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Chapter: 6 -Problem: 5 >> Leigh Ann Walker graduated from a major state university with a bachelor's degree in accounting.1 During her college career, Walker earned a 3.9 grade point average and participated in several extracurricular activities, including three student business organizations. Her closest friends often teased her about the busy schedule she maintained and the fact that she was, at times, a little too "inte
Answer Preview: 1. Students tend to react quite differently to this series of questions. Following are summaries of some of my former students' responses to these questions. a. Jackie should have given Leigh Ann a ch…

, Chapter: 8 -Problem: 7 >> Fifteen minutes before the first meeting of Professor Noah DeBerry's graduate auditing seminar, he sat down at his desktop computer to retrieve the photo roster for the three-hour evening course.1 While he waited for the roster to appear, DeBerry studied the online newsfeed, which was being flooded with reports of a shocking domestic terrorism attack that had taken place a few hours earlier. When
Answer Preview: 1. The nature of the independent auditors work environment brings the personal attributes of auditorsincluding their physical traits, personality attributes, and often their attitudinal predisposition…

, Chapter: 2 -Problem: 7 >> Bankrate's management organized the company into three operating divisions: Core, Insurance, and Credit Cards. The Core division housed the company's original operations that provided mortgage interest rate data to U.S. consumers as well as available interest rates for certificates of deposit, money market accounts, and other interest-bearing accounts. Consumers could obtain competitive quotes for
Answer Preview: 1. AS 4105, Reviews of Interim Financial Information, of the PCAOBs auditingstandards is the authoritative source in this context. According to AS4105 07, The objective of a review of interim financia…

, Chapter: 1 -Problem: 12 >> The entertainment industry had fascinated Garth Drabinsky from an early age. Unlike many of his colleagues in the industry, Drabinsky did not benefit from a network of family members and friends in show business. Instead, Drabinsky relied on his own drive, inspiration, and indomitable work ethic to claw his way to the top of the volatile and fickle entertainment industry. Born in Toronto in 1947,
Answer Preview: 1. The entertainment industry is very diverse and fragmented. In fact, there is little consensusamong financial analysts on which specific companies belong to this industry. Video game manufacturers, …

, Chapter: 6 -Problem: 1 >> After answering her cell phone, Kayleigh Caudell cradled it between her right ear and shoulder as she continued to scroll through a large electronic file searching for a client document.  "Hello, Kayleigh. It's me, your favorite audit manager." Kayleigh gritted her teeth momentarily before responding. "Hi, Lauren." "Did I catch you at a bad time?" "Oh, I'm trying to find the invoice for that large
Answer Preview: 1. The relevant PCAOB standard in this context is AS 1215, Audit Documentation. Paragraph .06 of that standard notes that an auditor must document the procedures performed, evidence obtained, and conc…

, Chapter: 3 -Problem: 8 >> Neumann and Tides quickly found that their new work roles were tension-packed. The source of the tension was management's concern that Deloitte, which at the time was completing its 2006 audit of Boeing's financial statements, would report one or more "material weaknesses" in the company's IT financial reporting controls. Management realized that Boeing would face significant adverse consequences
Answer Preview: 1. The five components of internal control, according to the COSO framework, are control environment, risk assessment, control activities, information and communication, and monitoring. Different argu…

, Chapter: 8 -Problem: 6 >> Michael Woodford became the first foreign-born chief executive of a Nikkei 2252 firm when he was appointed Olympus's CEO. Being selected as Olympus's CEO was the culmination of the British citizen's 30-year career with the company. Woodford was born into a working-class family in 1960 in a small city in central England. At age seven, after his parents divorced, Woodford moved to nearby Liverpool,
Answer Preview: 1. Listed next are examples of measures that have been taken in the U S. and other countries to strengthen the independence of auditors: a. Rotation of audit engagement partners after a given period o…

, Chapter: 2 -Problem: 3 >> Grand Theft Auto ranks among the best-selling video games of all time as well as one of the most controversial.1 By the time Grand Theft Auto V was released in 2013, over 125 million copies of the video game had been sold worldwide since the original version of the game was introduced in 1997. Wikipedia provides the following general description of the game.Game play focuses on an open world where
Answer Preview: 1. Following are the requested financial ratios for Take-Two for the period 1998-2000. Notice that the accounts receivable turnover and inventory turnover ratios are also provided. Equations: A/R Turn…

, Chapter: 8 -Problem: 3 >> The Horn of Africa has long played an important role in world history. Most historians believe that the large triangular peninsula that juts into the Indian Ocean along the east coast of Africa was the home of the legendary Kingdom of Punt, an important trading partner of ancient Egypt during the time of the pharaohs. Centuries later, the tribes that occupied the Horn of Africa played a pivotal ro
Answer Preview: 1. In general, the PwC-TFG engagement was an assurance services engagement. [Note: I am using the past tense here because technically the PwC-TFG relationship has ended, as noted in the case epilogue. …

, Chapter: 2 -Problem: 13 >> Hannah Van Dyke methodically flipped through the financial statement disclosure checklist searching for items underscored with a yellow highlighter by Jennifer Jones, the audit manager assigned to the Hampton & Worley audit engagement.1 In 30 minutes, Hannah would be meeting with Jefferson Wood, Hampton & Worley's controller to complete the checklist. Jennifer, Hannah's immediate superior on the a
Answer Preview: 1. I dont believe there is a definitive list of audit objectives or goals for the completion or wrap-up phase of an independent audit. At least, there isnt one in the professional auditing standards. …

