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Wicon Waste
Notes

Required: Significant audit and accounting issues

Multiple changes in auditors
Plans to sell – increases incentive to maximize value of company by increasing assets and net income
and decreasing liabilities
Users
 Current owners – maximize assets and NI
 Possible purchasers – accuracy of FV
 Debt holders – repayment
Materiality set at $6.5 M – does this need to be adjusted given the accounting misstatements? And
identified users?
Risk assessment
 Questionable integrity – foreign exchange error, changing in useful lives, dispute with tax
auditor, patent infringement, rumour – together these increase risk of the engagement
 Additional users due to plans to sell – increase risk
 May be unable to rely on BB’s work – conflict of interest, missing working papers is suspicious
 High risk engagement suggested need for increased evidence; repeat or extend BB’s work
 May reduce materiality

Accounting Issues/Audit Implications (consider materiality)

Accounting
Incorrect wire transfer amount – approx. $9.2 M
recorded in income in error? Deliberately?
Purchased shares of WSIL $18 M as required in
legal judgment related to patent infringement
Revenue recognition $16 M in 1996 for contract
covering 1997 - 2001
Accounts payable includes $2.99 M to Cajanza
Consulting for work in 1994 – but other
information states Cajanza used only beginning in Increase professional skepticism
1996
Audit implication
Management integrity is questionable
Increases NI by material amount
Speak with management – should inform bank
and return excess funds
Properly accounted for? Adequate disclosure?
Examine correspondence and purchase
agreement
What are shares currently worth?
May require an independent valuation
Revenue recognition criteria are not met (show
work – Measurable, Collectible, Performance)
therefore needs to be reversed
Contradictory responses to inquiries need to be
assessed
Is Cajanza independent?

Overall
 Several material errors
 Aggressive revenue recognition
 Questionable ethics/integrity – wire transfer
 All Asset and NI misstatements are increasing
 Hoa needs to plan independently and obtain an independent understanding of internal control
 Independent assessment of materiality

Audit Issues
Issue
Engagement acceptance was subject to receipt of
all working papers; 11 pages missing – what is
missing? Why?
Two changes in auditors in two years – a red flag
Tax audit could have material implications
$451 x 20% x 9% - contingency?
Hazardous waste lawsuits
Accounts receivable confirmation procedures
Credit rating downgrade due to changing
environmental regulations
Useful lives of sites increased; has effect of
decreasing amortization charges; increasing NI
Predecessor auditor using a combined approach
– relying on internal controls
All misstatements are NI increasing
BB’s work seems not to meet necessary quality
standards
Professional Standards
 Request missing 11 pages from predecessor
 Much more evidence is required
 Consider the need for other experts
Will not be able to address every issue in 72 minutes
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How to Address
Contact predecessor to follow up
May need to resign if pages not forthcoming
Increase professional skepticism
Examine correspondence; speak with tax
auditors; inquiry of management
Consult our own in-house tax department
Consider impact of lawsuit on financial
statements
Are the disclosure requirements met?
Did not maintain independent control over the
confirmation process
Should use a stratified sample, not just the high
dollar value items
Should include procedures to address municipal
receivables
Use of WWF’s fax machine means there was a
lack of control over the confirmations; may need
to reaudit these confirmations
Does Hoa have the environmental expertise
needed to assess the impact? Are experts
required?
Does Hoa have the environmental expertise
needed to assess the impact? Are experts
reliable?
Is use of three amortization methods
appropriate?
If
Hoa needs to perform its own planning; obtain its
own understanding of internal control and the
client’s business before determining audit
approach
Consider deliberate nature of misstatements
Increase skepticism and evidence
Consider possible fraudulent activity
Consider reporting BB to provincial accounting
association?