Auditing A Risk Based Approach To Conducting A Quality Audit 10Th Edition Johnstone Solutions Manual Full Chapter PDF

Auditing A Risk Based-Approach to
Conducting a Quality Audit 10th Edition

Johnstone Solutions Manual
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Auditing: A Risk Based Approach to Conducting a Quality Audit, 10e
Solutions for Chapter 12

True/False Questions
12-1 F
12-2 T
12-3 T
12-4 T
12-5 T
12-6 T
12-7 T
12-8 F
12-9 T
12-10 F
12-11 T
12-12 F
12-13 F
12-14 T
12-15 T
12-16 T
Multiple-Choice Questions
12-17 D
12-18 A
12-19 D
12-20 A
12-21 B
12-22 D
12-23 B
12-24 C
12-25 A
12-26 D
12-27 C
12-28 A
12-29 B
12-30 C
12-31 C
12-32 B
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12-1
Review and Short Case Questions
12-33
The existence and valuation assertions related to long-lived assets are usually the more relevant
assertions. Organizations may have incentives to overstate their long-lived assets and may do so
by including fictitious long-lived assets on the financial statements. Alternatively, organizations
may capitalize costs, such as repairs and maintenance costs, which should be expensed. Concerns
regarding valuation include whether the organization properly and completely recorded
depreciation and properly recorded any asset impairments. The valuation issues typically involve
management estimates that may be subject to management bias.
Identifying and focusing on the relevant assertions will allow the auditor to be more efficient in
the performance of the audit (i.e., the auditor will not over-audit the lower risk assertions and
will focus more effort on the higher risk assertions).
12-34
Depreciation expense relates to the expensing of a fixed asset over its life. For natural resources,
the related expense account would be referred to as depletion expense (the expense associated
with the extraction of natural resources). For intangible assets with a definite life, the related
expense account would be referred to as amortization expense.
12-35
The five management assertions relevant to long-lived assets are as follows:
1. Existence or occurrence. The long-lived assets exist at the balance sheet date. The focus
is typically on additions during the year.
2. Completeness. Long-lived asset account balances include all relevant transactions that
have taken place during the period.
3. Rights and obligations. The organization has ownership rights for the long-lived assets as
of the balance sheet date.
4. Valuation or allocation. The recorded balances reflect the balance that is in accordance
with GAAP (includes appropriate cost allocations and impairments).
5. Presentation and disclosure. The long-lived asset balance is reflected on the balance sheet
in the noncurrent section. The disclosures for depreciation methods and capital lease
terms are adequate.
12-36
Asset impairment is a term used to describe management’s recognition that a fixed asset is no
longer as productive as had originally been expected. When assets are impaired, the assets should
be written down to their expected economic value.
12-2
Much of the inherent risk associated with long-lived assets is due to the importance of
management estimates, such as estimating useful lives and residual values and determining
whether asset impairment has occurred. Inherent risk related to asset impairment stems from the
following factors:
• Normally, management does not have incentives to identify and write down assets.
• Sometimes, management wants to write down every potentially impaired asset to a
minimum realizable value (although this will cause a one-time reduction to current
earnings, it will lead to higher reported earnings in the future).
• Determining asset impairment, especially for intangible assets, requires a good
information system, a systematic process, good controls, and professional judgment.
12-37
Natural resources present unique risks. First, it is often difficult to identify the costs associated
with discovery of the natural resource. Second, once the natural resource has been discovered, it
is often difficult to estimate the amount of commercially available resources to be used in
determining a depletion rate. Third, the client may be responsible for restoring the property to its
original condition (reclamation) after the resources are removed. Reclamation costs may be
difficult to estimate.
12-38
Intangible assets should be recorded at cost. However, the determination of cost for intangible
assets is not as straightforward as it is for tangible assets, such as equipment. As with tangible
long-lived assets, management needs to determine if the book values of patents and other
intangible assets have been impaired. Thus, there is a great deal of estimation by management
associated with intangible assets.
12-39
a. Management’s motivation to overstate fixed assets is similar to other circumstances in

which fraud is perpetrated:
• Increase reported earnings

• Boost stock price
• Improve ability of the company to acquire another company
• Avoid a violation of company debt covenants
b. The auditor should also consider the other two components of the fraud triangle–
opportunity and rationalization–when assessing fraud risk associated with long-lived assets.
12-3
12-40
A skeptical auditor will understand that management can manage earnings in a number of ways,
including:
• Improperly recording repairs and maintenance costs that should be expensed as fixed
assets.
• Lengthening the estimated useful lives and/or increasing estimated residual value of
depreciable assets without economic justification as was done in the Waste Management
fraud.
The auditor becomes aware of management’s potential by considering relevant fraud risk factors,
including incorporating information related to internal control effectiveness–in particular the
control environment.
12-41
Potential fraud schemes related to long-lived assets include:
• Sales of assets are not recorded and proceeds are misappropriated.

• Assets that have been sold are not removed from the books.
• Inappropriate residual values or lives are assigned to the assets, resulting in
miscalculation of depreciation.
• Amortization of intangible assets is miscalculated.
• Costs that should have been expensed are improperly capitalized.
• Impairment losses on long-lived assets are not recognized.
• Fair value estimates are unreasonable or unsupportable.
12-42
Typically, the more relevant assertions (areas of higher risk) for tangible long-lived assets (e.g.,
property, plant, and equipment) include existence and valuation. For these assertions, the
appropriate internal controls could include:
• The use of a computerized property ledger. The property ledger should uniquely identify
each asset. In addition the property ledger should provide detail on the cost of the
property, the acquisition date, depreciation method used for both book and tax, estimated
life, estimated scrap value (if any), and accumulated depreciation to date.
• Authorization procedures to acquire new assets. In particular, the use of a capital
budgeting committee to analyze the potential return on investment is a strong control
procedure.
• Periodic physical inventory of the assets and reconciliation with the recorded assets.
• Formal procedures to account for the disposal of assets.
• Periodic review of asset lives and adjustments of depreciation methods to reflect the
changes in estimated useful lives.
12-4
12-43
For intangible assets, the client should have controls designed to:
• Provide reasonable assurance that decisions are appropriately made to capitalize
(completeness of assets) or expense (existence of assets) research and development
expenditures
• Develop amortization schedules that reflect the remaining useful life of intangible assets
such as patents or copyrights (valuation)
• Identify and account for intangible-asset impairments (valuation)
Management should have a monitoring process in place to review valuation of intangible assets.
For example, a pharmaceutical company should have fairly sophisticated models to predict the
success of newly developed drugs and monitor actual performance against expected performance
to determine whether a drug is likely to achieve expected revenue and profit goals. Similarly, a
software company should have controls in place to determine whether capitalized software
development costs will be realized. Exhibit 12.2 identifies examples of other controls over
intangible long-lived assets that clients may design and implement.
12-44
Analytical procedures that would be included as part of planning analytical procedures related to
depreciation expense include analysis of the following relationships, in the light the expectations
developed by the auditor:
• Current depreciation expense as a percentage of the previous year's depreciation expense,

