Read the case study “Professional Judgment by Auditors” and answer the following questions.

Instruction-1:

1. In January 2008, it was discovered that William Borchard, who handled due diligence for clients of PwC interested in mergers and acquisitions, divulged controversial plans to Gregory Raben, an auditor at the firm, and Raben used the information to buy stock ahead of a series of corporate takeovers. The SEC found the two guilty of insider trading, a violation of the law. Assume none of the clients were audit clients. What are the ethical issues involved in engaging in such transactions? Were any of the AICPA rules of conduct violated? Explain .

2. Assume that the CPA firm of Packers & Vikings audits Chi Bears Systems. The controller of Chi Bears, a CPA, happens to be a tax expert. During the current tax season, Packers & Vikings gets far behind in reviewing processed tax returns. It does not want to approach clients and ask permission to file for an extension to the April 15 deadline so the firm approaches the controller and offers him a temporary position as a consultant for the tax season. Was it ethical for the firm to make the offer? Would it be ethically acceptable for the controller to accept the position? Explain.

3. Assume you are the senior in charge of the audit of a client in New York who offers you two tickets to the Super Bowl between the New York Giants and the Denver Broncos. The opportunity to see the Manning brothers square off against each other is appealing. How would you decide whether to accept the tickets for the game?

4. On May 20, 2014, the SEC settled an investigation of James T. Adams, the former chief risk officer at Deloitte, for causing violations of the auditor independence rules. It seems that Adams accepted tens of thousands of casino markers while he was the advisory partner on a Deloitte casino gaming client. Review the facts of the case and explain how Adams’s actions compromised his independence under the AICPA Code.

Instruction 2:

1. Krispy Kreme was involved in an accounting fraud where the company reported false quarterly and annual earnings and falsely claimed that, as a result of those earnings, it had achieved what had become a prime benchmark of its historical performance, that is, reporting quarterly earnings per share that exceeded its previously announced EPS guidance by 1¢. One method used to report higher earnings was to ship two or three times more doughnuts to franchisees than ordered in order to meet monthly quotas. Would you characterize what Krispy Kreme did as earnings management? Explain.

2. Safety-Kleen issued a major financial restatement in 2001. The next year, the company restated (reduced) previously reported net income by $534 million for the period 1997-1999. PwC withdrew its financial statement audit reports for those years. Do you believe that financial restatements and withdrawing an audit report are prima facie indicators that a failed audit has occurred? Explain

3. Revenue recognition in the Xerox case called for determining the stand-alone selling price for each of the deliverables and using it to separate out the revenue amounts. Why do you think it is important to separate out the selling prices of each element of a bundled transaction? How do these considerations relate to what Xerox did to manage its earnings? Do you think the new revenue recognition standard will change the criteria in accounting for transactions like at Xerox?

4. Tinseltown Construction just received a $2 billion contract to construct a modern football stadium in the City of Industry located in southern California for a new National Football League (NFL) team called the Los Angeles Devils of Industry. The company estimates it will cost $1.5 billion to construct the stadium. Explain how Tinsel town can make revenue recognition decisions that enable it to manage earnings over the three-year duration of the contract.