Contemporary Auditing: Issues and Cases

by Michael Chris Knapp; napp

• ISBN13: 9780538891172
• ISBN10: 0538891173
• Edition: 3rd
• Format: Paperback
• Copyright: 1998-07-13
• Publisher: South-Western College Pub

Summary

Knapp's market-leading auditing casebook stresses the people aspect of independent audits. This casebook allows students to learn from cases based upon problem audits and acquaint them with the work environment of auditors. Professors can use this text as a supplement for the first undergraduate auditing course or as a primary text for a second undergraduate auditing course or graduate-level seminar in auditing. A syllabus for each course is included in the Instructor's Manual.

Table of Contents

SECTION ONE COMPREHENSIVE CASES	1	(150)
Case 1.1 Mattel, Inc.	3	(12)
To sustain Mattel's impressive sales and earnings trends in the early 1970s, the company's top executives engaged in a massive fraudulent scheme to distort the company's operating results.
Key Topics: Assessment of inherent risk, revenue recognition, the use of sales cutoff tests, effectiveness of the audit review process, auditing the reserve for inventory obsolescence, and auditor-client disagreements regarding year-end adjusting entries.
Case 1.2 ESM Government Securities, Inc.	15	(14)
The ESM scandal rocked the international financial markets and resulted in one state imposing the first "banking holiday" in the United States since the Depression.
Key Topics: Performance pressure exerted on auditors, the use of audit confirmation procedures, quality control in an auditing practice, and discovery of financial statement errors following the issuance of an audit report.
Case 1.3 United States Surgical Corporation	29	(12)
An SEC investigation revealed that officials of this company went to great lengths to conceal pervasive irregularities in the company's accounting records from its independent auditors.
Key Topics: The use of analytical procedures, accounting for revenue and capital expenditures, the imbalance of power in the auditor-client relationship, and evaluation of conflicting audit evidence.
Case 1.4 ZZZZ Best Company, Inc.	41	(16)
Barry Minkow, the "boy wonder" of Wall Street, created a $200,000,000 company that existed only on paper.
Key Topics: Identification of key management assertions, limitations of audit evidence, importance of candid predecessor-successor auditor communications, client confidentiality, and client-imposed audit scope limitations.
Case 1.5 Lincoln Savings and Loan Association	57	(14)
Charles Keating's use of questionable accounting methods allowed him to manufacture huge paper profits for Lincoln.
Key Topics: Substance over form rule, detection of fraud, identification of key management assertions, collegial responsibilities of auditors, assessment of control risk, and auditor independence.
Case 1.6 Crazy Eddie, Inc.	71	(10)
"Crazy Eddie" Antar oversaw a highly profitable chain of consumer electronics stores on the East Coast during the 1970s and 1980s. After extensive irregularities were discovered in the company's accounting records, Antar fled the country, leaving behind thousands of angry stockholders and creditors.
Key Topics: Auditing inventory, inventory control activities, management integrity, the use of analytical procedures, and the hiring of former auditors by audit clients.
Case 1.7 Penn Square Bank	81	(12)
The collapse of Penn Square Bank in 1982 triggered a series of financial crises at some of the nation's largest financial institutions.
Key Topics: Opinion shopping, client confidentiality, internal control reporting, and auditor independence.
Case 1.8 IFG Leasing	93	(10)
The spectacular growth of this company in the early 1980s was largely a result of unsound business decisions made by overly aggressive executives.
Key Topics: Auditing receivables and the allowance for uncollectible accounts, auditors' responsibility for "other financial information," factors influencing inherent risk, and audit evidence evaluation issues.
Case 1.9 The Fund of Funds, Ltd.	103	(14)
Bernie Cornfeld, John McCandish King, and Robert Vesco were among the parties associated with this once high-flying mutual fund.
Key Topics: Detection of fraud, client confidentiality, materiality of financial statement errors, and auditors' legal exposure under the Securities Exchange Act of 1934.
Case 1.10 Wedtech Corporation	117	(8)
The former auditors of this now infamous company were charged with numerous breaches of the accounting profession's ethical code.
Key Topics: Auditor independence issues, detecting and reporting illegal acts and irregularities, and the percentage-of-completion method of accounting for long-term construction projects.
Case 1.11 AMRE, Inc.	125	(10)
AMRE's chief financial officer arranged a secret meeting with the company's independent auditors in a subtle but unsuccessful effort to focus their attention on a fraudulent scheme masterminded by his superiors.
