I have an assignment for my ACC/497 class and I need someone to reword this paper so it is not plagiarized. Thank you!

Week 5 Individual Assignment Learning Check: 4-15 Some other ways in which the Private Securities Act of 1995 may possibly change the legal liabilities of auditors and their potential benefits are: 1) Sets a limit on damages in order to possibly decrease the maximum limit, which auditors are legally liable for. 2) Requires the plaintiff to be responsible for legal fees of defendants which includes attorney fees and other fees directly related to the suit when the suit is ruled as false or unwarranted. This would reduce the risk of auditors being sued for such false claims. 3) Allows a stay of discovery during the time of a motion, in order for a pending of dismissal. This would decrease costs that frequently forces settlements when parties are innocent, but settle because the cost of settlement is less than taking the suit through the entire court process. 4) Places a limit on punitive damages, through the elimination of the basis of securities fraud such as, when the case is filed under the RICO Act. Such file allows for treble damages. This limits punitive damages, which decreases the auditors' responsibility in covering costs associated with damages. 5) Restricts third-parties' rights to sue, through placing restrictions on the number of times that a plaintiff can sue as the primary plaintiff (the limit is. up to five class actions, during a three year time frame) and requiring firmer pleading standards - This sets a limit on the amount of individuals, which are allowed to sue an auditor/auditors and decreases the chance of a law suit/class action being brought by \"professional plaintiffs.\" Learning Check: 4-17 Some of the changes for auditors as a result of the establishment of the Sarbanes-Oxley Act of 2002 include the following: 1. Auditors of public companies are prohibited from various non-attest services. 2. The establishment of the Public Company Accounting Oversight Board (PCAOB), which was given the authority to set standards for auditing, quality control, and independence for auditors of public companies. 3. Holds companies and auditors more responsible for fully disclosing material within the financial statements and how the financial statements are prepared. The following are some of the main changes in liabilities for managements of public companies created by the Sarbanes-Oxley Act of 2002: 1. Section 302, summarized, and requires a public company's CEO and CFO to prepare a statement accompanying the audit report, this statement is used to certify the appropriateness of the financial statement and the disclosures required. 2. Section 303, summarized, and makes it illegal for any/all officers/directors of an issuer to fraudulently influence, coerce, manipulate, or mislead an auditor. 3. Section 305, summarized, requires CEOs and CFOs of public organizations, which have restated its financial statements due to material noncompliance with financial reporting requirements to reimburse the company for any bonus or other incentive-based or equitybased compensation received during the year following the issuance of the filing of the document under noncompliance and any profits realized from the sale of securities of the issuer during the same period. 4. The \"Corporate and Criminal Fraud Act of 2002\" (or Title VIII of the Sarbanes-Oxley Act)lists the following: i. Make it a felony to knowingly destroy documents/data or create false documents, which can be used to impede, obstruct, or influence any existing or contemplated federal investigation. ii. Demands that auditors maintain all audit or review work papers for up to five years. iii. Extends the statute of limitations on securities fraud claims to the earliest of five years from the date of the fraud, or two years after the fraud was discovered. iv. Extends whistleblower protection to employees of public companies and the company's auditors, which would prohibit employers from taking adverse action(s) against employees/auditors who lawfully disclose private employer information/data to, but not limited to, parties in a judicial proceeding involving a fraud claim. Also, whistleblowers are given a solution in regard to special damages/attorney's fee. v. Created a new law, which makes securities fraud a criminal act, which carries penalties and fines and up to a 10-year incarceration. Comprehensive Question: 5-34: (Risk of material mismanagement) The assertions, which are likely to be misstated, are as follows: 1) Presentation (or occurrence); 2) Existence (or ownership) 3) Completeness These assertions are for revenue items such as membership fees or number of units sold; and would include: 1) Presentation (or occurrence) - the revenue, which was earned by the company and the number of items sold represented the actual number of items sold; 2) Existence (or ownership) - The items sold and fees which were not owned by another company or competitor; and 3) Completeness - revenue, which was earned, was recorded properly in the company's books and other documents. The accounts, which are likely to be overstated or understated, are as follows: Understated - Cost of goods sold and inventory on hand are likely to be understated; Overstated - Numbers of units sold and accounts receivable are likely to be overstated; The reason for this is because of the failed attempt to improve products and the financial difficulties of the customers, the company would still want to appear as if it were making profit with high revenues on the company books and other documents. Since inventory is classified as an asset, it can be assumed that the inventory exists and is owned by the client. Thus, existence or ownership is related to the asset category involving inventory. The existence of the inventory is focused on the date in which the inventory was received and whether transactions involving the inventory occurred during a specific reporting period. The auditor would review the books and ledger to determine existence or ownership. The auditor would look for evidence, which would prove that the transaction occurred and was properly recorded. In testing for existence, the auditor would need to look for evidence aside from the books to determine which transactions have been recorded. The auditor's testing should not end when finding the supporting debit/credit amounts in the initial book entry, the auditor should cross check the entry to the supplier's (of the inventory) records, production records, and the raw material accounts of supplies, for example. These accounts are likely to be misstated as well. Ownership deals with the right the company has in regard to the inventory on a specific date. Some accounts could have been deleted or not presented at all in the financial statements. Off statement financing has regularly resulted in companies' receiving the use of items without recording or disclosing the transaction in the financial statements. This would cause raw materials and labor (for example) to be understated. Comprehensive Question 5 - 35: (Developing responses to assessed risks) Your client, General Television, Inc., manufacturers televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer. 1. General Television has strong internal controls over the existence of inventory. It has a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. 