, Chapter: 5 -Problem: 5 >> On April 11, 2017, KPMG LLP announced that five partners and one employee of the firm had been dismissed for failing to disclose confidential information obtained illicitly from the Public Company Accounting Oversight Board (PCAOB). According to the KPMG press release, the six individuals "either had improper advance warnings of engagements to be inspected by the PCAOB or were aware that others ha
Answer Preview: 1. Consider assigning this question on a group basis and expanding it. Assign each student group a unique Big Four firm. Require the student groups to report the recent audit deficiency rates for thei…

, Chapter: 7 -Problem: 10 >> Two days after the Miss USA pageant aired in June 2012 on NBC, one of the losing contestants claimed in a Facebook post that the pageant's outcome had been "rigged." That allegation cast doubt on the integrity of the Miss Universe Organization that had sponsored the pageant, the organization's principal owners, which included future U.S President Donald Trump, and Ernst & Young, which had overseen
Answer Preview: 1. PwCs vote tabulation engagement for the Academy of Motion Picture Arts and Sciencesis most broadly an assurance services engagement. The AICPAs Special Committee on Assurance Services defined those …

, Chapter: 7 -Problem: 5 >> In the business world of the Roaring Twenties, the schemes and scams of flim-flam artists and confidence men were legendary. The absence of a strong regulatory system at the federal level to police the securities markets-the Securities and Exchange Commission was not established until 1934-aided, if not encouraged, financial frauds of all types. In all likelihood, the majority of individuals invol
Answer Preview: 1. The key cost of this phenomenon for audit firms is the increased business risk it imposes upon them. On an individual level, the ever present potential for litigation can impose a significant amoun…

, Chapter: 3 -Problem: 5 >> Woodrow Wilson Robinson and Albert Leroy Hunt lived and worked in Huntington, West Virginia, a city of 60,000 tucked in the westernmost corner of the state. The bluecollar city sits on the south bank of the Ohio River. Ohio is less than one mile away across the river, while Kentucky can be reached by making a 10-minute drive westward on Interstate 64. Woody and Al were born six days apart in a sma
Answer Preview: 1. (a) Provide adequate physical security for inventory to minimize losses due to customer and employee theft. (b) Identify inventory shortages on a timely basis. (c) Ensure that inventory purchases, …

, Chapter: 5 -Problem: 2 >> In 1984, Scott London graduated with an accounting degree. He accepted an entry-level audit position with the Los Angeles office of Peat Marwick, the U.S. predecessor of KPMG that was formed three years later. The personable and wellliked London quickly advanced up KPMG's employment hierarchy. In 1995, KPMG promoted London to partner and nine years later chose him to head up the firm's Pacific Sou
Answer Preview: 1. Here is the textof the Confidential Client Information Rule, that is included in the AICPAs Code of Professional Conduct: A member in public practice shall not disclose any confidential client info…

, Chapter: 1 -Problem: 17 >> Orecchio and Oliver agreed to be equal partners in AA Capital. Orecchio assumed the titles of president and secretary for the new firm, while Oliver took the titles of chairman and treasurer. Because of Orecchio's extensive experience in investment management, the two partners agreed that he would oversee the firm's day-to-day operations. Orecchio's key responsibilities would be recruiting clients
Answer Preview: 1. A) The fact that both McNeeley and Oprins were new to the AA Capital engagementalmost certainly resulted in a learning curve effect for each of them. For example, because McNeeley didnt have a hist…

, Chapter: 8 -Problem: 1 >> The rapidly expanding Chinese economy has captured the attention of investors worldwide over the past two decades. Companies such as Longtop sought to capitalize on the growing interest in the Chinese economy by listing their securities on international stock exchanges, including the leading exchanges in the United States. In October 2007, Longtop went public with an initial public offering (IPO)
Answer Preview: 1. None of the professional standards include a discussion of auditabilitywhich may or may not be an actual word. To address the issue of what conditions or circumstances must be present for a company …

, Chapter: 3 -Problem: 11 >> In 1899, Cator and Guy Woodford established a new business, the Retail Credit Company, in downtown Atlanta. The two brothers realized that local grocery stores suffered large losses each year because they extended credit to customers who did not have the ability or intent to pay their bills. After convincing a large number of grocers to provide access to their customers' credit histories-without t
Answer Preview: 1. The CAQ does a great job of answering this question in the following source (which is referenced in the case): The Center for Audit Quality, The CPAs Role in Addressing Cybersecurity Risk, www thec…

, Chapter: 2 -Problem: 9 >> Brian Fox quickly "turned around" Powder River. In 2006, the company reported a net income of $5.7 million on revenues of $13.2 million. The company's balance sheet for that year reported nearly $25 million of assets, the bulk of which consisted of investments in oil and gas properties. Thanks to the company's profitable operations in 2006, Fox's compensation for the following year approached $1.5
Answer Preview: 1. In the PCAOBs report in which it disciplined CBN, Todd Chisholm, and Troy Nilson (see PCAOB Release No. 105-2011-003), the agency noted that, Chisholm and the Firm also failed to consider, or exerc…

, Chapter: 4 -Problem: 7 >> "The final undergraduate award today is the William J. Upchurch Medal, which is given annually to the outstanding senior in the Hopkins College of Business. Nominations are made by Hopkins faculty members and the criteria considered in choosing the winner include overall GPA, GPA in business courses, and involvement in student organizations." Dean Rodney Brown paused to build suspense among the ne
Answer Preview: 1. Based on the information provided, it appears that Zane Corbin misrepresented his involvement in the Beta Alpha Psi organization, which is considered academic misconduct. If I were a member of the …