Key Topics: Hiring of former auditors by audit clients, client-imposed audit scope limitations, auditors' responsibility for unaudited quarterly financial data, and auditing large and suspicious write-offs by clients.
Case 1.12 National Student Marketing Corporation	135	(16)
Two Big Eight accountants faced a long and grueling jury trial following their indictment on criminal fraud charges stemming from their audits of this once high-profile company.
Key Topics: Communications between predecessor and successor auditors, application of the percentage-of-completion accounting method, auditors' responsibilities when associated with unaudited financial data, and the criminal liability of auditors.
SECTION TWO AUDITS OF HIGH-RISK ACCOUNTS AND INTERNAL CONTROL ISSUES	151	(70)
Case 2.1 Doughtie's Foods, Inc. Inadequate inventory observation procedures prevented this company's auditors from discovering a materially overstated inventory balance.	153	(4)
Case 2.2 Flight Transportation Corporation This company's auditors failed to investigate major internal control weaknesses, which prevented them from uncovering a fraudulent scheme engineered by the firm's top executives.	157	(6)
Case 2.3 The Trolley Dodgers Control deficiencies in the Dodgers' payroll transaction cycle allowed an accounting manager to embezzle several hundred thousand dollars.	163	(2)
Case 2.4 J.B. Hanauer & Co. This case focuses on audit objectives related to confirmation procedures and illustrates inappropriate methods of applying these procedures.	165	(63)
Case 2.5 Berkshire Hathaway, Inc. The lack of a definitive accounting rule for recognizing profits on "proportionate redemptions" of stock led to a stormy confrontation between this company's independent auditors and its prominent chief executive.	171	(4)
Case 2.6 Giant Stores Corporation Numerous intentional understatements of this company's accounts payable and the failure of its auditors to discover these irregularities was the focus of an intensive SEC investigation.	175	(8)
Case 2.7 Howard Street Jewelers, Inc. Given the susceptibility of cash to theft, companies typically establish rigorous internal controls for their cash processing functions. This case documents the high price of failing to implement such controls.	183	(4)
Case 2.8 E.F. Hutton & Company, Inc. This brokerage firm's auditors were criticized by regulatory authorities and the financial press for failing to expose a massive and illegal cash management system.	187	(10)
Case 2.9 CapitalBanc Corporation What is the most important asset of a bank? Cash, of course. This case focuses on an audit that failed to uncover a large embezzlement scheme perpetrated by a bank's chief executive officer.	197	(4)
Case 2.10 Four Seasons Nursing Centers of America, Inc. The misuse of the percentage-of-completion method of accounting for long-term construction contracts allowed Four Seasons to materially misrepresent its operating results.	201	(6)
Case 2.11 American Fuel & Supply Company, Inc. This case focuses on auditors' responsibility to recall an audit report when they discover previously undetected errors in a client's audited financial statements.	207	(4)
Case 2.12 General Technologies Group, Ltd. The quality control director retained by General Technologies' audit firm at the insistence of the SEC uncovered evidence suggesting that the company's inventory and receivables were materially overstated.	211	(10)
SECTION THREE ETHICAL RESPONSIBILITIES OF AUDITORS AND ACCOUNTANTS	221	(48)
Case 3.1 Cardillo Travel Systems, Inc. A top executive of Cardillo pressured three accountants, the company's controller and two partners of public accounting firms, to misrepresent the nature of a large payment received by the company from United Airlines.	223	(6)
Case 3.2 Creve Couer Pizza, Inc. Intrigue and espionage seem far removed from accounting...but not in this case. The accountant for Creve Couer Pizza was actually a double agent. While providing accounting services to his client, the accountant was also supplying incriminating evidence regarding the client to the IRS.	229	(4)
Case 3.3 The PTL Club PTL officials convinced a partner of their independent audit firm to maintain a secret check register in his office to record illicit disbursements being made by the organization.	233	(4)
Case 3.4 Leigh Ann Walker, Staff Accountant In this case, a staff accountant employed by a large accounting firm was dismissed after serious questions arose regarding her integrity.	237	(4)
Case 3.5 Phillips Petroleum Company Rather than compromise the confidentiality of his client's accounting records, Phillips' audit engagement partner was found in contempt of court and jailed.	241	(4)
Case 3.6 Laurel Valley Estates A staff accountant wrongfully accused a client official of criminal conduct, an accusation that resulted in the official suing the staff accountant's employer.	245	(4)
Case 3.7 Mariner Corporation This case involves the acceptance of contingent fees by public accountants, a practice that has long posed contentious ethical issues for the accounting profession.	249	(4)