2. Prices have been changing rapidly in General Television's marketplace. Although the marketplace is relatively stable for traditional televisions, the prices on flat panel televisions have become much more competitive. 3. General Television had to pay a premium to acquire Micro Engineering. General Television had independent appraisals of the fair value of assets and has determined that about 35 percent of the purchase price should be allocated to goodwill. i. The relevant assertion for Risk 1 is existence (or occurrence). ii. The relevant assertion for Risk 2 is valuation (or allocation). iii. The relevant assertion for Risk 3 is existence and valuation. 1. Risk 1 - the total value of the inventory in an unstable market (regarding pricing) is an inherent risk, where inventory may be overstated, which could be intentional or accidental. If inventory is overstated, cost of goods sold will be understated, which will cause profit to be overstated. Inventory is considered (or should be considered) to be the most significant part of the audit for this scenario. 2. Risk 2 - following the testing of existence (or occurrence) of inventory, the assertion of valuation is measured. First-in First-out (FIFO) based inventories are valued at lower of cost or market (LCM). The pricing of inventory in an unstable market reflects an inherent risk because it is more likely to occur in inventory than in other sections. Also, there is the risk of detection, which means the auditor will be less likely to detect a material misstatement in the account balance. 3. Risk 3 - this risk may not be an inherent risk in and of itself, although the allocation of the purchase price could create an inherent risk. This is because the purchased assets are mixed, there is a chance that the total purchase price will be allocated by using the excuse (for want of better word) that is either more favorable for tax purposes or financial reporting purposes. Preferably, goodwill should be lesser than more, and even with the appraisals, there could be unfairness regarding allocations. 1. Risk 1 - since this is a significant component of the audit, in which errors/misstatements are more likely to occur, it would be prudent to require more well trained employees to perform this part of the audit, with closer supervision as well. 2. Risk 2 - in this case, the risk of overstatement resulting from valuation, an auditing supervisor will need to review the findings. This scenario requires, not only a check of invoices and tracking the amount through the accounting system, but also there is a need to conduct an analysis of value, especially when it may be less than invoice pricing. 3. Risk 3 - in the case of staffing decisions, documentation gathering of purchase (such as, legal documents, board minutes of directors' meetings, asset appraisal(s), physical examinations of assets, and account balances testing) can be performed by staff, with sufficient supervision. a. How might you respond to this risk in terms of the nature of audit tests? 1. Risk 1 - in view of the inherent risk, it may be prudent to expend the testing of the system to include the internal controls. The kind of tests, which are performed for the assertion of existence (or occurrence), includes testing of transactions and account balances, which are more or less the methods required to prove that the company's system of internal controls is functioning efficiently. 2. Risk 2 - the kinds of testing for valuation can include documentation on external prices or future sales (following year end). Changes in the contribution margin could indicate conclusions regarding valuation. This is a greater subjective decision, which might involve some skill from the management level for the auditing firm and the client's company. 3. Risk 3 - risk of misstatement in the allocation is very important and might involve more external documentation and/or confirmation. This would be based on the nature of the purchased assets, although the end result will be determined whether the asset section of the balance sheet of the merged companies is overstated. For instance, it may be that part of the purchased assets will not be required in the merged operations, in the case that the assets are duplicated. The assets, which are not being used and are not considered fixed assets, which are not to be depreciated. The impairment of goodwill would need to be judged according to the asset's future valuation. How might you respond to this risk in terms of the timing of audit tests? 1. Risk 1 - tests of inventory transactions usually occur prior to year end. Prior testing of some of these transactions can help in designing the audit program, which will guarantee that efficient testing will be conducted. Account balances must be tested following the year end, with the physical inventory, which can be moved in/out without delay. The testing of inventory should be one of the beginning areas, in which the audit team starts the audit. 2. Risk 2 - the valuation decision may occur during the act part of the audit, this is due to the evidence of conditions of the market, which may not be clear until after different other sections of the audit are finished; it would be hard to determine these decisions during the time when testing is being conducted for existence. 3. Risk 3 - the timing of the audit testing for this transaction is not as important as some of the other testing. Actually, the fact is the accomplishment of the acquisition may not be apparent for a year. Any demonstration of changes, which affect the fieldwork, or even during the presentation and disclosure stage of the audit. This would be the best time. For example, a draft of disclosures would be discussed with the client, who might take exception to the presentation, resulting in changes being made. b. How might you respond to this risk in terms of the extent of audit tests? 1. Risks 1 - the scope of the tests are determined by the exceptions noted in the initial phase of the testing. If few errors are discovered, it is likely to decrease the testing, although this rarely occurs. It may be better to say that fewer errors would confirm that the testing does not require an extension of the audit. 2. Risk 2 - the valuation assumption is not major concern, which can be resolved by further testing of the prior year's transactions, although it could consist of some testing of the current year's sales, along with meetings with management. 