, Chapter: 6 -Problem: 10 >> "No, that's okay, Bea. I'll write that memo this weekend and send it to Mr. Fielder. You go on home."1 "Are you sure, Chuck? I don't mind staying a while longer." "Thanks, Bea, but you've already put in too much overtime this week." After he sent his secretary home, Charles Tollison spent several minutes shuffling through the audit workpapers and correspondence stacked on his desk, trying to decid
Answer Preview: 1. Students typically have strong and often conflicting opinions on this issue. The majority of my students generally maintain that Tollison was qualified to be promoted to partner given his strong wo…

, Chapter: 2 -Problem: 1 >> The Brothers Greenberg For decades, Jack Greenberg oversaw a successful wholesale meat company, a company that he eventually incorporated and named after himself.1 Jack Greenberg, Inc., marketed a variety of meat, cheese, and other food products along the Eastern Seaboard of the United States from its Philadelphia headquarters. Jack Greenberg's failing health in the early 1980s prompted him to pla
Answer Preview: 1. AS 1101 04, Audit Risk,of the PCAOB auditing standards defines audit risk as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstate…

, Chapter: 5 -Problem: 9 >> A former Merrill Lynch executive organized IPOC in 2000 after the Bermuda government issued a license to the company to operate as a mutual fund. Three years later, after Bermuda regulatory authorities discovered that the company's founder was a convicted felon, he was dismissed, and Jeffrey Galmond took control of the company. Over the next few years, IPOC grew dramatically. The company's princip
Answer Preview: 1. Although the various media outlets reporting on this case and the parties involved in it commonly used the phrases audit and auditors, KPMGs IPOC engagement was not an independent audit. The media …

, Chapter: 7 -Problem: 2 >> Sarah Russell grew up in a small town in the flatlands of western Kansas where she was born.1 In high school, she was homecoming queen, valedictorian of her graduating class, point guard on her basketball team for two years, and a candy striper (volunteer) at the local hospital. Since her parents had attended the University of Kansas, Sarah was off to Lawrence at age 18. After spending her freshma
Answer Preview: 1. Sarah seemed to deal with this situation very well, given the circumstances. However, she would likely have benefited if she had discussed this problem with either members of her family or her clos…

, Chapter: 6 -Problem: 4 >> "So, any good news on the staffing front, Till?" Sophie White Eagle asked in between bites of a Christmas cookie. "Nope. Still short at least one staff accountant," Tillman Rollins replied glumly before adding, "probably two." Tillman Rollins and his wife were hosting the annual Christmas party for the Big Four practice office for which he served as the managing partner. In the waning minutes of t
Answer Preview: 1. The third case question for the Charles Tollison, Audit Manager case (Case 6 10) requires students to identify the criteria that international accounting firms should use when evaluating individuals for promotion to partner. Listed next are the criteria that I identify in the solution to that case question. These criteria are not necessarily listed in order of importance. (I allow my students to hammer out what they consider to be the proper order of the criteriaif their list proves to be incomplete, I sometimes nudge them to consider other relevant factors from my list.)As indicated in the Tollison solution, what I typically do in addressing the third case question is begin by listing individual …

, Chapter: 1 -Problem: 16 >> Madoff's brokerage firm initially traded only securities of small over-the-counter companies, securities commonly referred to as "penny stocks." At the time, the securities of most large companies were traded on the New York Stock Exchange (NYSE). The rules of that exchange made it extremely difficult for small brokerage firms such as Madoff's to compete with the cartel of large brokerage firms th
Answer Preview: 1. The principal authoritative source in the PCAOBs auditing standards vis--vis the auditing of investments was AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securit…

, Chapter: 1 -Problem: 2 >> In 1998, Bernard Duroc-Danner merged his oilfield equipment company with Weatherford Services to create Houston-based Weatherford International. The native of France had emigrated to the United States a decade earlier at the age of 34.Duroc Danner's father, a wealthy executive with the large French petroleum company Total, reportedly gave his son $20 million and encouraged him to go to the United
Answer Preview: 1. For public companies such as Weatherford International, the PCAOB auditing standards identify five management assertions. Specific audit objectives for individual accounts are derived from those as…

, Chapter: 2 -Problem: 10 >> LocatePlus had two principal revenue streams. Slightly more than one-half of the company's annual revenue was generated by selling direct, one-time access to its large database. The company's other major revenue source involved so-called channel partner arrangements. A channel partner paid LocatePlus a fixed monthly royalty in exchange for unlimited access to its database. Channel partners were ty
Answer Preview: 1. Listed next is a bullet list of specific requirements included in AS 2401 of the PCAOBs auditing standardsthat L& H apparently failed to complete or complete adequately. This bullet list was drawn …

, Chapter: 3 -Problem: 6 >> Michael Barnes, Buranello's general manager, was just as frustrated by the cash shortages as his boss, Marta Giordano. Barnes had worked at Buranello's for more than 20 years and was practically a member of the Giordano family. His first position with the restaurant was as a busboy when he was 14 years old. During college, he worked as a waiter at the restaurant. When he graduated from Northeaster
Answer Preview: 1. Listed next are specific internal control weaknesses evident in Buranellos operations followed by a brief discussion of the given control risks. Your students will likely come up with additional co…

, Chapter: 3 -Problem: 3 >> Andrea Jung earned a degree in English literature from Princeton in 1979. Before pursuing a law degree, the 20-year-old Jung decided to take a short break from academics to gain some real-world experience. During a college career fair, Jung landed a job as a management trainee with Bloomingdale's, an upscale New York-based retailer. Jung soon became fascinated by the retail industry and decided to
Answer Preview: 1. Andrea Jung stated that, Look, the buck stops with me when asked in 2011 about Avons evolving FCPA scandal (see, D. Rushe, SEC Investigates Allegations that Avon Reps Bribed Foreign Officials, www …