• Fixed assets (by class) as a percentage of previous year's assets. The relative increase in
this percentage can be compared with the relative increase in depreciation expense as a
test of overall reasonableness.
• Depreciation expense (by asset class) as a percentage of assets each year. This ratio can
indicate changes in the age of equipment or changes in depreciation policy, or
computation errors.
• Accumulated depreciation (by class) as a percentage of gross assets each year. This ratio
provides information on the overall reasonableness of the account and may indicate
problems of accounting for fully depreciated equipment.
• Average age of equipment (by class). This ratio provides additional insight on the age of
assets and may be useful in modifying depreciation estimates.
12-45
Ratios and expected relationships that auditors can use when performing planning analytical
procedures include:
• Review and analyze gains/losses on disposals of equipment (gains indicate

depreciation lives are too short, losses indicate the opposite).
12-5
• Perform an overall estimate of depreciation expense.
• Compare capital expenditures with the client’s capital budget, with an expectation that
capital expenditures would be in line with the capital budget.
• Compare depreciable lives used by the client for various asset categories with that of
the industry, with a typical expectation that the client’s depreciable lives would be
consistent with those in the industry. Large differences may indicate earnings
management.
• Compare the asset and related expense account balances in the current period to similar
items in the prior audit and determine whether the amounts appear reasonable in relation
to other information you know about the client, such as changes in operations
Ratios that the auditor should plan to review, after developing independent expectations, include:
• Ratio of depreciation expense to total depreciable long-lived tangible assets. This ratio
should be predictable and comparable over time unless there is a change in depreciation
method or asset lives. The auditor should plan to analyze any unexpected deviations and
assess whether any changes are reasonable.
• Ratio of repairs and maintenance expense to total depreciable long-lived tangible assets.
This ratio may fluctuate because of changes in management’s policies (for example,
maintenance expenses can be postponed without immediate breakdowns or loss of
productivity). The auditor should plan to analyze any unexpected deviation with this
consideration in mind.
• Long-lived assets to total assets
12-46
Panel B of Exhibit 12.3 illustrates the different levels of assurance that the auditor could obtain
from tests of controls and substantive procedures. The reason for the differing approaches is due
to the different levels of risk of material misstatement associated with each of the clients. Panel
B makes the point that because of the higher risk associated with the existence of equipment at
Client B, the auditor will want to design the audit so that more of the assurance is coming from
tests of details. In contrast, the risk associated with the existence of equipment at Client A is
lower and therefore the auditor would be willing to obtain more assurance from tests of controls
and substantive analytics, and less assurance from substantive tests of details. Note that the
relative percentages are judgmental in nature; the examples are simply intended to give you a
sense of how an auditor might select an appropriate mix of procedures.
12-47
For many organizations, long-lived assets involve only a few assets of relatively high value. In
these settings, the time and effort needed to perform tests of controls in order to reduce
substantive testing may exceed the time required to simply perform the substantive tests. Thus,
the most efficient approach would be to use a substantive approach, using test of details, for
testing.
12-6
12-48
Control Procedure Purpose of Control Impact on Substantive Audit

Procedure (a) Procedures (b)
1. Periodic physical Provide reasonable Auditor should expand
inventory of assets. assurance that records procedures either by taking a
reflect equipment on-hand sample from the property ledger
and in use. Relates to and verifying existence or take a
existence and tour of plant and identify idle
completeness. equipment for future review (or
both procedures.)
2. Policy to classify Provide reasonable Auditor would have to review
equipment and compute assurance of consistent use each equipment life for
depreciation. of depreciation methods consistency and rationale for the
based on experience of life chosen.
client. Relates to valuation.
3. Policy on minimum Promote processing There is no particular effect on
amounts that are to be efficiency by expensing the audit except that the
capitalized. small dollar value items. property, plant and equipment
ledger would have substantially
larger items as the smaller dollar
items would have been
expensed.
4. Method for designating Provide reasonable Auditor would expand
scrap or idle equipment for assurance that the records production facilities tour with
disposal. are updated for changes in special emphasis on identifying
productive life of assets. obsolete or non-productive
Relates to valuation. assets. The items identified
would be discussed with
management in order to
determine if adjustments are
needed.
5. Differentiate major Provide reasonable Expand review of repairs and
renovations from repair assurance that the proper maintenance expense.
and maintenance. accounting since major Investigate all large expenditures
renovations may extend to determine if they are more
the life of the asset and appropriately classified as
should be debited to renovations.
accumulated depreciation.
6. Self-construction of Provide reasonable Perform a detailed review of all

assets. assurance of proper self-constructed assets.
12-7
Control Procedure Purpose of Control Impact on Substantive Audit
Procedure (a) Procedures (b)
accounting for self-
constructed assets.
7. Systematic review for Provide reasonable Auditor would have to review
asset impairment. assurance of proper asset productivity each year and
accounting for asset make inquiries of client of the
impairment (valuation accounting for impaired assets.
issues). Company Auditor would be more alert to
performing the review on a declining productivity indicators
consistent basis is a strong or changes in product mix that
control because it might affect asset values.
eliminates many of the
"big bath" write-offs.
8. Management Provide reasonable Auditor should review asset
periodically reviews assurance of asset disposals for potential impact on
disposals for potential valuation. choice of economic lives for
impact on changing asset assets.
lives for depreciation
purposes.
12-49
Test of controls over tangible long-lived assets could include:
• Examine documentation corroborating that a tangible long-lived asset budget is prepared

and used.
• Examine relevant documentation for management's approval process of the tangible long-
lived asset budget.
• Examine a sample of tangible long-lived asset requisition forms for management's
approval.
• Inspect copies of the vouchers used to document departmental request for sale,
retirement, or scrapping of tangible long-lived assets for management's approval.
• Test depreciation shown in the general ledger to the amounts shown in the tangible long-
lived asset ledger. (This might be performed as a dual purpose test.)
• Review or recompute a sample of depreciation calculations.
• Agree the posting of depreciation expense to the general ledger.
• Inspect the tangible long-lived asset ledger for adequate detail to support the tangible
long-lived asset accounts.
• Verify that the tangible long-lived asset ledger is periodically balanced to the general
ledger.
• Verify accuracy of calculations on a sample of tangible long-lived asset requisition
forms.
12-8
• Check for the existence of a written policy which establishes whether a budget request is
to be considered a capital expenditure or a routine maintenance expenditure.
• Confirm the existence of approved vouchers for entries which remove assets from the
tangible long-lived asset ledger.
• Inspect documentation of tangible long-lived asset requisition forms for authenticity.
• Test a sample of maintenance expenditures to evaluate compliance with the written
policy which establishes whether an item is to be considered a capital expenditure or a
routine maintenance expenditure.
• Evaluate the effectiveness and appropriateness of the written policy used to distinguish
capital expenditures from maintenance expenditures.
• Compare costs and prices on a sample of tangible long-lived asset requisition forms to
established list prices to determine reasonableness.
• Compare sale or scrap prices on a sample of vouchers used to document departmental
requests for sale, retirement, or scrapping of tangible long-lived assets to established list
prices to determine reasonableness.
• Review tangible long-lived asset budget reports and note management's explanation of
any significant variances.
• Scan the tangible long-lived asset ledger for unusually large or small items.
• Through review of relevant documentation and inquiry of appropriate personnel
determine that tangible long-lived asset records are maintained by persons other than
those who are responsible for custody and use of the assets.
• Agree the identification numbers of a sample of fixed assets to those shown in the
tangible long-lived asset ledger.
• Through review of relevant documentation and inquiry of appropriate personnel, verify
that periodic physical inventories of tangible long-lived assets are taken for purposes of
reconciliation to the tangible long-lived asset ledger as well as appraisal for insurance
purposes.
• Through review of relevant documentation and inquiry of appropriate personnel,
substantiate that periodic physical inventories of tangible long-lived assets are taken
under the supervision of employees who are not responsible for the custody of record
keeping for the tangible long-lived assets.
• Through review of relevant documentation and inquiry of appropriate personnel,
investigate whether significant discrepancies between the tangible long-lived asset ledger
and physical inventories are reported to management.
12-50
CONTROL POSSIBLE TESTS OF CONTROLS