3. Risk 3 - the risk of existence is unlikely to be a concern for extending testing, although valuation would be concern for extending testing. This kind of transaction is hardly affected by further testing, it might be solved at the board of directors' or management's level, with the auditor's firm, which goes beyond any audit tests. Text-Only Report Phoenix/Axia Public Papers - 2015-11-30 10:56:06.657345-08 - DUE 30-Dec-2009 Loading... Roadmap help Help Paper -- of 0 Paper 1 of 1 OriginalityGradeMarkPeerMark W5 by Rebecca Heath 28% Similar -out of 0 Download submitted file: w5ind.docx (28.95K) 2 2 2 2 6 8 9 EN Full Source View Loading Page 2 4 5 EN Full Source View Loading Page Read only Undo Page: 1 of 10 Text-Only Report ETS Data Loading... Full Source Text Loading... Match Overview Match OverviewAll Sources Currently viewing standard sources View English Sources (Beta) Matches 1 www.transtutors.com Internet source 11% 2 sba.pdx.edu Internet source 7% 3 www.brainmass.com Internet source 6% 4 www.coursehero.com Internet source 1% 5 www.phxcpas.net Internet source 1% 6 www.docstoc.com Internet source 1% 7 lindakinyo.hubpages.com Internet source 1% Loading... There are no matching sources for this report. Match Overview Match OverviewAll Sources Currently viewing standard sources View English Sources (Beta) Matches Loading... There are no matching sources for this report. Text-Only Report Document Viewer is loading... _Would you like to try the new Document Viewer? _Try it _Not now _No, thanks _Learn more... _Try the new Turnitin (beta) Week 5 Individual Assignment Learning Check: 4-15 Some other ways in which the Private Securities Act of 1995 may possibly change the legal liabilities of auditors and their potential benefits are: 1) Sets a limit on damages in order to possibly decrease the maximum limit, which auditors are legally liable for. 2) Requires the plaintiff to be responsible for legal fees of defendants which includes attorney fees and other fees directly related to the suit when the suit is ruled as false or unwarranted. This would reduce the risk of auditors being sued for such false claims. 3) Allows a stay of discovery during the time of a motion, in order for a pending of dismissal. This would decrease costs that frequently forces settlements when parties are innocent, but settle because the cost of settlement is less than taking the suit through the entire court process. 4) Places a limit on punitive damages, through the elimination of the basis of securities fraud such as, when the case is filed under the RICO Act. Such file allows for treble damages. This limits punitive damages, which decreases the auditors' responsibility in covering costs associated with damages. 5) Restricts third-parties' rights to sue, through placing restrictions on the number of times that a plaintiff can sue as the primary plaintiff (the limit is. up to five class actions, during a three year time frame) and requiring firmer pleading standards - This sets a limit on the amount of individuals, which are allowed to sue an auditor/auditors and decreases the chance of a law suit/class action being brought by \"professional plaintiffs.\" Learning Check: 4-17 Some of the changes for auditors as a result of the establishment of the Sarbanes-Oxley Act of 2002 include the following: 1. Auditors of public companies are prohibited from various non-attest services. 2. The establishment of the Public Company Accounting Oversight Board (PCAOB), which was given the authority to set standards for auditing, quality control, and independence for auditors of public companies. 3. Holds companies and auditors more responsible for fully disclosing material within the financial statements and how the financial statements are prepared. The following are some of the main changes in liabilities for managements of public companies created by the Sarbanes-Oxley Act of 2002: 1. Section 302, summarized, and requires a public company's CEO and CFO to prepare a statement accompanying the audit report, this statement is used to certify the appropriateness of the financial statement and the disclosures required. 2. Section 303, summarized, and makes it illegal for any/all officers/directors of an issuer to fraudulently influence, coerce, manipulate, or mislead an auditor. 3. Section 305, summarized, requires CEOs and CFOs of public organizations, which have restated its financial statements due to material noncompliance with financial reporting requirements to reimburse the company for any bonus or other incentive-based or equitybased compensation received during the year following the issuance of the filing of the document under noncompliance and any profits realized from the sale of securities of the issuer during the same period. 4. The \"Corporate and Criminal Fraud Act of 2002\" (or Title VIII of the Sarbanes-Oxley Act)lists the following: i. Make it a felony to knowingly destroy documents/data or create false documents, which can be used to impede, obstruct, or influence any existing or contemplated federal investigation. ii. Demands that auditors maintain all audit or review work papers for up to five years. iii. Extends the statute of limitations on securities fraud claims to the earliest of five years from the date of the fraud, or two years after the fraud was discovered. iv. Extends whistleblower protection to employees of public companies and the company's auditors, which would prohibit employers from taking adverse action(s) against employees/auditors who lawfully disclose private employer information/data to, but not limited to, parties in a judicial proceeding involving a fraud claim. Also, whistleblowers are given a solution in regard to special damages/attorney's fee. v. Created a new law, which makes securities fraud a criminal act, which carries penalties and fines and up to a 10-year incarceration. Comprehensive Question: 5-34: (Risk of material mismanagement) The assertions, which are likely to be misstated, are as follows: 1) Presentation (or occurrence); 2) Existence (or ownership) 3) Completeness These assertions are for revenue items such as membership fees or number of units sold; and would include: 1) Presentation (or occurrence) - the revenue, which was earned by the company and the number of items sold represented the actual number of items sold; 2) Existence (or ownership) - The items sold and fees which were not owned by another company or competitor; and 3) Completeness - revenue, which was earned, was recorded properly in the company's books and other documents. The accounts, which are likely to be overstated or understated, are as follows: Understated - Cost of goods sold and inventory on hand are likely to be understated; Overstated - Numbers of units sold and accounts receivable are likely to be overstated; The reason for this is because of the failed attempt to improve products and the financial difficulties of the customers, the company would still want to appear as if it were making profit with high revenues on the company books and other documents. Since inventory is classified as an asset, it can be assumed that the inventory exists and is owned by the client. Thus, existence or ownership is related to the asset category involving inventory. The existence of the inventory is focused on the date in which the inventory was received and whether transactions involving the inventory occurred during a specific reporting period. The auditor would review the books and ledger to determine existence or ownership. The auditor would look for evidence, which would prove that the transaction occurred and was properly recorded. In testing for existence, the auditor would need to look for evidence aside from the books to determine which transactions have been recorded. The auditor's testing should not end when finding the supporting debit/credit amounts in the initial book entry, the auditor should cross check the entry to the supplier's (of the inventory) records, production records, and the raw material accounts of supplies, for example. These accounts are likely to be misstated as well. Ownership deals with the right the company has in regard to the inventory on a specific date. Some accounts could have been deleted or not presented at all in the financial statements. Off statement financing has regularly resulted in companies' receiving the use of items without recording or disclosing the transaction in the financial statements. This would cause raw materials and labor (for example) to be understated. Comprehensive Question 5 - 35: (Developing responses to assessed risks) Your client, General Television, Inc., manufacturers televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer. 1. General Television has strong internal controls over the existence of inventory. It has a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. 