, Chapter: 1 -Problem: 3 >> Caterpillar traces its roots to the early 1900s when Benjamin Holt invented a slowmoving but functional tractor-previous efforts at developing tractors for agricultural use had produced bulky machines whose production cost was prohibitively high. In marveling at the new tractor, one of Holt's acquaintances remarked that it crawled like a "caterpillar." Holt seized on that analogy to name his new p
Answer Preview: 1. If your experience is similar to mine, you will have students that come down on both sides of the ledger in responding to this question. As I noted in the Suggestions for Use, there was not even co…

, Chapter: 7 -Problem: 1 >> In the summer of 2002, the U.S. Congress hurriedly passed the Sarbanes-Oxley Act (SOX). The SOX legislation contained the most far-reaching financial reporting reforms at the federal level since the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. The reforms included a requirement that public companies have their internal controls over financial reporting audited by
Answer Preview: 1. As a caveat, I did not have access to Deloittes policy and procedures manual, which means that I do not know specifically how the firm defined engagement risk. Most likely, Deloitte used (or uses) …

, Chapter: 1 -Problem: 6 >> Thursday, October 24, 1929, easily ranks as the most dramatic day that Wall Street has ever seen.1 That day witnessed the beginning of the Great Stock Market Crash that over the following few years would result in an almost 90 percent decline in the Dow Jones Industrial Average (DJIA). Although not nearly as dramatic as "Black Thursday," September 15, 2008, is a date that modern day Wall Street in
Answer Preview: 1. No, auditors do not have an explicit responsibility to be involved in an audit clients process of developing new accounting policies. In the PCAOBs auditing standards, AS 1001 03 notes that The fin…

, Chapter: 3 -Problem: 10 >> Cash shortages had been a recurring problem for Blakely's Fourth Street store. Over the previous 12 months, Martin Carrington had reported four shortages, each exceeding $200, to Thomas Blakely, the principal owner of Blakely Markets. The cash shortage Rose Holly discovered was the first that could be tracked to a specific cash register and a specific time of day.When Rose reported the missing $21
Answer Preview: 1. Professional auditing standards indicate that an entitys internal control process should be designed to achieve objectives in the following three categories: reliability of financial reporting, eff…

, Chapter: 7 -Problem: 9 >> "Olivia, I would like you to meet Eli Arezzo." "Hey, no need to introduce us, Luke. We are old pals. Right, Eli?' "Oh yeah, we go way back!" Olivia and Eli shared a laugh at the expense of Luke Stotts, an audit manager who had attempted to introduce the two of them as all three stood in line at a corner Starbucks near their office late one afternoon. After Olivia explained how she and Eli had met,
Answer Preview: 1. Notice that the case indicates that both Olivia and Eli were aware of their firms formal policy regarding personal relationships, namely, that partners and employees were required to avoid any and …

, Chapter: 1 -Problem: 10 >> Podlucky served as Le-Nature's chief executive officer (CEO) and relied principally on his family and wide circle of friends and business associates to staff the company's other key positions as it expanded over the years. He hired his brother, Jonathan, to serve as Le-Nature's chief operating officer (COO) and placed his 22-year-old son Jesse in charge of the day-to-day accounting for Le-Nature's
Answer Preview: 1. Investopedia defines corporate governance as the system of rules, practices and processes by which a company is directed and controlled. As such, corporate governance involves the interests and bal…

, Chapter: 2 -Problem: 4 >> Similar to many companies, GM was victimized by the economic crisis triggered in late 2008 by collapsing housing prices and the implosion of the subprime sector of the mortgage industry. That crisis quickly spread to other sectors of the U.S. economy, including the large automotive industry. Panic and fear caused millions of distraught U.S. consumers to delay or cancel "big-ticket" discretionary e
Answer Preview: 1. Listed next are examples of general audit procedures that could be applied to a companys reported pension obligation or liability and/orits related pension expense. This list is not intended to be …

, Chapter: 4 -Problem: 8 >> Like most high school graduates, Michael Dell had a sense of anticipation, if not exhilaration, when he left home to begin his college career. Because Dell planned to become a doctor, like his father, he declared premed as his major when he enrolled in the University of Texas (UT) in the fall of 1983. Over the next few months, Dell's interest in college waned as he began spending most of his time
Answer Preview: 1. As noted in the Suggestions for Use, the SEC defines earnings management as a material and intentional misrepresentation of a given entitys reported operating results. In some sense, that may be th…

, Chapter: 5 -Problem: 1 >> Say that you infect your computer with the virus du jour after downloading a YouTube video that had been trending on your favorite social media site. What do you do? Many low-tech mouse potatoes would immediately call the Geek Squad. In 1994, Best Buy, the consumer electronics retailer, acquired Geek Squad and made the computer services company a wholly-owned subsidiary. Geek Squad invokes a wide
Answer Preview: 1. As a word of warning, the domain of professional ethics is fraught with pitfalls and logic traps for amateur ethicists such as myself, especially when the subject at hand involves thorny ethical is…

, Chapter: 2 -Problem: 8 >> As David Robinson works his way through the large, festive crowd, he keeps bumping into people he knows. All the while, Robinson is hoping that he will avoid the one person he doesn't want to meet face to face. Belot Enterprises' several hundred employees and their family members are celebrating the Fourth of July with a corporate picnic. For the occasion, the company had reserved a municipal park
Answer Preview: 1. What I hope students recognize in addressing this issue is that Robinsons suggested compromise does not appear to be based upon a thoughtful analysis of the underlying accounting and financial repo…

