Auditing Cases An Interactive Learning Approach

Auditing Cases: An Interactive Learning Approach is intended for use in undergraduate and graduate Auditing, Professional Research Case, or capstone courses.

Step through real auditing cases one by one in this comprehensive text

Auditing Cases is a comprehensive case book that focuses on each of the major activities performed during an audit. Most of the auditing cases are based on actual companies, and a number address financial reporting fraud. The unique active learning approach helps students learn to think critically and develop their interpersonal skills, which are increasingly important in the workplace.

Teaching and Learning Experience

To provide a better teaching and learning experience–for both instructors and students–this program will:

• Engage Students with an Active Learning Approach: The auditing cases capture students’ interest using lively narrative that introduces emerging accounting-related issues.
• Easily Integrate Cases into your Course: The Instructor’s Resource Manual offers instructional approaches, activity ideas, and group assignments to merge the cases into an existing course.
• Help Students See Concepts in Action: Cases are introduced according to the phase of auditing they demonstrate, presenting students with clear examples of the material.

Introduction: Professional Judgment

Section 1: Client Acceptance

1.1 Ocean Manufacturing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

The New Client Acceptance Decision

Section 2: Understanding the Client’s Business and Assessing Risk

2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues

2.2 Apple Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Evaluation of Client Business Risk

2.3 Flash Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Risk Analysis

2.4 Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Understanding of Client’s Business Environment

Section 3: Professional and Ethical Issues

3.1 A Day in the Life of Brent Dorsey . . . . . . . . . . . . . . . . . . . . . . . 57

Staff Auditor Professional Pressures

3.2 Nathan Johnson’s Rental Car Reimbursement . . . . . . . . . . . . . . . . 61

Should He Pocket the Cash?

3.3 The Anonymous Caller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Recognizing It’s a Fraud and Evaluating What to Do

3.4 WorldCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

The Story of a Whistleblower

3.5 Hollinger International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Realities of Audit-Related Litigation

Section 4: Accounting Fraud and Auditor Legal Liability

4.1 Enron Corporation and Andersen, LLP . . . . . . . . . . . . . . . . . . . 87

Analyzing the Fall of Two Giants

4.2 Comptronix Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Identifying Inherent Risk and Control Risk Factors

4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud

4.4 Waste Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Manipulating Accounting Estimates

4.5 Xerox Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Evaluating Risk of Financial Statement Fraud

4.6 Phar-Mor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Accounting Fraud, Litigation, and Auditor Liability

4.7 Satyam Computer Services Limited . . . . . . . . . . . . . . . . . . . . . 143

Controlling the Confirmation Process

Section 5: Internal Control over Financial Reporting

5.1 Simply Steam, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Evaluation of Internal Control Environment

5.2 Easy Clean, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Evaluation of Internal Control Environment

5.3 Red Bluff Inn & Café . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Establishing Effective Internal Control in a Small Business

5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Evaluation of Manual and IT-Based Sales Accounting System Risks

5.5 Collins Harp Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

Recommending IT Systems Development Controls

5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting

5.7 Société Générale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

How a Low-Risk Trading Area Caused a $7.2 Billion Loss

Section 6: The Impact of Information Technology

6.1 Harley-Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

Identifying eBusiness Risks and Related Assurance Services for the eBusiness Marketplace

6.2 Jacksonville Jaguars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

Evaluating IT Benefits and Risks and Identifying Trust Services Opportunities

Section 7: Planning Materiality

7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Determination of Planning Materiality and Tolerable Misstatement

Section 8: Analytical Procedures

8.1 Laramie Wire Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . 233

Using Analytical Procedures in Audit Planning

8.2 Northwest Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Developing Expectations for Analytical Procedures

8.3 Burlingham Bees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Using Analytical Procedures as Substantive Tests

Section 9: Auditing Cash, Fair Value, and Revenues

9.1 Wally’s Billboard & Sign Supply . . . . . . . . . . . . . . . . . . . . . . . 249

The Audit of Cash

9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

Understanding the IT Accounting System and Identifying Audit Evidence for Retail Sales

9.3 Longeta Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269

Auditing Revenue Contracts

9.4 Bud's Big Blue Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 273

Accounts Receivable Confirmations

9.5 Morris Mining Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 285

Auditing Fair Value

9.6 Hooplah, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

Applying Audit Sampling Concepts to Tests of Controls and Substantive Testing in the Revenue Cycle

9.7 RedPack Beer Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 301

Estimating the Allowance for Bad Debts

Section 10: Planning and Performing Audit Procedures in the Revenue and Expenditure Cycles: An Audit SImulation

10.1 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 311

Identification of Tests of Controls for the Revenue Cycle (Sales and Cash Receipts)

10.2 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 329

Identification of Substantive Tests for the Revenue Cycle (Sales and Cash Receipts)

10.3 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 339

Selection of Audit Tests and Risk Assessment for the Revenue Cycle (Sales and Cash Receipts)

10.4 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 347

Performance of Tests of Transactions for the Expenditure Cycle (Acquisitions and Cash Disbursements)

10.5 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . . . . 367

Performance of Tests of Balances for the Expenditure Cycle (Acquisitions and Cash Disbursements)

Section 11: Developing and Evaluating Audit Documentation

11.1 The Runners Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379

Litigation Support Review of Audit Documentation for Notes Payable

Section 12: Completing the Audit, Reporting to Management, and External Reporting

12.1 EyeMax Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

Evaluation of Audit Differences

12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401

Considering Materiality When Evaluating Accounting Policies and Footnote Disclosures

12.3 K&K Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403

Leveraging Audit Findings to Provide Value-Added Insights in a Manufacturing Environment

12.4 Surfer Dude Duds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409

Considering the Going-Concern Assumption

12.5 Murchison Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 413

Evaluating an Attorney’s Response and Identifying the Proper Audit Report

12.6 Going Green . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421

Sustainability and External Reporting