2. Prices have been changing rapidly in General Television's marketplace. Although the marketplace is relatively stable for traditional televisions, the prices on flat panel televisions have become much more competitive. 3. General Television had to pay a premium to acquire Micro Engineering. General Television had independent appraisals of the fair value of assets and has determined that about 35 percent of the purchase price should be allocated to goodwill. i. The relevant assertion for Risk 1 is existence (or occurrence). ii. The relevant assertion for Risk 2 is valuation (or allocation). iii. The relevant assertion for Risk 3 is existence and valuation. 1. Risk 1 - the total value of the inventory in an unstable market (regarding pricing) is an inherent risk, where inventory may be overstated, which could be intentional or accidental. If inventory is overstated, cost of goods sold will be understated, which will cause profit to be overstated. Inventory is considered (or should be considered) to be the most significant part of the audit for this scenario. 2. Risk 2 - following the testing of existence (or occurrence) of inventory, the assertion of valuation is measured. First-in First-out (FIFO) based inventories are valued at lower of cost or market (LCM). The pricing of inventory in an unstable market reflects an inherent risk because it is more likely to occur in inventory than in other sections. Also, there is the risk of detection, which means the auditor will be less likely to detect a material misstatement in the account balance. 3. Risk 3 - this risk may not be an inherent risk in and of itself, although the allocation of the purchase price could create an inherent risk. This is because the purchased assets are mixed, there is a chance that the total purchase price will be allocated by using the excuse (for want of better word) that is either more favorable for tax purposes or financial reporting purposes. Preferably, goodwill should be lesser than more, and even with the appraisals, there could be unfairness regarding allocations. 1. Risk 1 - since this is a significant component of the audit, in which errors/misstatements are more likely to occur, it would be prudent to require more well trained employees to perform this part of the audit, with closer supervision as well. 2. Risk 2 - in this case, the risk of overstatement resulting from valuation, an auditing supervisor will need to review the findings. This scenario requires, not only a check of invoices and tracking the amount through the accounting system, but also there is a need to conduct an analysis of value, especially when it may be less than invoice pricing. 3. Risk 3 - in the case of staffing decisions, documentation gathering of purchase (such as, legal documents, board minutes of directors' meetings, asset appraisal(s), physical examinations of assets, and account balances testing) can be performed by staff, with sufficient supervision. a. How might you respond to this risk in terms of the nature of audit tests? 1. Risk 1 - in view of the inherent risk, it may be prudent to expend the testing of the system to include the internal controls. The kind of tests, which are performed for the assertion of existence (or occurrence), includes testing of transactions and account balances, which are more or less the methods required to prove that the company's system of internal controls is functioning efficiently. 2. Risk 2 - the kinds of testing for valuation can include documentation on external prices or future sales (following year end). Changes in the contribution margin could indicate conclusions regarding valuation. This is a greater subjective decision, which might involve some skill from the management level for the auditing firm and the client's company. 3. Risk 3 - risk of misstatement in the allocation is very important and might involve more external documentation and/or confirmation. This would be based on the nature of the purchased assets, although the end result will be determined whether the asset section of the balance sheet of the merged companies is overstated. For instance, it may be that part of the purchased assets will not be required in the merged operations, in the case that the assets are duplicated. The assets, which are not being used and are not considered fixed assets, which are not to be depreciated. The impairment of goodwill would need to be judged according to the asset's future valuation. How might you respond to this risk in terms of the timing of audit tests? 1. Risk 1 - tests of inventory transactions usually occur prior to year end. Prior testing of some of these transactions can help in designing the audit program, which will guarantee that efficient testing will be conducted. Account balances must be tested following the year end, with the physical inventory, which can be moved in/out without delay. The testing of inventory should be one of the beginning areas, in which the audit team starts the audit. 2. Risk 2 - the valuation decision may occur during the act part of the audit, this is due to the evidence of conditions of the market, which may not be clear until after different other sections of the audit are finished; it would be hard to determine these decisions during the time when testing is being conducted for existence. 3. Risk 3 - the timing of the audit testing for this transaction is not as important as some of the other testing. Actually, the fact is the accomplishment of the acquisition may not be apparent for a year. Any demonstration of changes, which affect the fieldwork, or even during the presentation and disclosure stage of the audit. This would be the best time. For example, a draft of disclosures would be discussed with the client, who might take exception to the presentation, resulting in changes being made. b. How might you respond to this risk in terms of the extent of audit tests? 1. Risks 1 - the scope of the tests are determined by the exceptions noted in the initial phase of the testing. If few errors are discovered, it is likely to decrease the testing, although this rarely occurs. It may be better to say that fewer errors would confirm that the testing does not require an extension of the audit. 