, Chapter: 4 -Problem: 5 >> Wiley Jackson spent three months as an audit intern with a local practice office of a major accounting firm while he was earning an undergraduate accounting degree at the University of Wisconsin-Milwaukee.1 Wiley thoroughly enjoyed the three-month internship. He made several friends and, more importantly, gained valuable work experience and insight into the nature and work environment of independe
Answer Preview: 1. Listed next are examples of decision alternatives available to Wiley. --Report the incident on the Arrests and Convictions form. --Contact the OMP (office managing partner) and fully explain the mi…

, Chapter: 7 -Problem: 8 >> Frank Coleman pounded away at his calculator as he tried in vain to reconcile his number for the LIFO reserve to the figure recorded by the client.1 Frustrated and fatigued, Frank glanced at his wristwatch; he couldn't believe it was 9:40 p.m. Frank immediately stood and began shuffling together the workpapers spread out before him on his desk. No doubt, Maggie, his wife of two months, would be up
Answer Preview: 1. This is a discussion question for students that doesnt have a definitive answer. For a question such as this, I often draft two groups of students and then have those groups debate the given issue. …

, Chapter: 2 -Problem: 2 >> Jack Nicklaus began playing golf as a young boy and had mastered the game by his mid-teens. After graduating from high school, the golf prodigy accepted a scholarship to play collegiately for Ohio State University in his hometown of Columbus. At the age of 21, Nicklaus joined the professional golf tour and was an instant success, racking up more than one dozen victories within a few years. Shortly
Answer Preview: 1. I have not attempted to identify every management assertion relevant to Paragons construction projects. Instead, this suggested solution lists what I believe were several key management assertions …

, Chapter: 5 -Problem: 8 >> In the early 1930s, the Great Depression forced engineering student William Harrah to drop out of UCLA. Known as a "hustler" by his friends, Harrah began operating a bingo parlor to support himself. After repeated confrontations with law enforcement authorities that centered on the legality of his bingo games, Harrah moved his business operations to Nevada, which had less restrictive gambling laws
Answer Preview: 1. In my view, the advisory partners role in the Caesars auditsas described by the SEC in AAER No. 3554was a substantive role. Audit committees of SEC registrants play a very important role in the aud…

, Chapter: 5 -Problem: 7 >> Cornelius Vander Starr wanted to see the world. In 1918, the 26-year-old Californian emptied his bank account to purchase a one-way ticket to the Far East on a steamship. After "bumming around" Japan for several months, Vander Starr traveled to Shanghai, China, where he landed a job working for an insurance company. Within a short period of time, Vander Starr realized that selling insurance was a
Answer Preview: 1. Regardless of the specific service (auditing, consulting, taxation, etc.) that they happen to be providing, as professionals CPAs have an obligation to serve the public interest. In my view, it is …

, Chapter: 1 -Problem: 5 >> Discipline, honesty, and a strong work ethic were three key traits that John and Mary Andersen instilled in their son. The Andersens also constantly impressed upon him the importance of obtaining an education. Unfortunately, Arthur's parents did not survive to help him achieve that goal. Orphaned by the time he was a young teenager, Andersen was forced to take a full-time job as a mail clerk and a
Answer Preview: 1. A large number of parties bore some degree of responsibility for the problems that the Enron fiasco ultimately posed for the public accounting profession and the independent audit function. The fol…

, Chapter: 3 -Problem: 9 >> Walmart's incredible growth was due to the hypercompetitive business model developed by Sam Walton. The central tenet of Walton's business plan was the motto that he adopted for his company, "The Lowest Prices Anytime, Anywhere!" Walton reasoned that if he undercut the prices charged by his competitors, his company would generate sufficient sales volume to realize significant economies of scale. T
Answer Preview: 1. In retrospect, the most important control policyWalmart could have established for its foreign subsidiaries would have been to inform those subsidiaries executives and employees that the payment of …

, Chapter: 4 -Problem: 2 >> Jon Fries orchestrated a large-scale financial fraud that led to the downfall of F&C International. At least 10 other F&C executives actively participated in the scam or allowed it to continue unchecked due to their inaction. The methods used by Fries and his cohorts were not unique or even innovative.Fries realized that the most effective strategy for embellishing his company's periodic operating
Answer Preview: 1. Chief executive officer: In most companies, the CEO ranks as the ultimate decision maker within the firm. This is where the buck stops in terms of long-range policy issues facing a company. Granted…

, Chapter: 3 -Problem: 7 >> In late 1993, Joseph Fierro accepted a part-time sales position with a Saks Fifth Avenue store in New York City.1 Fierro was assigned to the Men's Polo Department of that store, a department supervised by Robert Perley. Fierro's hard work and ingenuity produced sizable sales and impressed his superior. Within a few months, Perley hired Fierro as a full-time salesperson at an annual salary of $30,0
Answer Preview: 1. Many students maintain that Saks zero tolerance policy is unreasonable or extreme. These same students typically argue that Fierros theft--taking an undeserved employee discount of $10--did not mer…

, Chapter: 7 -Problem: 3 >> Two congressional investigations in the 1970s provided for the first time revealing insights into the internal operations of the eight major accounting firms that had dominated the U.S. accounting profession for decades. Those "Big Eight" firms were the key members of what was coined “The Accounting Establishment” by the two congressional investigative subcommittees. In fact, that uncomplimentary
Answer Preview: 1. The fact that the EY-WCEY problem was discovered and reported initially by Reuters reporters who stumbled upon the relevant information apparently while researching another story line is somewhat t…

