material misstatement by Dell’s accountants. The firm issued fraudulent quarterly reports that showed they were consistent with meeting their quarterly financial objectives and the Wall Street predictions. This was important as it assured the investors of the reliability of the firm in the financial market. As revealed by the SEC, this was not the actual operating position because the firm was running “cookie jars” that were used in hiding deficiencies in the next fiscal year. This action by the accountant is not in accordance with GAAP, and the auditor ought to have recognized it as a possible fraud risk. Some of the operating “cooking jars” include strategic fund accounts, corporate contingencies, EMEA reserves, and risk and opportunities schedules. The reserve manipulations enabled the firm to materially misstate earnings and expenses of operation as percentage revenue.