Management authorizations are required for For selected intangible asset transactions
intangible asset transactions. inquire of management as to the authorization
process and review documentation of the
appropriate authorizations.
Documentation regarding intangible assets For selected intangible assets, review
should be maintained and such documentation documentation and assess reasonableness of
should include: management estimates
12-9
o Manner of acquisition (e.g.,
purchased, developed internally),
o Basis for the capitalized amount,
o Expected period of benefit, and
amortization method.
Amortization periods and calculations should For selected items, inquire of management
be approved and periodically reviewed by regarding this process, review documentation
appropriate personnel. supporting the process, and recompute
calculations.
12-51
• To detect fictitious assets, the auditor should have traced recent recorded acquisitions of
long-lived asset accounts to original source documents; doing so would have enabled the
auditor to realize that such documents did not exist.
• For improper depreciation, the auditor should have compared depreciation expense over a
period of time, adjusting for the volume of business and the number of trucks used. The
decrease in depreciation per truck should have led to more detailed investigation,
including tests of depreciation on each truck.
• For the impairment issue, the auditor should have compared current earnings with future
expected earnings that were predicted when the goodwill was initially recorded. A
dramatic decrease in current earnings signals the need for an impairment adjustment. As
discussed in a later chapter, there is a formalized approach to be used in determining
goodwill impairment
• For the impaired assets, the auditor should have noted (a) the relative age of the assets
(net book value has decreased), (b) idle equipment during a tour of the factory, and (c)
should have traced apparently idle assets to the books.
• For the assets overvalued at acquisition, the auditor should have determined if the
company had used a reputable and certified independent appraiser. If the auditor had
doubts, he or she should have hired an appraiser (auditor expert/specialist) to form an
independent opinion.
12-52
Compute the average balance: ($380,500 + $438,900) / 2 = $409,700

Adjust for the salvage value: $409,700 * .9 = $368,730
Compute the annual depreciation expense: $368,730 / 6 = $61,455.
Once the auditor has developed an expectation of the account balance, the auditor will compare
that expectation with the amount recorded by the client. If the difference between the two
amounts is less than the threshold (based on level of materiality) set by the auditor, the auditor
would conclude that the recorded depreciation expense is reasonable. Although the problem did
not provide details on the auditor’s threshold, it is reasonable to believe that the difference
between the auditor’s expectation and the client’s recorded amount in this problem would be
below that auditor’s threshold. Thus, the auditor would likely conclude that the recorded
12-10
depreciation expense of $60,500 appears reasonable, given the auditor’s expectation of $61,455.
Given the results of this substantive analytical procedure, the auditor will likely not need to
perform any additional substantive tests of details.
12-53
The audit approaches applicable to identifying and determining the proper accounting of fully
depreciated or idle facilities would include:
• The auditor should tour the client facilities and make inquiries concerning idle
equipment. The auditor should note all idle equipment to be subsequently traced to the
property ledger. Discussions with management about these issues will also be helpful.
• GAS could be used to develop a schedule of fully depreciated assets. A sample could be
taken and the auditor could attempt to physically observe the asset and determine whether
it is in production and whether a scrap value is appropriate.
12-54
The client has a policy that apparently has been used for a number of years. Assignment of assets
to classes for depreciation purposes is common and represents an expedient method of dealing
with depreciation issues. The auditor can determine the reasonableness of the classification
schemes by:
• Reviewing previous data on the asset's productive life (within each category)
• Reviewing IRS guidelines for classification and reasonableness in comparison with the
company's categories and life guidelines
• Noting significant gains/losses on disposal (suggesting potentially inappropriate asset
lives).
12-55
The general concept of valuing impaired assets consists of two major approaches:
• Estimating the future economic benefits to be derived from the asset. The auditor would
evaluate management’s assumptions and estimates for reasonableness.
• Obtaining an independent appraisal of current value. The auditor could either assess the
competence and independence of the appraiser hired by management and the
reasonableness of the assumptions used and/or the auditor could obtain an independent
appraisal of the value of the asset.
12-56
The auditor must make sure the appraisal is reasonable. The auditor should consider the
qualifications and certification of the appraiser and appropriateness of the assumptions used by
12-11
the appraiser. The auditor may also need to use an auditor specialist/expert to assist with these
audit procedures.
12-57
General substantive procedures for leases include:
• Obtain copies of lease agreements, read the agreements, and develop a schedule of lease
expenditures.
• Review the lease expense account, select entries to the account, and determine if there are
entries that are not covered by the leases obtained from the client. Review to determine if
the expenses are properly accounted for.
• Review the relevant criteria from FASB ASC to determine which leases meet the
requirement of capital leases.
• For all capital leases, determine that the assets and lease obligations are recorded at their
present value. Determine the economic life of the asset. Calculate amortization expense
and interest expenses, and determine any adjustments to correct the financial statements.
• Develop a schedule of all future lease obligations or test the client’s schedule by
reference to underlying lease agreements to determine that the schedule is correct.
• Review the client’s disclosure of lease obligations to determine that it is in accordance
with GAAP.
12-58
Items 1 through 6 could have been found in the following way:
1. The company's policies for depreciating equipment are available from several sources:
• The prior-year's audit working papers and permanent file.
• Footnote disclosure in the annual report and SEC Form 10-K.
• Company procedures manual.
• Detailed fixed asset records.
• Inquiry of relevant client personnel.
2. The ten-year lease contract would be found when supporting data for current year's
equipment additions were examined. Also, it may be found by a review of company lease and
contract files.
3. The building wing addition would be apparent by the addition to buildings during the
year. The use of the low construction bid amount would be found when support for the addition
was examined. When it was determined that this inappropriate method was followed, the actual
costs were determined by reference to construction work orders and supporting data. The wing
was also physically observed by the auditor.
4. The paving and fencing was discovered when support was examined for the addition to
land. These costs should be charged to Land Improvements and depreciated.
12-12
5. The details of the retirement transactions were determined by examining the sales
agreement, cash receipts documentation, and related detailed fixed asset record. This
examination would be instigated by the recording of the retirement in the machinery account or
the review of cash receipts records.
6. The auditor would become aware of a new plant in several ways:
• Volume would increase.