, Chapter: 4 -Problem: 1 >> Imagine this scenario. A few years after graduating from Boston College, Florida Gulf Coast University, or the University of North Texas with an accounting degree, you find yourself working as an audit senior with an international accounting firm. Your best friend, Rick, whom you have known since kindergarten, is a special agent with the Internal Revenue Service (IRS). Over lunch one day, Rick men
Answer Preview: 1. Most of us have heard anecdotes related by business owners or other taxpayers regarding how their accountants allegedly helped them, or actually encouraged them, to underreport their taxable income…

, Chapter: 8 -Problem: 5 >> The surging demand for petroleum products in recent decades has produced a windfall of revenues for many oil-rich Islamic countries in the Middle East, including, among others, Kuwait, Saudi Arabia, and the United Arab Emirates. Because Islam limits the types of investments and business ventures in which the world's 1.8 billion Muslims can become involved, the Middle Eastern oil boom has resulted
Answer Preview: 1. One approach to answering this question is to simply walk through the ten auditing concepts or premises that long served as the Ten Commandments of auditing, that is, the ten generally accepted aud…

, Chapter: 1 -Problem: 8 >> Clifford Hotte had a problem. His company had come up short of its earnings target. For the fiscal year ended April 30, 1995, financial analysts had projected that Health Management, Inc. (HMI), a New York-based pharmaceuticals distributor, would post earnings per share of $0.74. Following the close of fiscal 1995, Drew Bergman, HMI's chief financial officer (CFO) informed Hotte, the company's fou
Answer Preview: 1. The two dimensions of auditor independence are relevant to this context: appearance of independence and de facto independence. A close friendship between an auditor and a client employee can jeopar…

, Chapter: 8 -Problem: 4 >> In 1956, the Republic of the Sudan obtained its independence from Great Britain. Although unified, Sudan was effectively two countries within one. Northern Sudan, home of the nation's capital, Khartoum, was controlled by Islamic fundamentalists, while southern Sudan was controlled by Christian fundamentalists. In 1989, a military coup led by General Omar Hassan al-Bashir, leader of the National Is
Answer Preview: 1. In recent years, the official definitions of materiality in the auditing and financial accounting domainsincluding the FASB, the PCAOB, and the Auditing Standards Boardhave coalesced around the SEC…

, Chapter: 6 -Problem: 6 >> Bill, will you have that inventory memo done by this afternoon?" "Yeah, Sam, it's coming along. I should have it done by five, or so." "Make it three . . . or so. Okay, Bub?" Bill responded with a smile and a nod. He had a good relationship with Sam Hakes, the partner supervising the audit of Marcelle Stores. Bill DeBurger was an in-charge accountant who had 18 months experience with his employer,
Answer Preview: 1. Most students believe that Bill DeBurger indicated in his memo that the inventory account balance was materially accurate which was the actual decision made by thereal Bill DeBurger. My experience …

, Chapter: 1 -Problem: 11 >> In late 2005, Deloitte's Navistar audit for the fiscal year ending October 31, 2005, was nearing completion when the audit engagement partner took a "mysterious medical leave"2 and was replaced. Navistar's new audit engagement partner was a former Arthur Andersen partner who had joined Deloitte after a felony conviction in 2002 drove Andersen out of business.3 The new engagement partner was appare
Answer Preview: 1. The key disadvantage of mandatory auditor rotation is the learning curve effect. That is, a new audit firm will automatically have less understanding of a clients business practices, internal contr…

, Chapter: 1 -Problem: 4 >> Che-Chuen Yuen was born in 1948 in Shanghai during the bloody civil war that rocked China following the conclusion of World War II. After the Chinese civil war ended in 1949, Mao Zedong, the leader of the Communist forces that gained control of the country, established an authoritarian central government and renamed the nation the People's Republic of China. The new Communist government forced bus
Answer Preview: 1. No doubt, Yuens point of view is one that is shared by many businesspeople and professionals. An anything goes if it is legal mindset is certainly not consistent with the major ethical paradigms of …

, Chapter: 6 -Problem: 7 >> After spending much of the previous three months working elbow-to-elbow with as many as six colleagues in a cramped and poorly ventilated conference room, Hamilton Wong was looking forward to moving on to his next assignment.1 Wong served as an in-charge accountant on the audit staff of a large international firm's San Francisco practice office, the same firm that had offered him a job two years e
Answer Preview: 1. Require students to fully explain the choice they make, whether it is a yes or a no. Students responding with a yes typically suggest that they would be justified in underreporting their time since …

, Chapter: 5 -Problem: 10 >> In late 2003, Le-Nature's Inc., a Pennsylvania-based beverage company, selected BDO Seidman to replace Ernst & Young (EY) as its independent audit firm.1 A few months earlier, EY had insisted that Le-Nature's retain an external law firm to investigate allegations made by the company's former chief financial officer (CFO) and two other former company officials. Each of the three men had suggested t
Answer Preview: 1. As professionals, I believe that CPAs do have a responsibility to serve as role models for client…

, Chapter: 4 -Problem: 4 >> Aaron Elrod spent the early years of his professional career in a large Sun Belt city working on the staff of a major accounting firm and then serving as an assistant controller for a municipal hospital.1,2 In their early thirties, Elrod and his wife decided they wanted a different lifestyle for themselves and their three children. After several months of searching for a new position, Elrod accept
Answer Preview: 1. The AICPAs Statements on Quality Control Standards are the professional standards relevant to client acceptance decisions for CPAs serving nonpublic clients. In fact, one of the six elements of qua…

, Chapter: 6 -Problem: 8 >> It was late May, just two weeks before Tommy would be leaving for Amarillo to begin the Altamesa audit-the company had a June 30 fiscal year-end. Tommy, Jack Morrison, and an audit manager were having lunch at the Cattleman's Restaurant in the Cowtown district of north Fort Worth. "Tommy, I've decided to send Carl with you out to Amarillo. Is that okay?" asked Jack Morrison. "Uhh . . . sure, Jack.
Answer Preview: 1. One could easily argue that audit seniors occupy the most critical role on an audit engagement. On most audit engagements, audit seniors personally oversee the fieldwork. In this role, seniors supe…