Case 3.8 Suzette Washington, Accounting Major Suzette Washington was a college senior majoring in accounting when she came face-to-face with an important ethical decision. Since accounting majors are entering a profession with a rigorous code of ethics, do they have a greater responsibility than other students to behave ethically?	253	(2)
Case 3.9 Rocky Mount Undergarment Company, Inc. You are the accountant of a company experiencing severe financial problems. Company executives suggest that the firm's several hundred employees will lose their jobs unless you misrepresent the company's financial condition. Three employees of Rocky Mount faced this unpleasant dilemma during the mid-1980s.	255	(4)
Case 3.10 Oak Industries, Inc. Auditors principally search for misstatements that enhance a client's reported financial condition and operating results. However, client officials on occasion intentionally understate their firm's assets, revenues, and profits, as proven by this case.	259	(6)
Case 3.11 Koger Properties, Inc. An accounting firm obtains a client in which one of its audit partners has a small but direct financial interest. What should he do?	265	(4)
SECTION FOUR PROFESSIONAL ISSUES	269	(48)
Case 4.1 Hopkins v. Price Waterhouse The unique problems faced by women pursuing a career in public accounting are explored in this case.	271	(8)
Case 4.2 When Auditors Become Lobbyists Some of the largest public accounting firms have been charged with "kowtowing" to the economic interests of their clients when it comes to new accounting rules proposed by the FASB. This case examines this issue in the context of the new accounting standard for stock options.	279	(10)
Case 4.3 Tommy O'Connell, Audit Senior A new audit senior is quickly exposed to the challenging responsibilities of his professional work role when he is assigned to supervise a difficult audit engagement. During the course of this engagement, the audit senior must deal with the possibility that a staff accountant is not completing his assigned audit procedures.	289	(4)
Case 4.4 Sarah Russell, Staff Accountant Sexual harassment is a sensitive subject that many companies and professional firms have been forced to contend with in recent years. This case recounts the experiences of a staff accountant who was harassed by an audit partner.	293	(4)
Case 4.5 Maurice Stans, CPA Maurice Stans, a close friend of President Nixon and a central figure in the Watergate scandal, faced potential sanctions from the accounting profession in the late 1970s.	297	(4)
Case 4.6 Bill DeBurger, In-Charge Accountant "To sign off" or "not sign off" was the issue facing Bill DeBurger after completing his audit of an important client account. An angry confrontation with the audit engagement partner made Bill's decision even more difficult.	301	(4)
Case 4.7 Stuart Seltzer, Auditor and Entrepreneur The central issue in this case is the extent to which public accounting firms should be able to influence the off-work activities of their employees.	305	(2)
Case 4.8 Charles Tollison, Audit Manager Audit managers, such as Charles Tollison, occupy an important role on audit engagements and are a critical link in the employment hierarchy of public accounting firms.	307	(4)
Case 4.9 Mallon Resources Corporation The common practice of auditors "changing sides" by accepting positions with clients raises several difficult-to-resolve issues for the accounting profession.	311	(6)
SECTION FIVE CLASSIC LITIGATION CASES	317	(46)
Case 5.1 Fred Stern & Company (Ultramares Corporation v. Touche et al.) This 1931 legal case established the Ultramares Doctrine that six decades later still has an important influence on auditors' civil liabilities under the common law.	319	(8)
Case 5.2 BarChris Construction Corporation Among the key topics addressed in this case are factors influencing materiality decisions, the absence of definitive accounting standards for certain client transactions, and auditors' due diligence responsibilities under the Securities Act of 1933.	327	(10)
Case 5.3 1136 Tenants Corporation The need for an explicit contractual agreement between a client and audit firm was made clear in this landmark case.	337	(4)
Case 5.4 Yale Express System, Inc. During the course of a consulting engagement, Yale Express's audit firm discovered that the company's prior year financial statements were materially in error, although the audit firm had issued an unqualified opinion on those statements.	341	(8)
Case 5.5 First Securities Company of Chicago (Ernst & Ernst v. Hochfelder et al.) In reviewing this case, the Supreme Court defined the degree of auditor misconduct that must be present before a client can recover damages from an auditor in a lawsuit filed under the Securities Exchange Act of 1934.	349	(8)
Case 5.6 Equity Funding Corporation of America The huge Equity Funding scandal demonstrated the critical need for auditors to maintain a high level of skepticism when planning and carrying out an audit.	357	(6)
Index	363