• Account details such as cash, inventory, prepaid expenses, and payroll would be
attributed to the new location.
• The transaction may be indicated in documents such as the minutes of the board, press
releases, and reports to the stockholders.
• Property tax and insurance bills examined show the new plant.
• Inquiry of appropriate client personnel.
One or more of these factors would lead the auditor to investigate the reasons and
circumstances involved. Documents from the city and appraisals would be examined to
determine the details involved.
12-59
a. Impairment of assets refers to long-lived tangible assets and certain identifiable

intangibles to be held and used by an entity for which events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the entity should estimate the future cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of
an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset.
b. Management’s motivation will depend on the specific facts and circumstances. In some
settings, management may follow the so-called big bath theory and take very large write-offs
when any write-off occurs. The rationale for this approach is that the market seems to be
forgiving, especially if there is a change in management and the new management can blame the
problems on the previous management. If the write-off is large, then it decreases the amount of
assets that might be charged against earnings in the future. In some settings, the investment
public is skeptical of the large write-offs and has recognized such write-offs as a symbol of
management failure. Thus, managers will resist taking any write-offs unless there is compelling
evidence that there has been impairment in assets.
12-13
However, it is important to recognize that management will want to understate expenses, and
thus overstate income, and so will want to understate the write-off. The auditor has to be aware
of management’s incentives when assessing the nature and type of potential misstatements.
c.
Step 1. Identify the ethical issue. The ethical issue is that the auditor believes that her estimate is
correct, and knows that it is materially lower than management’s estimate of the impairment.
Allowing the client to record its estimate may keep the client happy, but will result in financial
statements that are misleading.
Step 2. Determine who are the affected parties and identify their rights. There are various
affected parties:
• shareholders, who have a right to accurate financial information
• the audit committee and board, who have a right to know that the auditor and management
are having a material disagreement
• management, who has a right to uphold their own valid, defensible professional opinions
• the auditor and audit firm, who have a right to exercise their own professional judgment and
to minimize potential litigation against themselves
• tax authorities, who have a right to expect that management will make tax deductions that are
reasonable and appropriate
Step 3. Determine the most important rights. The most important rights are likely those of
shareholders, followed by the audit committee and board as major players in the corporate
governance of the company. The tax authorities represent society in general, so their rights are
also quite important.
Step 4. Develop alternative courses of action. The auditor could pursue various courses of action:
a. Try again to convince management that the auditor’s estimates are

superior.
b. Alert the audit committee of the disagreement and let them help to resolve
it.
c. Threaten management with a qualified audit opinion if they refuse to
acquiesce to the auditor’s preference.
d. Resign from the engagement.
Step 5. Determine the likely consequences of each proposed course of action.
a. Trying to convince management may or may not work. If it does work, then
the situation is resolved. If it does not work, the relationship between the
auditor and management will likely become even more strained.
b. Alerting the audit committee is required by professional standards. While it
may annoy management, the auditor can fall back on the requirement to
discuss such issues with the audit committee.
12-14
c. Threatening management will obviously strain the relationship with the
auditor, but it may be successful in getting management to see the auditor’s
point of view.
d. Resigning is the last resort as it is a fairly extreme measure, and will result in
public disclosure of the disagreement for the company, and loss of revenue for
the audit firm.
Step 6. Assess the possible consequences, including an estimation of the greatest good for the
greatest number. The auditor is required via professional standards to alert the audit committee,
and doing so will likely enable the auditor to (a) re-think their estimate if the audit committee
convincingly challenges their calculations, or (b) use the interaction to convince management to
use the correct valuation in the impairment. Ultimately, the process of interacting with the audit
committee and management will enable all parties to determine the most appropriate impairment
calculation. The revelation of that amount to shareholders and tax authorities will result in the
greatest good for the greatest number.
Step 7. Decide on the appropriate course of action. The auditor should first try to convince
management to change the estimate, and even if they succeed in doing so the auditor must alert
the audit committee to the situation.
12-60
a. The main difficulty that the auditor faces in determining whether the charges are
reasonable is to understand management’s estimation procedures and to decide if they are
reasonable. The auditor will have to understand the following types of decisions:
• Which third party offers were used in the calculations? How did management choose
which offers to use if there were multiple offers?
• What is the appropriate discount rate for the discounted future cash flow calculations?
• Is it appropriate to completely write off the Falkirk, Scotland assets? Or is management
possibly setting up a cookie jar reserve by doing so?
b. The consequences of the auditor’s decisions are associated with providing reasonable
assurance that no fixed assets are inappropriately over-valued on the balance sheet (with
resulting under-expensing of impairment charges on the income statement) or under-valued on
the balance sheet (with resulting over-expensing of impairment charges on the income
statement).
c. The risks are those associated with inaccurate financial reporting, particularly if the
impairment charges are material to the client’s financial statements. The uncertainties involve the
estimates, for example, is a 7% discount rate correct, or should it be 5%?
d. The auditor can gather various types of evidence including:

• Documentation of management’s estimation process and assumptions
• Documentation that includes third-party offers and negotiations
• Confirmations with third parties
12-15
• Comparisons of fixed asset values with competitors
• Understanding and documenting management’s potential motivations for under- or over-
expensing the impairment charges
• Obtaining current market values of assets.
Fraud Focus: Contemporary and Historical Cases
12-61
a. IRG’s lease accounts and fixed asset accounts (including related deprecation charges)
were misstated.
b. While the textbook feature does not provide information specifically related to
management motivation and does not suggest that management acted fraudulently, students will
likely note that the company recently went public and may have intentionally misstated the
financial statements so that the public offering would be more successful. The motivation,
coupled with opportunity due to weak internal controls, is often highlighted by students.
c. Typical controls that affect multiple assertions for long-lived assets include:
• Formal budgeting process with appropriate follow-up variance analysis
• Written policies for acquisition and disposals of long-lived assets, including required
approvals
• Limited physical access to assets, where appropriate
• Periodic comparison of physical assets to subsidiary records
• Periodic reconciliations of subsidiary records with the general ledger
Further, controls should be in place to:

• Identify existing assets, inventory them, and reconcile the physical asset inventory with
the property ledger on a periodic basis (existence).
• Provide reasonable assurance that all purchases are authorized and properly valued
(valuation).
• Appropriately classify new equipment according to its expected use and estimate of
useful life (valuation).
• Periodically reassess the appropriateness of depreciation categories (valuation).
• Identify obsolete or scrapped equipment and write the equipment down to scrap value
(valuation).
• Review management strategy and systematically assess the impairment of assets
(valuation).
With respect to the lease accounts, the company should have policies and procedures requiring
review all of leases by a qualified lease accountant to provide reasonable assurance over proper
recording of those transactions.
d. The auditors should have gained an understanding of the client’s internal controls over
these long-lived assets. If the controls were not well designed (or determined not to be operating
12-16
effectively), the auditors should have increased the assurance they needed regarding whether the
asset accounts were materially misstated. For the lease audit, the auditors could perform the
following:
• Obtain copies of lease agreements, read the agreements, and develop a schedule of lease
expenditures.
• Review the lease expense account, select entries to the account, and determine if there are
entries that are not covered by the leases obtained from the client. Review to determine if
the expenses are properly accounted for.
• Review the relevant criteria from FASB ASC to determine which leases meet the
requirement of capital leases.
• For all capital leases, determine that the assets and lease obligations are recorded at their
present value. Determine the economic life of the asset. Calculate amortization expense
and interest expenses, and determine any adjustments to correct the financial statements.
• Develop a schedule of all future lease obligations or test the client’s schedule by
reference to underlying lease agreements to determine that the schedule is correct.
• Review the client’s disclosure of lease obligations to determine that it is in accordance
with GAAP.
As for the tangible long-lived assets, a great deal of this chapter is focused on appropriate
substantive procedures for both the asset and expense accounts. Further, Exhibit 12-4 outlines
possible procedures that the auditor could have performed.
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a. Yes, it would be highly unusual for debits to fixed assets to come from adjusting journal
entries. Most debits to fixed assets should come from purchases of the assets and should be
evidenced by invoices and contracts. The auditor should view significant amounts of debits to
fixed asset as high risk and should investigate all of the entries if the aggregate amount could be
significant or material.
b. No, entries to depreciation expense and accumulated depreciation should normally come
from adjusting journal entries. However, the journal entries should come from an automated
computer program. Thus, the auditor should trace the summary entries back to the detail
computation for specific items.
c. An explanation of “Capitalization of line capacity per CFO, amounts were originally