, Chapter: 6 -Problem: 9 >> "Oh no, not Store 51," Avis Love moaned under her breath. For the third time, Avis compared the dates listed in the cash receipts journal with the corresponding dates on the bank deposit slips. Avis shook her head softly and leaned back in her chair. There was no doubt in her mind now. Mo Rappelle had definitely held open Store 51's cash receipts journal at the end of October.1 Avis Love was a sta
Answer Preview: 1. No. Once Avis selected the sample of 20 stores, she should have applied her audit procedures to each of those stores. AS 2315 25 of the PCAOBs auditing standards discusses auditors responsibilities …

, Chapter: 2 -Problem: 12 >> "So, Dani, seriously, what exactly am I going to be doing today?" "I am serious, Tyler. I'm not sure what I'm supposed to be doing much less what I'm supposed to have you do. Like I said . . . Katelyn hasn't told me anything more about this assignment than she has told you." "Seriously?" Instead of responding to her persistent subordinate, Dani shook her head and looked away. Dani Morgan and Tyler
Answer Preview: 1. In fact, the individual who provided the key information for this case was not aware of how the hours spent on the inventory observation assignment were billed to the client identified as Volterra …

, Chapter: 6 -Problem: 3 >> The busy season that was winding down had been notable for Madison because it was her first as an audit manager for her employer, a large practice office of a Big Four accounting firm. Her promotion from audit senior to audit manager had become effective five months earlier on October 1, one month following her five-year anniversary with the firm. During each of the previous two busy seasons, Madi
Answer Preview: 1. AS 2905, Subsequent Discovery of Facts Existing at the Date of the Auditors Report, of the PCAOBs auditingstandards is the relevant section of the professional standards for an SEC registrant. AS 2…

, Chapter: 1 -Problem: 1 >> Henry Wells, William Fargo, and their partners decided the two business services most needed by San Franciscans were transportation and banking. After acquiring a building near the intersection of present-day California and Montgomery Streets, the new company plunged headfirst, if not blindly, into those lines of business. Despite the lack of considerable forethought-or a comprehensive business pl
Answer Preview: 1. Internal controls can be categorized several different ways. For example, we could classify internal controls by transactions cycles, by cost, or by complexity. The key scheme that the accounting p…

, Chapter: 7 -Problem: 6 >> Ladislas Nay immigrated to the United States from Hungary in 1921 at the age of 18. The opportunities offered by his new land excited the industrious young immigrant, and he promised himself that he would make the most of them. Shortly after arriving in the United States, Nay made his way to Chicago and landed a job in the booming securities industry with a small brokerage firm. For the next sever
Answer Preview: 1. The mail rule would likely qualify as a "material weakness under AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, of the PCAO…

, Chapter: 4 -Problem: 3 >> Suzette Washington financed her college education by working as an inventory clerk for Bertolini's, a clothing store chain located in the southeastern United States.1 Bertolini's caters primarily to fashion-conscious young men and women. The company's stores carry a wide range of clothing, including casual wear, business suits, and accessories. The Bertolini's store for which Suzette worked is loc
Answer Preview: 1. Occasionally, debate on this question can become quite intense. If you recognize this up front, you will be better prepared to manage students' interaction. It has been my experience that accountin…

, Chapter: 8 -Problem: 8 >> Financial crime is a growth industry worldwide. The U.S. Department of the Treasury estimates that the proceeds from extortion, healthcare fraud, identity theft, insider trading, the trafficking of illicit drugs, and other financially-motivated crimes total several hundred billion dollars each year in the United States alone. A major problem faced by criminal enterprises is "laundering" their "dir
Answer Preview: 1. The PCAOBs fourth general attestation standard requires that in all matters relating to the engagement, an independence in mental attitude shall be maintained by the practitioner [AT101 35] Likewis…

, Chapter: 7 -Problem: 7 >> In the mid-1990s, KPMG Peat Marwick audited a small, Dallas-based drugstore chain, Texas Drug Warehouse (TDW). Before beginning the company's 1995 audit, KPMG "made a business decision to reduce the number of hours it would expend on the TDW audit and to use less experienced personnel to perform the audit."1 KPMG did not inform the client's executives of that decision. Following the 1996 audit, KP
Answer Preview: 1. AU-C Section 210, Terms of Engagement, addresses the auditors responsibilities in agreeing upon the terms of the audit engagement with management. Paragraph .10 notes that the agreed-upon terms of …

, Chapter: 6 -Problem: 2 >> "Come on, Brian. You don't mean that." "I meant every word of it, Elise. Here, let me repeat it for you: My career will be a total failure if I don't make audit partner. A complete bust, an absolute waste of time even if I wind up as the chief financial officer of a Fortune 500 company. Since I was twelve, all I ever wanted to be was a partner of a Big Four firm." "Wait a minute, wait a minute. Ho
Answer Preview: 1. Students typically suggest that Elise would have gained little by reporting Brians dishonesty to Bailey because the audit manager wasapparently cowed by Brian due to his close relationship with Ada…

, Chapter: 5 -Problem: 3 >> Antoine Deltour faced a difficult decision in the summer of 2008. Deltour was searching for a job after having completed a master's degree in business with a concentration in accounting from Ecole Superieure de Commerce in Bordeaux, France. The timing could not have been worse for the 24-year-old Deltour and other recent business college graduates seeking entry-level professional accounting positi
Answer Preview: 1. The following definition of public interest is found in the AICPA Code of Professional Conduct: The public interest is defined as the collective well-being of people and institutions that the profe…

