kpmg llp served as the external auditor
unter during rally being a auditor address "senior management. a. What audit evidence-related problems did DTT encounter du the audit of Longtop? b. Exhibit 6.8 describes external confirmations as generally beine reliable, high quality type of evidence. When would that ger ity not be accurate? What assumptions should the auditor ad concerning confirmations before concluding that using confirma tions will result in reliable audit evidence? c. Explain the role of professional skepticism in the context of eval ating evidence obtained from confirmations. 6-32 GATEWAY COMPUTERS (LO 1, 2, 4) The SEC took action against Gateway Computers in 2001 because it believed that Gateway systematically understated the allowance for doubtful accounts to meet sales and earnings targets. This is essentially the way the alleged fraud took place: Gateway sold most of its computers over the Internet and had a strong credit department that approved sales. When sales dropped, management decided to go back to customers who had been rejected because of poor credit approval. * 2/25/2020. Fraud Focus: Contemporary and Historical Cases 271 During the first quarter, it went after the better of the previously rejected customers. As the need for more revenue and earnings remained, Gateway continued down the list to include everyone. However, Gateway did not change any of its estimates for the allowance for uncollectible accounts. At the end of the process, the poor credit customers represented about 5% of total income, but the SEC alleged that Gateway under- stated the allowance account by over $35 million, which amounted to approximately $0.07 per share. In essence, Gateway wanted to show it was doing well when the rest of the industry was doing badly. a. How does management determine the valuation of the allowance for doubtful accounts? Does this process differ from account bal- ances based on recording transactions, such as cash transactions? Is more precision required for determining account balances that do or do not contain estimates? b. What information should the company use to make the estimate of the allowance for uncollectible accounts? c. What evidence should the auditor gather to determine whether the client's estimate of the allowance for uncollectible accounts is fairly stated? d. How should Gateway's expansion of sales to customers who they had previously rejected for credit affect the estimate of the allow- ance for doubtful accounts? e How important are changes in economic conditions to making an estimate of the allowance for doubtful accounts? Explain. 6-33 CENDANT CORPORATION (LO 1, 2, 3) Fraud Focus: Contemporary and Historical Cases 271 During the first quarter, it went after the better of the previously rejected customers. As the need for more revenue and earnings remained, Gateway continued down the list to include everyone. However, Gateway did not change any of its estimates for the allowance for uncollectible accounts. At the end of the process, the poor credit customers represented about 5% of total income, but the SEC alleged that Gateway under- stated the allowance account by over $35 million, which amounted to approximately $0.07 per share. In essence, Gateway wanted to show it! was doing well when the rest of the industry was doing badly. How does management determine the valuation of the allowance for doubtful accounts? Does this process differ from account bal- ances based on recording transactions, such as cash transactions? Is more precision required for determining account balances that do or do not contain estimates? b. What information should the company use to make the estimate of the allowance for uncollectible accounts? c. What evidence should the auditor gather to determine whether the client's estimate of the allowance for uncollectible accounts is fairly stated? d. How should Gateway's expansion of sales to customers who they had previously rejected for credit affect the estimate of the allow- ance for doubtful accounts? e. How important are changes in economic conditions to making an estimate of the allowance for doubtful accounts? Explain. CENDANT CORPORATION (LO 1,2,3) Cendant Corporation, a company that sold travel and health club harshins was the subject of an intensive fraud investigation that --33