incorrectly recorded as an expense” is a highly unusual description of a transaction. The auditor
should be highly skeptical because it does not appear to be supported by outside, objective
evidence. The client claims it is misclassified as an expense. The auditor should seek the
following evidence:
• Ask the client to examine the original invoice, contract, and other information associated
with the original payment for the goods, services, or fixed asset.
• The auditor should examine the invoice to determine the nature of the purchase.
12-17
• The auditor should determine that the document that is examined was not used to support
other purchases, that is, the auditor should be suspicious of the information because it is
all obtained internally. The auditor should be concerned that one invoice might serve as
support for this journal entry and another purchase.
• The auditor should use GAS to prepare a list of all other purchases from the vendor. The
auditor should trace the purchases to invoices and to proper recording in the accounts.
• The auditor should consider confirming the total amount of purchases with the outside
vendor.
Significant differences should be recorded as misstatements and projected to the statements as a

whole. If the auditor has suspicions that other such misstatements might exist in the accounts, the
auditor should use GAS to schedule all entries to the account balance that come from other than
the purchase journal and should investigate all of the entries in a similar manner.
12-63
a. The statement of facts for this case reveals that company management had made
promises (earnings expectations) to investors and Wall Street that were not going to materialize,
thereby suggesting the motivation for management. Further, it is likely that the controls in place
were not very effective. While Safety-Kleen had policies prohibiting the types of fraudulent
entries that were being made, presumably there was no monitoring or review of adherence to
these policies. And students can often see how management might provide rationalizations for
the fraud (for example, not our fault the numbers are not being meant, we shouldn’t suffer
because of something outside of our control, etc.).
b. It is important to note that this response has the benefit of hindsight. However, analytical
procedures (either planning or substantive) should have noted the increases in quarter end
adjustments, with rather significant adjustments occurring in the 3rd and 4th quarters of 1999.
Further, the 2000 1st quarter adjustment was quite a bit larger than the previous 1st quarter
adjustment. The case states that these adjustments in 1999 were significantly higher than the
adjustments in previous. We assume that these balances in 1999 and 2000 were different than
what an auditor, knowledgeable of the industry, would expect. Therefore, the auditor should
have followed up on these unexpected account balances to determine if there was supporting
documentation to validate the balances. The statement of facts for the case indicates that for the
$7.3 million of fraudulent adjustments to capitalize the tires on the company's trucks and the fuel
in the tanks, a company executive sketched these adjustments on graph paper, without any
analysis or documentation to support them.
The problem states that one of the adjusting entries was recorded twice. The use of GAS or other
procedures should have identified this duplicate recording.
Further, the auditor should likely have selected capitalized items and reviewed documentation to
determine whether the capitalization was appropriate or whether the items (such as salary
expense) should have been expensed.
12-18
Students might also expect that audit work in the area of payroll expenses might have identified
an unexpected decrease in payroll expenses and that follow-up of this unexpected result might
have identified the inappropriate capitalization.
Application Activities
12-64
The point of this exercise is to get students to access online financial reports, to see the
relationship to conceptual auditing topics involving impairments, and to read and interpret
financial statement disclosures. Further, discussing each student’s findings in a small group or
even as an entire class may prove beneficial in stimulating conversation about the nature of
impairment charges, their causes, their magnitudes, and implications for the external auditor in
terms of assessing reasonableness of the estimates made by management.
There are many recent examples that students might find including:
• In 2014, Caesars Entertainment Corp. posted a large quarterly loss after taking a hefty
impairment charge. The casino corporation said it took goodwill and asset-impairment
charges because of the continuing slump in Atlantic City and expectations that some
property holdings may not last as long as expected.
• Best Buy, for the fiscal year ended March 3, 2012
• Sears Holding Corporation, for the fiscal year ended January 28, 2012
• AT&T Inc., for the fiscal year ended December 31, 2011
For a less recent example, consider that Starbuck’s recorded a $224 million impairment charge in
2009, and that was following a $325 million impairment charge in 2008. These impairment
charges were associated with a significant slowdown in the Company’s expansion, with fewer
store openings attributed to reduced demand and a steep decline in discretionary consumer
spending related to the recession. Note 2 of Starbuck’s Annual Report provides a nice summary
of the Company’s restructuring plan.
While the judgments that management made may vary across the selected companies, typical
judgments that management makes concern expected useful lives of long-lived assets,
undiscounted cash flows, and anticipated changes in economic conditions and operating
performance. Necessarily, these types of estimates are by definition uncertain. Thus, the job of
the auditor is to assess their reasonableness and to be professionally skeptical of the numbers
produced by management based upon these estimates.
12-65
DRG Audits- Excerpts from PCAOB Order
DRG reported in the notes to its 2008 financial statements that it had incurred advertising
expenses during 2008 and that it had capitalized approximately $840,000 of those expenses as
12-19
"direct response advertising" pursuant to AICPA Statement of Position ("SOP") 93-7, Reporting
on Advertising Costs (December 29, 1993). DRG's capitalized direct response advertising
balance for 2008 represented an increase of over 350% from the prior year and constituted 21%
of DRG's total reported assets.
SOP 93-7 provides that a company may only capitalize advertising expenses as direct response
advertising if (1) the primary purpose of the advertising "is to elicit sales to customers who could
be shown to have responded specifically to the advertising;" and (2) the advertising "results in
probable future benefits." In addition, SOP 93-7 states that direct response advertising costs
reported as assets are to be "amortized on a cost-pool-by-cost-pool basis over the period during
which the future benefits are expected to be received.”
During the 2008 audit, JSW failed to exercise due professional care and failed to obtain
sufficient audit evidence to conclude that DRG was appropriately capitalizing, as opposed to
expensing, the costs it reported as direct response advertising. Specifically, JSW failed to obtain
audit evidence indicating that sales were to customers responding specifically to the advertising.
Nor did JSW obtain sufficient competent audit evidence indicating that the advertising would
result in probable future benefits to DRG. In addition, JSW failed to perform any procedures to
evaluate whether DRG was appropriately amortizing the amounts it capitalized as direct response
advertising. Indeed, JSW's work papers include a schedule, provided by DRG, indicating that the
company was not amortizing those amounts.
DDM Audits- Excerpts from PCAOB Order
As of year-end 2008, more than 75% of DDM's total reported assets were classified as intangible
assets and consisted mostly of website and platform development costs for an unlaunched
product. During the 2008 audit, JSW failed to ensure that the engagement team appropriately
tested DDM's intangible asset balance for impairment. The work papers reflect that
management's basis for not recognizing an impairment on its intangible assets in 2008 was a cash
flow projection. JSW, however, performed no procedures to assess the reasonableness of the
cash flow projection, including the relevance, sufficiency, and reliability of the data supporting
the projection and the assumptions management made in formulating the projection. In addition,
the untested cash flow projection was inconsistent with JSW's conclusion that there was
substantial doubt as to DDM's ability to continue operating as a going concern.
Sanctions
Accordingly, it is hereby ORDERED that: A. Pursuant to Section 105(c)(4)(E) of the Act and
PCAOB Rule 5300(a)(5), Jewett, Schwartz, Wolfe & Associates, P.L. is hereby censured.
Pursuant to Section 105(c)(4)(A) of the Act and PCAOB Rule 5300(a)(1), the registration of
Jewett, Schwartz, Wolfe & Associates, P.L. is revoked.
After five (5) years from the date of this Order, Jewett, Schwartz, Wolfe & Associates, P.L. may
reapply for registration by filing an application pursuant to PCAOB Rule 2101.
12-20
Student discussion as to the severity and appropriateness of the sanctions can be quite lively.
12-66
The following excerpts from the speech provide useful points of discussion including the
difficulty of measuring intangible assets, the potential for abuse, and the constraints imposed by
the accounting standards.
One of the biggest measurement dilemmas relates to intangible assets. We know that they are there. While the value of
Facebook’s tangible assets is relatively limited, its business concept is immensely valuable (although 25% less immense
than a month ago).
Likewise, the money-making potential of pharmaceutical patents is often quite substantial. However, both types of intangible
assets go unrecorded (or under-recorded) on the balance sheet. Under strict conditions, IAS 38 Intangible Assets allows for
limited capitalisation of Development expenditures, but we know the standard is rudimentary because it is based on
historical cost, which may not reflect the true value of the intangible asset.
The fact is that it is simply very difficult to identify or measure intangible assets. High market-to-book ratios may provide
indications of their existence and value. However, after the excesses of the dot.com bubble, there is understandable
reluctance to record them on the balance sheet.
Pragmatism also means we need to look very carefully at any possible undesirable use of our standards. Whenever we are
confronted with a high degree of uncertainty, we should act with great caution. I just gave the example of intangible assets.
We know they are there, but measurement is a big problem. If our standards were to provide too much room for recognition
of intangible assets, the potential for mistakes or abuse would be immense.
In such circumstances, it is better for our standards to require more qualitative reporting than pseudo-exact quantitative
reporting.
By the way, people always tell us we should not set our standards from an anti-abuse perspective. I think that is nonsense. If
we see ample scope for abuse in a standard, we had better do something about it. There are sufficient temptations and
incentives for creative accounting as it is.
These excerpts highlight the difficulty of auditing intangible assets—if the asset is difficult to
measure, it will be difficult to audit. Estimation and uncertainty make audits of intangibles
extremely challenging and highlight the importance of professional skepticism.
12-67
The appropriate standard is AU-C Section 620, Using the Work of an Auditor’s Specialist. The
AICPA issues the standards that relevant to auditors of non-public companies (non-issuers).
In terms of the qualifications of the specialist, AU-C 620.09 notes:
The auditor should evaluate whether the auditor's specialist has the necessary
competence, capabilities, and objectivity for the auditor's purposes. In the case of an
auditor's external specialist, the evaluation of objectivity should include inquiry regarding
interests and relationships that may create a threat to the objectivity of the auditor's
specialist.
12-21
The student will likely also include information from paragraphs A15-A22, as these paragraphs
provided additional application guidance on the competence, capabilities, and objectivity of the
auditor’s specialist.
As to whether the specialist should be mentioned in the audit report, AU-C 620.14-15 notes:
The auditor should not refer to the work of an auditor's specialist in an auditor's report
containing an unmodified opinion.
If the auditor makes reference to the work of an auditor's external specialist in the
auditor's report because such reference is relevant to an understanding of a modification
to the auditor's opinion, the auditor should indicate in the auditor's report that such
reference does not reduce the auditor's responsibility for that opinion.
Further, AU-C 620.A44 notes:
It may be appropriate to refer to the auditor's external specialist in an auditor's report