, Chapter: 2 -Problem: 5 >> During the 1990s, Kenneth Lipper emerged as a leader of the rapidly growing hedge fund "industry" in the United States. Born in 1941, Lipper, the son of a shoe salesman, spent his childhood in a modest working-class neighborhood in New York City's South Bronx. As an adolescent, he enjoyed a wide range of interests, including sports, movies, and the stock market. Unlike his childhood friend, Alfred
Answer Preview: 1. The three categories of fraud risk factors discussed in AS2401, Consideration of Fraud in A Financial Statement Audit, in the PCAOBs auditing standards are incentives/pressures, opportunities, and …

, Chapter: 5 -Problem: 4 >> By 2010, Ernst & Young (EY; E&Y) had served as the independent audit firm for Universal American Corporation for 15 years. Universal, a large healthcare services company headquartered in affluent Westchester County, 20 miles north of New York City, was a valued and high profile audit client of the Big Four firm. Universal's stock traded on the New York Stock Exchange, and the company claimed membe
Answer Preview: 1. Regulation S-X includes the SEC rules that prescribe the overall content and format of financial reports filed with the federal agency and various and sundry other requirements relevant to the acco…

, Chapter: 7 -Problem: 4 >> Historians disagree when the first email message caromed down the information superhighway, but there is no dispute that email was the Internet's first "killer app." Email quickly became the primary communication medium within the business world. By 2019, an estimated 230 billion business-related emails were sent each day worldwide. On a typical day, a business professional received more than 120
Answer Preview: 1. The phrase low expectation of privacy is not cryptic or otherwise difficult to interpret. In certain contexts, individuals have a high expectation of privacy, for example, in their homes. In public …

, Chapter: 2 -Problem: 6 >> Castello instructed several of his subordinates to misrepresent CBI's reported operating results and financial condition for the fiscal years ended April 30, 1992, and 1993.1 Those misrepresentations allowed Castello to receive large, year-end bonuses to which he was not entitled. CBI actively concealed the fraudulent activities from TCW's management, from TCW's appointees to CBI's board, and from
Answer Preview: 1. "Completeness" is typically the management assertion of most concern to auditors when investigating the material accuracy of a client's accounts payable. Generally, clients have a much stronger inc…

, Chapter: 5 -Problem: 11 >> Richard Grimes glanced at his wristwatch as he pulled into the nearly deserted parking lot of the corporate headquarters of McCaleb Medical Corporation (MMC).1 It was 6:25 a.m. on a cold and overcast Friday morning in February. Based in a suburb on the south side of Pittsburgh, Pennsylvania, MMC manufactured diagnostic instruments used in medical laboratories. The company's common stock traded on
Answer Preview: 1. The topic of subsequent events is addressed in AS 2801 of the PCAOBs auditingstandards and AU-C Section 560 of the AICPA Professional Standards. Generally, there are two types of subsequent events: …

, Chapter: 1 -Problem: 15 >> Nearly one-half of recent mortgage foreclosure victims obtained their loans from socalled subprime lenders that became dominant forces within the mortgage industry during the past two decades. The largest of those lenders were Countrywide, HSBC, New Century Financial Corporation (New Century), and Wells Fargo, but more than a dozen other large companies provided loans to borrowers with suspect cre
Answer Preview: 1. Several academic studies have found that the major international accounting firms have historically specialized, that is, havehad heavy concentrations of clients, in certain industries. For example…

, Chapter: 2 -Problem: 11 >> Before entering the business world, Patrick Byrne, the son of a wealthy associate of Warren Buffett, lived the life of a bon vivant and Renaissance man. After spending time as a student in China, Byrne earned an undergraduate degree from Dartmouth, a Master's degree from Cambridge, and a doctorate in philosophy from Stanford. In addition to accumulating an impressive educational portfolio, Bryne t
Answer Preview: 1. The dispute between Overstock and Grant Thornton was not that unusual. Given the nature of their relationships, public companies and their independent auditors are commonly involved in disagreements that can range from minor differences of opinion to emotional, tension-packed confrontations. What was unusual was the fact that the Overstock-Grant Thornton dispute was made available for public consumption. No doubt, the finger pointing and caustic allegations diminished, to some degree, the publics respect for the financial reporting domain and the independent audit function. Granted, the most caustic, if not childish, statements were made by Overstock officials. Although Grant Thornton officials candidly expressed their disagreement …

, Chapter: 8 -Problem: 2 >> The black Toyota minivan made slow but steady progress down the narrow, unpaved road as it approached the village of Takhli in south-central Thailand, approximately 150 miles north of Bangkok. On either side of the bumpy road were fields of sugarcane, dense thickets of scrub brush, and an occasional rice paddy. Seated in a rear window seat of the minivan was Michael Wansley, a senior partner with
Answer Preview: 1. I am not aware of the specific policies, if any, that the major international accounting firms may have with respect to this particular issue. Since many of your students will likely have at least …

, Chapter: 1 -Problem: 7 >> At approximately the same time that Thomas Shine was launching his business career in the retail industry in the United States, Harold Ruttenberg was doing the same in South Africa. Ruttenberg, a native of Johannesburg, paid for his college education by working nights and weekends as a sales clerk in an upscale men's clothing store. After graduation, he began importing Levi's jeans from the United
Answer Preview: 1. Common-sized balance sheets for Just for Feets 1996-1998 fiscal years: Common-sized income statements for Just for Feet: Financial Ratios for Just for Feet: Equations: Current ratio: current assets …

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