Concept explainers
(a)
Introduction:
“Securities and Exchange Commission (SEC)” is created by congress in the year 1934. It is served as an agency of federal government to control the stock market and other related trades in the country of U.S. Also, SEC supervises the security
In the present case, SEC was concerned for some of the accountants violating the rule of the investment practice, by investing in the stock of the company, who is the audit client of their firm. Company P fired 10 people and spent $25 million for educating the employees about the ethical investment practice rules along with installing an investment tracking system as a result of the investigation by the SEC.
To study: The case of the investment rules and installing an investment tracking system.
(b)
To study: The case of the investment rules and installing an investment tracking system.
(c)
To study: The case of the investment rules and installing an investment tracking system.
(d)
To study: The case of the investment rules and installing an investment tracking system.
(e)
To study: The case of the investment rules and installing an investment tracking system.
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Financial Accounting: Tools for Business Decision Making, 8th Edition
- You are asked to be interviewed by a student newspaper regarding the nature of accounting fraud. The reporter says, “As I understand it, asset misappropriations are more likely to be found are more likely to be found in small organizations, but not in larger organizations. On the other hand, fraudulent financial reporting is more likely to be found in larger organizations.” How would you respond to the reporter’s observation?arrow_forwardAs the engagement partner, you have reviewed the audit working papers of Royal Height Limited. The audit team has highlighted the following matters in the working papers: 1. Thirty percent of the company's recorded turnover (revenue) comprises of cash sales. Proper records of cash sales have not been maintained. Consequently, the audit team was unable to design audit procedures to verify the cash sales. 2. During the current year, the company changed the method of charging depreciation on its fixed assets from the straight line to the diminishing balance method. However, all the required disclosures have been included in the notes to the financial statements. Required: Discuss the impact of each of the above matters on your audit report Identify the basic types of audit reports other than a standard unqualified audit report and explain the circumstances under which each type of report is appropriate.arrow_forwardAn accountant is hired by a company to do an audit on their financial statements. The accountant does everything she is asked. 16 days after the audit, the CFO is arrested for embezzlement. The stockholders sue the accountant, suggesting that she should have discovered the embezzlement during the audit. Should the court find that the accountant is negligent? Group of answer choices A. Yes, because an accountant is hired to determine if there is embezzlement B. Yes, but only if it is shown than an ordinary accountant would have also uncovered the embezzlement C. No, because the accountant was hired by the CFO, so therefore it would have been a conflict of interest D. Yes, because the accountant was hired by the CFO, therefore it is likely the accountant is also guiltyarrow_forward
- Lehman Brothers, as well as many other investment banks, failed as a result of an extremely risky business model. Auditors are required under PCAOB standards to evaluate internal controls surrounding financial reporting. In the wake of the banking failure, many commentators asked, “Where were the auditors?” and questioned why the auditors did not also evaluate risk management controls. Do you believe auditors should have responsibility for evaluating a client’s internal controls in areas not directly related to financial reporting?arrow_forward25. An audit firm has been asked by a client to attend a meeting between the client and its prospective investors in order to discuss the company’s financial performance in the last year. According to the Code of Professional Ethics for Accountants, what type of threat to objectivity will be created if the auditor attends this meeting? a. Advocacy threat b. Self review threat c. Self-interest threat d. Intimidation threatarrow_forwardWhen employees have a conflict of interest between their personal compensation and provision of truthful financial statements to shareholders, the securities regulator, such as the Securities Exchange Commission, should shut down such financial companies. the external auditors should take the word of the employees and the management about the value of such securities. the accounting standards' supervisory board should be required to audit such financial companies. the board of directors should approve clear policy guidelines and monitor their enforcement to combat such conflicts. COarrow_forward
- Assume in the DigitPrint case that the venture capitalists do not provide additional financing to the company, even though the accrued expense adjustments have not been made. The company hires an audit firm to conduct an audit of its financial statements to take to a local bank for a loan. The auditors become aware of the unrecorded $1 million in accrued expenses. Liza Doolittle pressures them to delay recording the expenses until after the loan is secured. The auditors do not know whether Henry Higgins is aware of all the facts. Identify the stakeholders in this case. What alternatives are available to the auditors? Use the AICPA Code of Professional Conduct and Josephson’s Six Pillars of Character to evaluate the ethics of the alternative courses of action.arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. Rite Aid failed to record an accrued expense for stock appreciation rights it had granted to employees, in a program that gave the recipients the right to receive cash or stock in amounts tied to increases in the market price of Rite Aid stock. Rite Aid should have accrued an expense of $22 million in FY 1998 and $33 million in FY 1999 for these obligations.arrow_forwardRead the following scenario about Strang Corporation and identify the substantive procedures that the CPA (Elaine Stanley) should perform to determine whether lapping exists. Do not discuss deficiencies in the system of internal control. During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory review by management revealed receivable collection problems. Strang’s management engaged Elaine Stan ley, CPA, to perform a special investigation. Stanley studied the billing and collection cycle and noted the following: The accounting department employs one bookkeeper who receives and opens all incoming mail. This bookkeeper is also responsible for depositing receipts, filing daily remittance advices, recording receipts in the cash receipts journal, and posting receipts in the individual customer accounts and the general ledger accounts. There are no cash sales. The bookkeeper prepares and controls the mailing of monthly statements to customers. The concentration of functions and the receivable collection problems caused Stanley to suspect that a systematic theft of customers’ payments through a delayed posting of remittances (lapping of accounts receivable) is present.arrow_forward
- For each situation below identify and explain the threat and one fundamental principle that is comprised.- An accountant has compiled the financial statements for a client and was requested to also audit the statements.- The financial director of Baboo Ltd is very aggressive and dismissive of the audit function and audit team- A chartered accountant values a client’s shares and then leads the negotiations on the sale of the client’s company- The chartered accountant fails to report a fraud of a client because the perpetrator is a close friend and he issympathetic to the interest of his friend.arrow_forwardYour neighbor, Loot Starkin, invited you to lunch yesterday. Sure enough, it was no “free lunch” because Loot wanted to discuss the annual report of Dodge Corporation. He owns Dodge stock and just received the annual report. Loot says, “Our auditors prepared the audited financial statements and gave an unqualified opinion, so my investment must be safe.”Required:What misconceptions does Loot Starkin seem to have about the auditor’s role with respect to Dodge Corporation?arrow_forwardYou are asked to be interviewed by a student newspaper regarding the nature of accounting fraud. the reporter says "as I understand, it asset misappropriation are more likely to be found in a small organisation but not in large organisations. on the other hand fradulent financial reporting is more likely to be found in larger organization. how would you respond to the reporters observation?arrow_forward
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