Auditing Case

Long BeachBridge(anon-publiccompany) operates a major bridge. Vehicles are required to pay a toll based on their type (e.g., passenger cars pay 5.00, commercial trucks pay $7.00). Toll revenues support the maintenance and upkeep ofthe bridge.

There are 8 toll booths, several of which are automated for exact change while others are manuallyserviced by Long Beach Bridgeemployees. Each toll booth has an automated count mechanism to monitor the number of vehicles using the bridgeeach day. Periodically throughout each day, employees collect accumulated tolls. The funds are provided to an on-site, independent contractor hired by Long BeachBridgeto perform cash count and reconciliation functions. The funds are then transferred daily to a local depository institution.

Beginning in January, 2015, several toll collectors and their supervisors conspired to steal toll monies and employees of the independent cash count contractor agreed to participate in the scheme. In order to cover their tracks, the cash count contractors altered the daily reports, including vehicle use and other cash reconciliation records. This alteration process was so effective that reconstruction of the original transactions was impossible.

The thefts continued until November, 2015, when one toll collector felt he was not receiving his fair share of the money and anonymously called the Long BeachBridgeoffices and reported the scheme.

In order to estimate the amount of tolls stolen, Long BeachBridgemanagement engaged a qualified consultant to performa demographic study of toll bridgeuse over a period of time. Long BeachBridgemanagement used this study to arrive at their estimate of tolls lost. Theft losses for 2015were estimated to be $1.7 million. In preparing the financial statements of Long BeachBridge for 2015, Long Beach Bridgemanagement included their estimate of stolen revenue in revenues and reported the same amount as estimated losses due to theft loss inthe costs andexpensessection of the income statement. Toll revenue (including the estimate of stolen revenues) reported for 2015was $9.2 million.

There is no argument that some amount of tolls were collected and diverted to the benefit of the thieves; however, the actual amount stolen cannot be determined from the financial or other records. Long BeachBridgemanagement believes that the stolen tolls meet the criteria for revenue recognition and that the financial statements should include an estimate of tolls stolen in revenues with an equal amount included in expenses with a note to the financial statements describing the theft and the use of an estimate to record the revenue and expense.

In December, 2015,yourCPAfirm(XYZ Certified Public Accountants)was engagedto perform an auditof Long Beach Bridgesfinancial statements forthe year ended December 3, 2015.The Toll Bridgesfinancial statements forthe year ended December 31, 2014were audited by other auditors who expressed an unmodified opinion on 2014financial statements.

Both the Toll Bridges2015 and 2014financial statements will be included in the Toll Roads 2015annual report. Your opinion on the 2015financial statements will also be included in the 2015annual report. The other auditors opinion on the 2014financial statements willnotbe included in the 2015annual report.

Business Assumptions and Other Data

Long BeachBridgehad profitable operationsin 2015despite the theft loss. There appears to be no reason to question the integrity of Long BeachBridgesmanagement - collusion among the toll collectors, supervisors and cash count contractors allowed the theft to go undetected and to circumvent internal controls. Long BeachBridgesmanagement has taken appropriate action to remedy the situation and has enhanced controls even further. In addition, XYZ Certified Public Accountants believe that the estimate of the theft loss for 2015was done in a professional manner but understand that the estimate is only an estimate and that it might be significantly different than the actual theft loss.In addition, XYZ Certified Public Accountants believe the $1.7 million estimated loss ismaterialin relation to Long Beach Bridges 2015financial statements.

Web Page Information and Authoritative Literature:

Access FASB accounting principles authoritativeliteratureataaahq.org/ascLogin.cfm.Log in using username(AAA51300) and password (3upX7UM), click on FASB Accounting Standards Codification, click on I accept, click on Concept Statements, click on applicable concept statements (# 5 and Chapter 3 of # 8).

Access AICPA authoritative auditingliterature ataicpa.org.Click on Research - Standards, click on Auditing and Attest Standards, click onClarified Statements on Auditing Standards, click on applicable AU-C sections (700, 705, and 706).

Required:

1.Discuss the matters that should be considered in determining whether or not Long BeachBridgesmanagement is correct in its belief that the stolen tolls meet the criteria for revenue recognitionand that Long Beach Bridgesfinancial statements should include an estimate of tolls stolen in revenues with an equal amount included in expenses. Do not concern yourself as to whether the expense should be classified as an extraordinary item.Indicate your conclusion regarding this matter and discuss the bases for such conclusion.

2.Indicate the type of auditors report that should be issued on Long Beach Bridges2015financial statementsassuming an estimate of tolls stolen is included in revenue with an equal amount included in expenseanda note to the financial statements discloses the underlying assumptions and methods used in compiling the estimate. Also,assumeno unusual items, other than the stolen tolls, came to the attention of the auditors.In addition, assume nothing came to your attention during the audit of the Long Beach Bridges 2015financial statement that caused you to believe thatLong Beach Bridges2014financial statements were not presented in accordance with generally accepted accounting principles.

3.Prepare the auditors reportthat will beincluded in Long Beach Bridges 2015annual report. The date of your opinion will be March 15, 2016.