2. Risk 2 - the valuation assumption is not major concern, which can be resolved by further testing of the prior year's transactions, although it could consist of some testing of the current year's sales, along with meetings with management. 3. Risk 3 - the risk of existence is unlikely to be a concern for extending testing, although valuation would be concern for extending testing. This kind of transaction is hardly affected by further testing, it might be solved at the board of directors' or management's level, with the auditor's firm, which goes beyond any audit tests. Week 5 Individual Assignment Learning Check: 4-15 Some other ways in which the Private Securities Act of 1995 may possibly change the legal liabilities of auditors and their potential benefits are: 1) Sets a limit on damages in order to possibly decrease the maximum limit, which auditors are legally liable for. 2) Requires the plaintiff to be responsible for legal fees of defendants which includes attorney fees and other fees directly related to the suit when the suit is ruled as false or unwarranted. This would reduce the risk of auditors being sued for such false claims. 3) Allows a stay of discovery during the time of a motion, in order for a pending of dismissal. This would decrease costs that frequently forces settlements when parties are innocent, but settle because the cost of settlement is less than taking the suit through the entire court process. 4) Places a limit on punitive damages, through the elimination of the basis of securities fraud such as, when the case is filed under the RICO Act. Such file allows for treble damages. This limits punitive damages, which decreases the auditors' responsibility in covering costs associated with damages. 5) Restricts third-parties' rights to sue, through placing restrictions on the number of times that a plaintiff can sue as the primary plaintiff (the limit is. up to five class actions, during a three year time frame) and requiring firmer pleading standards - This sets a limit on the amount of individuals, which are allowed to sue an auditor/auditors and decreases the chance of a law suit/class action being brought by \"professional plaintiffs.\" Learning Check: 4-17 Some of the changes for auditors as a result of the establishment of the Sarbanes-Oxley Act of 2002 include the following: 1. Auditors of public companies are prohibited from various non-attest services. 2. The establishment of the Public Company Accounting Oversight Board (PCAOB), which was given the authority to set standards for auditing, quality control, and independence for auditors of public companies. 3. Holds companies and auditors more responsible for fully disclosing material within the financial statements and how the financial statements are prepared. The following are some of the main changes in liabilities for managements of public companies created by the Sarbanes-Oxley Act of 2002: 1. Section 302, summarized, and requires a public company's CEO and CFO to prepare a statement accompanying the audit report, this statement is used to certify the appropriateness of the financial statement and the disclosures required. 2. Section 303, summarized, and makes it illegal for any/all officers/directors of an issuer to fraudulently influence, coerce, manipulate, or mislead an auditor. 3. Section 305, summarized, requires CEOs and CFOs of public organizations, which have restated its financial statements due to material noncompliance with financial reporting requirements to reimburse the company for any bonus or other incentive-based or equitybased compensation received during the year following the issuance of the filing of the document under noncompliance and any profits realized from the sale of securities of the issuer during the same period. 4. The \"Corporate and Criminal Fraud Act of 2002\" (or Title VIII of the Sarbanes-Oxley Act)lists the following: i. Make it a felony to knowingly destroy documents/data or create false documents, which can be used to impede, obstruct, or influence any existing or contemplated federal investigation. ii. Demands that auditors maintain all audit or review work papers for up to five years. iii. Extends the statute of limitations on securities fraud claims to the earliest of five years from the date of the fraud, or two years after the fraud was discovered. iv. Extends whistleblower protection to employees of public companies and the company's auditors, which would prohibit employers from taking adverse action(s) against employees/auditors who lawfully disclose private employer information/data to, but not limited to, parties in a judicial proceeding involving a fraud claim. Also, whistleblowers are given a solution in regard to special damages/attorney's fee. v. Created a new law, which makes securities fraud a criminal act, which carries penalties and fines and up to a 10-year incarceration. Comprehensive Question: 5-34: (Risk of material mismanagement) The assertions, which are likely to be misstated, are as follows: 1) Presentation (or occurrence); 2) Existence (or ownership) 3) Completeness These assertions are for revenue items such as membership fees or number of units sold; and would include: 1) Presentation (or occurrence) - the revenue, which was earned by the company and the number of items sold represented the actual number of items sold; 2) Existence (or ownership) - The items sold and fees which were not owned by another company or competitor; and 3) Completeness - revenue, which was earned, was recorded properly in the company's books and other documents. The accounts, which are likely to be overstated or understated, are as follows: Understated - Cost of goods sold and inventory on hand are likely to be understated; Overstated - Numbers of units sold and accounts receivable are likely to be overstated; The reason for this is because of the failed attempt to improve products and the financial difficulties of the customers, the company would still want to appear as if it were making profit with high revenues on the company books and other documents. Since inventory is classified as an asset, it can be assumed that the inventory exists and is owned by the client. Thus, existence or ownership is related to the asset category involving inventory. The existence of the inventory is focused on the date in which the inventory was received and whether transactions involving the inventory occurred during a specific reporting period. The auditor would review the books and ledger to determine existence or ownership. The auditor would look for evidence, which would prove that the transaction occurred and was properly recorded. In testing for existence, the auditor would need to look for evidence aside from the books to determine which transactions have been recorded. The auditor's testing should not end when finding the supporting debit/credit amounts in the initial book entry, the auditor should cross check the entry to the supplier's (of the inventory) records, production records, and the raw material accounts of supplies, for example. These accounts are likely to be misstated as well. Ownership deals with the right the company has in regard to the inventory on a specific date. Some accounts could have been deleted or not presented at all in the financial statements. Off statement financing has regularly resulted in companies' receiving the use of items without recording or disclosing the transaction in the financial statements. This would cause raw materials and labor (for example) to be understated. Comprehensive Question 5 - 35: (Developing responses to assessed risks) Your client, General Television, Inc., manufacturers televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer. 1. General Television has strong internal controls over the existence of inventory. It has a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. 