The US Surgical Case
1) Identify audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements.
There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.
First and foremost, you would need to have a clear
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Are these changes permissible under generally accepted accounting principles? Assuming these changes had a material effect on USSC’s financial condition and results of operations, how should the changes have been disclosed in the company’s financial statements? How should these changes have affected Ernst & Whinney’s 1981 audit opinion? (Assume that the current audit reporting standards were in effect at the time.)
3) Prepare common-sized financial statements for USSC for the period 1979-1981. Also compute key liquidity, solvency, activity, and profitability ratios for 1980 and 1981. Given these data, identify what you believe were the high-risk financial statement items for the 1981 USSC audit.
4) What factors in the auditor-client relationship create a power imbalance in favor of the client? Discuss measures that the profession could take to minimize the negative consequences of this power imbalance.
5) Regarding the costs incurred for USSC by Barden, identify (a) the evidence Hope collected that supported USSC’s
Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s
As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count finished goods, copper rod, and plastic inventories, and determine actual increase of inventories at year end. Also, they should select items from the inventory ledger and locate them and reconcile the quantity. Second, for completeness, the auditors should make sure that all existing inventories have been recorded completely , go around the warehouse and ensure all the inventories are recorded in the inventory ledger. Third, for valuation or allocation, the auditors should make sure that Laramie Wire manufacturing sticks with one valuation method(For inventory items, valuation is based on the lower of cost or market value, with several alternative methods for calculating cost), find out if there is any scrap inventory that needs to be recorded and written off ,and ask about obsolescence items. Fourth, for rights and obligations, the auditor should ask them if there is any consigned inventory at their warehouse. If there is, those inventories should not be recorded in the company's inventory ledger. Finally, for presentation and disclosure, the auditors should review the company's financial
2. What procedures can auditors perform to detect fraudulent entries made during the consolidation process?
What steps should management, the Board of Directors, or the Audit Committee of the Board of Directors take in response to allegations of possible fraud or illegal acts?
The case of U.S. v. Lopez (1995) was the case of a young man in 12th grade named Alfonso Lopez Jr. who brought a loaded gun to school and was arrested and charged under Texas law. The state charges were later dismissed and federal agents charged him because he violated the Gun Free School Zone Act of 1990. This acts states that it is unlawful for people to bring firearms to a place that "the individual knows, or has a reasonable cause to believe, is a school zone." He was charged by federal agents because he violated a federal criminal law, however this was also dismissed because it was unconstitutional. This was the big issue surrounding this case. The act was unconstitutional because the Supreme Court said congress went above its constitutional
2. Evaluate Andersen’s claim that their problems on the Enron audit were due to a few “bad partners” in the organization. If you disagree with this claim, discuss what you think were the root causes of the problem. I do not believe Andersen’s claim. I believe that they had full knowledge of what was happening at Enron. I believe that Enron was paying off the auditors (staffers) in the Houston office. I believe they were
Gauthier, S. J. (n.d.). Better Understanding of The Financial Statement Audit. Retrieved 06 26, 2011, from
In the case of Phar-Mor fraud, the company was involved in cover up and some accounts were created to hide the fraudulent activities. Bad inventory counts in the stores were made to help with the cover up and deceit about activities that cost hundreds of millions of dollars. (Williams, S.L., 2011)
In the early 1980 the consumer electronics industry was growing at an explosive pace. Between the 1981 and 1984 the total sales for the industry doubled. To support increasing sales massive amounts of inventory has to be procured, marked up and sold to consumers. Inventory becomes the biggest asset a retailer has. As part of the audit planning processes the inspection of the inventory system and verification of the actual inventory numbers should have been a priority. Crazy Eddie was able to inflate its financial results by fraudulently altering its inventory counts and was able to conceal these activities from the auditors for several years.
1. What audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements?
2. Identify and briefly describe the specific fraud risk factors present during the 2000 NextCard audit. How should these factors have affected the planning and execution of the engagement?
As in the case with Enron, auditors didn’t do their jobs. In this case, the auditing company was Coopers&Lybrant. In order to realize the fraud, Mickey Monus and other had to put all their losses into expense accounts and come up with the way of boosting their asset accounts. They came up with an idea of inflating inventory. This wouldn’t be possible to do if Coopers&Lybrant wouldn’t do their job negligently. As video states, they were the lowest bid on Phar-Mor’s case, so they didn’t want to spend too much money on their audit. As a result, they checks only 4 stores out of 129. Moreover, they told Phar-Mor’s management in advance which stores will be checked.
a. The falsification of inventory count sheets. – Auditors should have observed a physical count of the inventory to check for accuracy. The case had mentioned that Eddie Antar would ship inventory to his retail stores before auditors arrived to conceal any shortages. (Knapp, 2011) These sites should have been audited unannounced in order to hinder any attempt by the client to conceal fraud.
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.
In our opinion, with proper use of analytical procedures Ernst & Whinney should have detected the overstatement of the leased assets. The following analytical procedures should have been used, at least at the planning and overall review stages of the audit.