containing a modified opinion to explain the nature of the modification. In such
circumstances, the auditor may need the permission of the auditor's specialist before
making such a reference.
12-68
The appropriate standard is AU-C Section 540 Auditing Accounting Estimates, Including Fair
Value Accounting Estimates, and Related Disclosures. The AICPA issues the standards that
relevant to auditors of non-public companies (non-issuers).
AU-C 540.21 notes that:
The auditor should review the judgments and decisions made by management in the making
of accounting estimates to identify whether indicators of possible management bias exist.
Indicators of possible management bias do not, themselves, constitute misstatements for the
purposes of drawing conclusions on the reasonableness of individual accounting estimates.
AU-C 540.A133-A134 provides additional guidance:
During the audit, the auditor may become aware of judgments and decisions made by
management that give rise to indicators of possible management bias (see paragraph .A9).
Such indicators may affect the auditor's conclusion about whether the auditor's risk
assessment and related responses remain appropriate, and the auditor may need to
consider the implications for the rest of the audit. Further, they may affect the auditor's
evaluation of whether the financial statements as a whole are free from material
misstatement, as discussed in section 700, Forming an Opinion and Reporting on
Financial Statements.
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Examples of indicators of possible management bias with respect to accounting estimates
include the following:
• Changes in an accounting estimate, or the method for making it, when management has
made a subjective assessment that there has been a change in circumstances
• The use of an entity's own assumptions for fair value accounting estimates when they
are inconsistent with observable market assumptions
• The selection or construction of significant assumptions that yield a point estimate
favorable for management objectives
• The selection of a point estimate that may indicate a pattern of optimism or pessimism
Academic Research Cases
12-69
a. From late 2004 to mid-2006 more than 250 U.S. firms uncovered and corrected
accounting errors related to operating leases. The underlying issue was that the accounting
method used was in violation of generally accepted accounting principles (GAAP). Many of
these companies filed restated financial statements with the SEC, while many other companies
elected to use a less visible current-period catch-up adjustment. GAAP allows companies to
avoid formal restatements when the error is deemed immaterial by management and the
independent auditor. This setting is one where materiality considerations are likely to be the
dominant influence on whether the correct the error through a restatement or through a catch-up
adjustments. Accordingly, this setting allows for the authors to test the role of various materiality
related factors (quantitative and qualitative) in explaining which correction method a company
used. (The authors also consider whether the method previously used by other companies in the
same industry influences the materiality decisions, and hence the correction method used.)
Regulatory bodies provide general guidance on assessing materiality; however, the guidance is
vague, at best. That leaves the question of materiality to the judgment of company management
and the auditor.
b. The results of the research indicate that the materiality judgment (and hence the judgment
regarding the correction method) is based on more than a purely quantitative approach (for
example, 5 percent of net income). Qualitative factors such as scaled magnitude of the error,
presence of other identified errors, and the importance of leasing activities to firm operations
play an important role in the determination of materiality. Firms’ materiality assessments are also
heavily associated with the prior actions of other firms.
c. In settings where a decision has to made as how to correct an error, there is likely a fair
amount of negotiation between the auditor and the client (preparer). Auditors and their clients
will find it useful to understand the determinants of this decision and whether their own
decisions seem reasonable given the evidence in this paper. It may be that auditors provide some
recommendations to clients on this issue; evidence in this paper could be used to support the
auditor’s recommendation and potentially help avoid placing the auditor in a legal liability
situation.
12-23
At least in the setting examined in the paper, it appears that materiality assessments are pretty
consistent across firms. However, the auditing standard setters might consider providing more
specific materiality guidelines for auditors to follow. This would reduce the amount of judgment
required on behalf of the auditor and management, and may be useful in other settings requiring
materiality assessments. The financial statements of companies would be more consistent and
provide more meaningful information to the investors who are comparing company financials
thereby increasing the value of audited financial statement.
d. The initial sample of companies to use for this research was gathered from the investment
newsletter “Analysts’ Accounting Observer” supplemented by companies found in wire service
press releases and SEC filings. The final sample consisted of 244 firms which included 150 firms
that used restatements to correct lease accounting errors and 91 that used current-period
adjustments. To gain insights in to the factors that affected a company’s decision regarding its
lease correction method, the authors use a logistic regression model of the likelihood that
restatement is used to correct the discovered lease accounting errors. Explanatory variables in the
model included quantitative factors, qualitative factors, and contextual variables.
e. The archival research method used for this paper is subject to certain limitations. For
example, some disclosures regarding correction of the error were not specific as to the dollar
amount of the error and thus were not included in the analysis. Further, there may be variables
other than the ones examined that influenced companies’ corrections methods and if these
variables were included, the results might be different. Further, data limitations do not allow for
the authors to provide evidence on whether auditors differ in the determinants (and weights
placed on those determinants) of error correction decisions and materiality assessments.
12-70
a. This paper addresses the issue of client negotiation in an asset write-down setting. Asset
write-downs can be highly judgmental audit areas, and the amounts reported in financial
statement for such highly judgmental audit areas are a product of auditor-client negotiation. This
paper specifically addresses how an auditor characteristic (negotiation experience) and a client
characteristic (negotiation style) can impact the outcomes of negotiation and thus impact the
amounts reported in the financial statements. The authors examine how these characteristics
influence auditors’ perceptions of negotiation outcomes at the beginning of negotiations.
Namely, the authors ask the participants to predict the ultimate outcome of a negotiation prior to
engaging in dialogue with the client. This study examines the impact of the aforementioned
characteristics on this prediction.
b. The authors find that auditor negotiation experience affects auditors’ predictions of the
ultimate outcome of negotiations, but only in situations where the client uses a contentious
negotiating style. Specifically, higher auditor negotiation experience leads auditors to predict a
higher ultimate write-down when a client uses a contentious negotiating style. However, when a
client uses a collaborative negotiating style, auditor negotiation experience does not affect
auditors’ predictions of the ultimate write-down. The authors note these results suggest that
auditor negotiation experience reaps benefits when it is needed most (i.e., when the client is
difficult to deal with). Similarly, the authors show that the effect of client negotiation style on
12-24
auditors’ perceived outcomes is contingent on auditor negotiation experience. Specifically, they
note that inexperienced auditors perceive a lower ultimate negotiated write-down when dealing
with a contentious client, rather than a collaborative client. However, experienced auditors
perceived negotiated write-downs are not affected by clients’ negotiation styles.
c. This paper shows that a client’s negotiation style can affect the amounts reported in the
financial statements. This finding indicates that auditors may benefit from considering clients’
negotiation styles in their decision-making. For example, auditors may benefit from considering
client negotiation style in resource management decisions. The authors note that audit firms
could benefit from assigning auditors with greater negotiation experience to negotiate with
clients who are known to be contentious during client-auditor negotiations. Further, the results
suggest that audit firms could implement policies that encourage inexperienced auditors to seek
assistance in negotiating with contentious clients.
Additionally, auditors can consider client negotiation style in the client acceptance and the
evidence evaluation (completion) stages of the audit. With respect to client acceptance, audit
firms may increase efficiency and profitability by considering the risks and potential resource
demands on engagements for clients that are known to be contentious in negotiation. Further,
audit firms can enhance their risk management procedures through enhanced reviews of final
audited financial statements for clients with contentious financial statements. For example, firms
may consider enhanced concurring review for such clients.
d. The authors perform an experiment using 20 partners (average of 12.1 years of