2. Prices have been changing rapidly in General Television's marketplace. Although the marketplace is relatively stable for traditional televisions, the prices on flat panel televisions have become much more competitive. 3. General Television had to pay a premium to acquire Micro Engineering. General Television had independent appraisals of the fair value of assets and has determined that about 35 percent of the purchase price should be allocated to goodwill. i. The relevant assertion for Risk 1 is existence (or occurrence). ii. The relevant assertion for Risk 2 is valuation (or allocation). iii. The relevant assertion for Risk 3 is existence and valuation. 1. Risk 1 - the total value of the inventory in an unstable market (regarding pricing) is an inherent risk, where inventory may be overstated, which could be intentional or accidental. If inventory is overstated, cost of goods sold will be understated, which will cause profit to be overstated. Inventory is considered (or should be considered) to be the most significant part of the audit for this scenario. 2. Risk 2 - following the testing of existence (or occurrence) of inventory, the assertion of valuation is measured. First-in First-out (FIFO) based inventories are valued at lower of cost or market (LCM). The pricing of inventory in an unstable market reflects an inherent risk because it is more likely to occur in inventory than in other sections. Also, there is the risk of detection, which means the auditor will be less likely to detect a material misstatement in the account balance. 3. Risk 3 - this risk may not be an inherent risk in and of itself, although the allocation of the purchase price could create an inherent risk. This is because the purchased assets are mixed, there is a chance that the total purchase price will be allocated by using the excuse (for want of better word) that is either more favorable for tax purposes or financial reporting purposes. Preferably, goodwill should be lesser than more, and even with the appraisals, there could be unfairness regarding allocations. 1. Risk 1 - since this is a significant component of the audit, in which errors/misstatements are more likely to occur, it would be prudent to require more well trained employees to perform this part of the audit, with closer supervision as well. 2. Risk 2 - in this case, the risk of overstatement resulting from valuation, an auditing supervisor will need to review the findings. This scenario requires, not only a check of invoices and tracking the amount through the accounting system, but also there is a need to conduct an analysis of value, especially when it may be less than invoice pricing. 3. Risk 3 - in the case of staffing decisions, documentation gathering of purchase (such as, legal documents, board minutes of directors' meetings, asset appraisal(s), physical examinations of assets, and account balances testing) can be performed by staff, with sufficient supervision. a. How might you respond to this risk in terms of the nature of audit tests? 1. Risk 1 - in view of the inherent risk, it may be prudent to expend the testing of the system to include the internal controls. The kind of tests, which are performed for the assertion of existence (or occurrence), includes testing of transactions and account balances, which are more or less the methods required to prove that the company's system of internal controls is functioning efficiently. 2. Risk 2 - the kinds of testing for valuation can include documentation on external prices or future sales (following year end). Changes in the contribution margin could indicate conclusions regarding valuation. This is a greater subjective decision, which might involve some skill from the management level for the auditing firm and the client's company. 3. Risk 3 - risk of misstatement in the allocation is very important and might involve more external documentation and/or confirmation. This would be based on the nature of the purchased assets, although the end result will be determined whether the asset section of the balance sheet of the merged companies is overstated. For instance, it may be that part of the purchased assets will not be required in the merged operations, in the case that the assets are duplicated. The assets, which are not being used and are not considered fixed assets, which are not to be depreciated. The impairment of goodwill would need to be judged according to the asset's future valuation. How might you respond to this risk in terms of the timing of audit tests? 1. Risk 1 - tests of inventory transactions usually occur prior to year end. Prior testing of some of these transactions can help in designing the audit program, which will guarantee that efficient testing will be conducted. Account balances must be tested following the year end, with the physical inventory, which can be moved in/out without delay. The testing of inventory should be one of the beginning areas, in which the audit team starts the audit. 2. Risk 2 - the valuation decision may occur during the act part of the audit, this is due to the evidence of conditions of the market, which may not be clear until after different other sections of the audit are finished; it would be hard to determine these decisions during the time when testing is being conducted for existence. 3. Risk 3 - the timing of the audit testing for this transaction is not as important as some of the other testing. Actually, the fact is the accomplishment of the acquisition may not be apparent for a year. Any demonstration of changes, which affect the fieldwork, or even during the presentation and disclosure stage of the audit. This would be the best time. For example, a draft of disclosures would be discussed with the client, who might take exception to the presentation, resulting in changes being made. b. How might you respond to this risk in terms of the extent of audit tests? 1. Risks 1 - the scope of the tests are determined by the exceptions noted in the initial phase of the testing. If few errors are discovered, it is likely to decrease the testing, although this rarely occurs. It may be better to say that fewer errors would confirm that the testing does not require an extension of the audit. 2. Risk 2 - the valuation assumption is not major concern, which can be resolved by further testing of the prior year's transactions, although it could consist of some testing of the current year's sales, along with meetings with management. 3. Risk 3 - the risk of existence is unlikely to be a concern for extending testing, although valuation would be concern for extending testing. This kind of transaction is hardly affected by further testing, it might be solved at the board of directors' or management's level, with the auditor's firm, which goes beyond any audit tests. Week 5 Individual Assignment Learning Check: 4-15 Some other ways in which the Private Securities Act of 1995 may possibly change the legal liabilities of auditors and their potential benefits are: 1) Sets a limit on damages in order to possibly decrease the maximum limit, which auditors are legally liable for. 2) Requires the plaintiff to be responsible for legal fees of defendants which includes attorney fees and other fees directly related to the suit when the suit is ruled as false or unwarranted. This would reduce the risk of auditors being sued for such false claims. 3) Allows a stay of discovery during the time of a motion, in order for a pending of dismissal. This would decrease costs that frequently forces settlements when parties are innocent, but settle because the cost of settlement is less than taking the suit through the entire court process. 4) Places a limit on punitive damages, through the elimination of the basis of securities fraud such as, when the case is filed under the RICO Act. Such file allows for treble damages. This limits punitive damages, which decreases the auditors' responsibility in covering costs associated with damages. 5) Restricts third-parties' rights to sue, through placing restrictions on the number of times that a plaintiff can sue as the primary plaintiff (the limit is. up to five class actions, during a three year time frame) and requiring firmer pleading standards - This sets a limit on the amount of individuals, which are allowed to sue an auditor/auditors and decreases the chance of a law suit/class action being brought by \"professional plaintiffs.\" Learning Check: 4-17 Some of the changes for auditors as a result of the establishment of the Sarbanes-Oxley Act of 2002 include the following: 1. Auditors of public companies are prohibited from various non-attest services. 2. The establishment of the Public Company Accounting Oversight Board (PCAOB), which was given the authority to set standards for auditing, quality control, and independence for auditors of public companies. 3. Holds companies and auditors more responsible for fully disclosing material within the financial statements and how the financial statements are prepared. The following are some of the main changes in liabilities for managements of public companies created by the Sarbanes-Oxley Act of 2002: 1. Section 302, summarized, and requires a public company's CEO and CFO to prepare a statement accompanying the audit report, this statement is used to certify the appropriateness of the financial statement and the disclosures required. 2. Section 303, summarized, and makes it illegal for any/all officers/directors of an issuer to fraudulently influence, coerce, manipulate, or mislead an auditor. 3. Section 305, summarized, requires CEOs and CFOs of public organizations, which have restated its financial statements due to material noncompliance with financial reporting requirements to reimburse the company for any bonus or other incentive-based or equity-based compensation received during the year following the issuance of the filing of the document under noncompliance and any profits realized from the sale of securities of the issuer during the same period. 4. The \"Corporate and Criminal Fraud Act of 2002\" (or Title VIII of the Sarbanes-Oxley Act)lists the following: i. Make it a felony to knowingly destroy documents/data or create false documents, which can be used to impede, obstruct, or influence any existing or contemplated federal investigation. ii. Demands that auditors maintain all audit or review work papers for up to five years. iii. Extends the statute of limitations on securities fraud claims to the earliest of five years from the date of the fraud, or two years after the fraud was discovered. iv. Extends whistleblower protection to employees of public companies and the company's auditors, which would prohibit employers from taking adverse action(s) against employees/auditors who lawfully disclose private employer information/data to, but not limited to, parties in a judicial proceeding involving a fraud claim. Also, whistleblowers are given a solution in regard to special damages/attorney's fee. v. Created a new law, which makes securities fraud a criminal act, which carries penalties and fines and up to a 10-year incarceration. Comprehensive Question: 5-34: (Risk of material mismanagement) The assertions, which are likely to be misstated, are as follows: 1) Presentation (or occurrence); 2) Existence (or ownership) 3) Completeness These assertions are for revenue items such as membership fees or number of units sold; and would include: 1) Presentation (or occurrence) - the revenue, which was earned by the company and the number of items sold represented the actual number of items sold; 2) Existence (or ownership) - The items sold and fees which were not owned by another company or competitor; and 3) Completeness - revenue, which was earned, was recorded properly in the company's books and other documents. The accounts, which are likely to be overstated or understated, are as follows: Understated - Cost of goods sold and inventory on hand are likely to be understated; Overstated - Numbers of units sold and accounts receivable are likely to be overstated; The reason for this is because of the failed attempt to improve products and the financial difficulties of the customers, the company would still want to appear as if it were making profit with high revenues on the company books and other documents. Since inventory is classified as an asset, it can be assumed that the inventory exists and is owned by the client. Thus, existence or ownership is related to the asset category involving inventory. The existence of the inventory is focused on the date in which the inventory was received and whether transactions involving the inventory occurred during a specific reporting period. The auditor would review the books and ledger to determine existence or ownership. The auditor would look for evidence, which would prove that the transaction occurred and was properly recorded. In testing for existence, the auditor would need to look for evidence aside from the books to determine which transactions have been recorded. The auditor's testing should not end when finding the supporting debit/credit amounts in the initial book entry, the auditor should cross check the entry to the supplier's (of the inventory) records, production records, and the raw material accounts of supplies, for example. These accounts are likely to be misstated as well. Ownership deals with the right the company has in regard to the inventory on a specific date. Some accounts could have been deleted or not presented at all in the financial statements. Off statement financing has regularly resulted in companies' receiving the use of items without recording or disclosing the transaction in the financial statements. This would cause raw materials and labor (for example) to be understated. Comprehensive Question 5 - 35: (Developing responses to assessed risks) Your client, General Television, Inc., manufacturers televisions and during the current year acquired Micro Engineering, Inc., which manufactured flat panel televisions. Following is a list of several risks that have been identified in the audit of this television manufacturer. 1. General Television has strong internal controls over the existence of inventory. It has a good perpetual inventory system and regularly compares inventory on hand with the perpetual records. 2. Prices have been changing rapidly in General Television's marketplace. Although the marketplace is relatively stable for traditional televisions, the prices on flat panel televisions have become much more competitive. 3. General Television had to pay a premium to acquire Micro Engineering. General Television had independent appraisals of the fair value of assets and has determined that about 35 percent of the purchase price should be allocated to goodwill. i. The relevant assertion for Risk 1 is existence (or occurrence). ii. The relevant assertion for Risk 2 is valuation (or allocation). iii. The relevant assertion for Risk 3 is existence and valuation. 1. Risk 1 - the total value of the inventory in an unstable market (regarding pricing) is an inherent risk, where inventory may be overstated, which could be intentional or accidental. If inventory is overstated, cost of goods sold will be understated, which will cause profit to be overstated. Inventory is considered (or should be considered) to be the most significant part of the audit for this scenario. 2. Risk 2 - following the testing of existence (or occurrence) of inventory, the assertion of valuation is measured. First-in First-out (FIFO) based inventories are valued at lower of cost or market (LCM). The pricing of inventory in an unstable market reflects an inherent risk because it is more likely to occur in inventory than in other sections. Also, there is the risk of detection, which means the auditor will be less likely to detect a material misstatement in the account balance. 3. Risk 3 - this risk may not be an inherent risk in and of itself, although the allocation of the purchase price could create an inherent risk. This is because the purchased assets are mixed, there is a chance that the total purchase price will be allocated by using the excuse (for want of better word) that is either more favorable for tax purposes or financial reporting purposes. Preferably, goodwill should be lesser than more, and even with the appraisals, there could be unfairness regarding allocations. 1. Risk 1 - since this is a significant component of the audit, in which errors/misstatements are more likely to occur, it would be prudent to require more well trained employees to perform this part of the audit, with closer supervision as well. 2. Risk 2 - in this case, the risk of overstatement resulting from valuation, an auditing supervisor will need to review the findings. This scenario requires, not only a check of invoices and tracking the amount through the accounting system, but also there is a need to conduct an analysis of value, especially when it may be less than invoice pricing. 3. Risk 3 - in the case of staffing decisions, documentation gathering of purchase (such as, legal documents, board minutes of directors' meetings, asset appraisal(s), physical examinations of assets, and account balances testing) can be performed by staff, with sufficient supervision. a. How might you respond to this risk in terms of the nature of audit tests? 1. Risk 1 - in view of the inherent risk, it may be prudent to expend the testing of the system to include the internal controls. The kind of tests, which are performed for the assertion of existence (or occurrence), includes testing of transactions and account balances, which are more or less the methods required to prove that the company's system of internal controls is functioning efficiently. 2. Risk 2 - the kinds of testing for valuation can b documentation on external prices or future sales (following year end). Changes in the contribution margin could indicate conclusions regarding valuation. This is a greater subjective decision, which might involve some skill from the management level for the auditing firm and the client's company. 3. Risk 3 - risk of misstatement in the allocation is very important and might involve more external documentation and/or confirmation. This would be based on the nature of the purchased assets, although the end result will be determined whether the asset section of the balance sheet of the merged companies is overstated. For instance, it may be that part of the purchased assets will not be required in the merged operations, in the case that the assets are duplicated. The assets, which are not being used and are not considered fixed assets, which are not to be depreciated. The impairment of goodwill would need to be judged according to the asset's future valuation. How might you respond to this risk in terms of the timing of audit tests? 1. Risk 1 - tests of inventory transactions usually occur prior to year end. Prior testing of some of these transactions can help in designing the audit program, which will guarantee that efficient testing will be conducted. Account balances must be tested following the year end, with the physical inventory, which can be moved in/out without delay. The testing of inventory should be one of the beginning areas, in which the audit team starts the audit. 2. Risk 2 - the valuation decision may occur during the act part of the audit, this is due to the evidence of conditions of the market, which may not be clear until after different other sections of the audit are finished; it would be hard to determine these decisions during the time when testing is being conducted for existence. 3. Risk 3 - the timing of the audit testing for this transaction is not as important as some of the other testing. Actually, the fact is the accomplishment of the acquisition may not be apparent for a year. Any demonstration of changes, which affect the fieldwork, or even during the presentation and disclosure stage of the audit. This would be the best time. For example, a draft of disclosures would be discussed with the client, who might take exception to the presentation, resulting in changes being made. b. How might you respond to this risk in terms of the extent of audit tests? 1. Risks 1 - the scope of the tests are determined by the exceptions noted in the initial phase of the testing. If few errors are discovered, it is likely to decrease the testing, although this rarely occurs. It may be better to say that fewer errors would confirm that the testing does not require an extension of the audit. 2. Risk 2 - the valuation assumption is not major concern, which can be resolved by further testing of the prior year's transactions, although it could consist of some testing of the current year's sales, along with meetings with management. 3. Risk 3 - the risk of existence is unlikely to be a concern for extending testing, although valuation would be concern for extending testing. This kind of transaction is hardly affected by further testing, it might be solved at the board of directors' or management's level, with the auditor's firm, which goes beyond any audit tests