experience) and 76 managers (average of 7.2 years of experience) from a Big 4 CPA firm in
China during a regular training session. The authors randomly assigned each auditor to one of
two groups: 1) contentious client negotiating style and 2) collaborative negotiating style. The
authors distributed materials indicating the audit team identified an audit adjustment for an
additional asset write-down of $1.8 million, where the materiality level for the overall financial
statements was $1.9 million. Participants in the contentious group were told that the CFO had
previously adopted a tough stand, was typically reluctant to record audit adjustments, and had
expressed reservations in recording the current adjustment. Participants in the collaborative
group were told that the CFO had previously been reasonable, was generally open to discussions
of audit adjustments, and had expressed willingness to consider the current audit adjustment. The
authors then asked the participants in both groups the following question: “Suppose that you
have had a few rounds of discussions with the client’s manager. Indicate the amount of the
proposed audit adjustment that you believe will ultimately be recorded in the client’s audited
financial statements.” As part of the experiment, the authors measured auditor negotiation
experience by asking each participant to indicate the number of auditor-client interactions they
had completed in the past three years to resolve 1) a complex and material financial reporting
issue and 2) a complex financial reporting issue that approached materiality. The authors
averaged the responses to these two questions to calculate a measure of negotiating experience.
Using the data collected, the authors measured the effects of auditor negotiation experience and
client negotiation style on the perceived amount of the ultimate audit adjustment. The authors
find that when the client negotiating style is contentious, auditor negotiation experience has a
significant effect on the perceived amount. However, auditor negotiation experience has no such
12-25
effect when the negotiating style is collaborative. Similarly, the authors find that when auditor
negotiation experience is low, client negotiating style has a significant effect on the perceived
amount. However, client negotiating style has no such effect when auditor negotiation
experience is high.
e. The authors self-identify four limitations of this study:

• The authors use a self-reported measure of negotiation experience to measure auditor
expertise. Self-reported measures are susceptible to bias, and experience does not
necessarily constitute expertise.
• The audit adjustment used in the study was not quantitatively material. The results may
have been different if this adjustment was quantitatively material
• This study does not consider several key considerations that can affect auditor-client
negotiations: concern over losing the client, auditors’ preferred write-downs and goals,
auditors’ strategies.
• The authors do not measure an actual outcome of an actual negotiation; rather, they only
measure auditors’ perceived outcome. This measure does not consider the iterative, rich,
and complex nature of negotiation.
Additional weaknesses to consider may include:

• This experiment was performed in China. Cultural differences could limit the
generalizability of these results.
• The authors do not appear to control for the position of the participants (i.e., manager vs.
partner)
• The authors do not explain why auditor negotiation experience might even matter in
negotiations with a collaborative client. For example, if a client is collaborative, then
there may be no reason to believe negotiation will matter. Without this tension, the
contribution of this research is limited.
• The results indicate that while an auditor’s negotiation experience and a client’s
negotiating style may effect auditor-client negotiations, the results do not indicate that
auditors allow material misstatements to go uncorrected. Thus, while the results are
interesting, there is no evidence that the characteristics examined in this study have a
meaningful effect on the outcomes of audits.
Ford and Toyota
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Note to instructor: The solutions based upon the FYE 2012 annual reports for Ford and Toyota
are posted at the Cengage web site for the 9th edition of this text. The solutions for FYE 2014
will be posted at the Cengage web site for the 10th edition of this text.
12-26
Another random document with
no related content on Scribd:
the approval of the governor of the islands, authorize the
cities and towns to form among themselves associations or
communities for determined ends, such as the construction of
public works, the creation and foundation of beneficent,
charitable, or educational institutions, for the better
encouragement of public interests or the use of communal
property.
{389}
"ARTICLE 54.
It shall be the duty of commanding officers of military
districts, immediately after the publication of this order, to
recommend to the office of the military governor in which towns
within their commands municipal governments shall be
established, and upon approval of recommendations, either
personally or through subordinate commanders designated by
them, to issue and cause to be posted proclamations calling
elections therein. Such proclamations shall fix the time and
place of election and shall designate three residents of the
town who shall be charged with the duty of administering
electors' oaths; of preparing, publishing, and correcting,
within specified dates, a list of electors having the
qualifications hereinbefore set forth, and of presiding at and
making a due return of the election thus appointed. The
proclamation shall specify the offices to be filled, and in
order to determine the number of councilors the commanders
charged with calling the election shall determine, from the
best available evidence, the class to which the town belongs,
as hereinbefore defined; the classification thus made shall
govern until the taking of an official census. The first
alcaldes appointed under the provisions of this order shall
take and subscribe the oath of office before the commanding
officer of the military district or some person in the several
towns designated by said commanding officer for the said
purpose; whereupon the alcalde so sworn shall administer the
said oath of office to all the other officers of the municipio
there elected and afterwards appointed. The election returns
shall be canvassed by the authority issuing the election
proclamation, and the officers elected shall assume their
duties on a date to be specified by him in orders.
"ARTICLE. 55.
Until the appointment of governors of provinces their duties
under this order will be performed by the commanding officers
of the military districts. They may, by designation, confer on
subordinate commanding officers of subdistricts or of other
prescribed territorial limits of their commands the
supervisory duties herein enumerated, and a subordinate
commander so designated shall perform all and every of the
duties herein prescribed for the superior commanding officer.
"ARTICLE. 56.
For the time being the provisions of this order requiring that
alcaldes be elected, in all cases shall be so far modified as
to permit the commanding officers of military districts, in
their discretion, either to appoint such officers or to have
them elected as hereinbefore prescribed. The term of office of
alcaldes appointed under this authority shall be the same as
if they had been elected; at the expiration of such term the
office shall be filled by election or appointment.
"ARTICLE 57.
The governments of towns organized under General Orders No.
43, Headquarters Department of the Pacific and Eighth Army
Corps, series 1899, will continue in the exercise of their
functions as therein defined and set forth until such time as
municipal governments therefor have been organized and are in
operation under this order."
United States, 56th Congress, 1st Session,

House Document Number 659.
PHILIPPINE ISLANDS: A. D. 1900 (April).

Appointment of the Second Commission to the Philippines and
the President's instructions to it.
Steps to be taken towards the establishment of civil
government, and the principles to be observed.
On the 7th of April, 1900, the President of the United States

addressed the following communication to the Secretary of War,
appointing a Second Commission to the Philippines, "to
continue and perfect the work of organizing and establishing
civil government" in the Islands, and defining the principles
on which that work should proceed: "In the message transmitted
to the Congress on the 5th of December, 1899, I said, speaking of
the Philippine Islands: 'As long as the insurrection continues
the military arm must necessarily be supreme. But there is no
reason why steps should not be taken from time to time to
inaugurate governments essentially popular in their form as
fast as territory is held and controlled by our troops. To
this end I am considering the advisability of the return of
the commission, or such of the members thereof as can be
secured, to aid the existing authorities and facilitate this
work throughout the islands.'
"To give effect to the intention thus expressed I have

appointed the Honorable William H. Taft of Ohio, Professor
Dean C. Worcester of Michigan, the Honorable Luke I. Wright of
Tennessee, the Honorable Henry C. Ide of Vermont, and
Professor Bernard Moses of California, Commissioners to the
Philippine Islands to continue and perfect the work of
organizing and establishing civil government already commenced
by the military authorities, subject in all respects to any
laws which Congress may hereafter enact. The Commissioners
named will meet and act as a board, and the Honorable William
H. Taft is designated as President of the board. It is
probable that the transfer of authority from military
commanders to civil officers will be gradual and will occupy a
considerable period. Its successful accomplishment and the
maintenance of peace and order in the meantime will require
the most perfect co-operation between the civil and military
authorities in the island, and both should be directed during
the transition period by the same executive department. The
commission will therefore report to the Secretary of War, and
all their action will be subject to your approval and control.
"You will instruct the commission to proceed to the City of

Manila, where they will make their principal office, and to
communicate with the Military Governor of the Philippine
Islands, whom you will at the same time direct to render to
them every assistance within his power in the performance of
their duties. Without hampering them by too specific
instructions, they should in general be enjoined, after making
themselves familiar with the conditions and needs of the
country, to devote their attention in the first instance to
the establishment of municipal governments, in which the
natives of the islands, both in the cities and in the rural
communities, shall be afforded the opportunity to manage their
own local affairs to the fullest extent of which they are
capable, and subject to the least degree of supervision and
control which a careful study of their capacities and
observation of the workings of native control show to be
consistent with the maintenance of law, order, and loyalty.
The next subject in order of importance should be the
organization of government in the larger administrative
divisions corresponding to counties, departments, or
provinces, in which the common interests of many or several
municipalities falling within the same tribal lines, or the
same natural geographical limits, may best be subserved by a
common administration. Whenever the commission is of the
opinion that the condition of affairs in the islands is such
that the central administration may safely be transferred from
military to civil control, they will report that conclusion to
you, with their recommendations as to the form of central
government to be established for the purpose of taking over
the control.
{390}
"Beginning with the 1st day of September, 1900, the authority

to exercise, subject to my approval, through the Secretary of
War, that part of the power of government in the Philippine
Islands which is of a legislative nature is to be transferred
from the Military Governor of the Islands to this commission,
to be thereafter exercised by them in the place and stead of
the Military Governor, under such rules and regulations as you
shall prescribe, until the establishment of the civil central
government for the islands contemplated in the last foregoing
paragraph, or until Congress shall otherwise provide. Exercise
of this legislative authority will include the making of rules
and orders, having the effect of law, for the raising of
revenue by taxes, customs duties, and imposts; the
appropriation and expenditure of public funds of the islands;
the establishment of an educational system throughout the
islands; the establishment of a system to secure an efficient
civil service; the organization and establishment of courts;
the organization and establishment of municipal and
departmental governments, and all other matters of a civil
nature for which the Military Governor is now competent to
provide by rules or orders of a legislative character. The
commission will also have power during the same period to
appoint to office such officers under the judicial,
educational, and civil service systems and in the municipal
and departmental governments as shall be provided for. Until
the complete transfer of control the Military Governor will
remain the chief executive head of the Government of the
islands, and will exercise the executive authority now
possessed by him and not herein expressly assigned to the
commission, subject, however, to the rules and orders enacted
by the commission in the exercise of the legislative powers
conferred upon them. In the meantime the municipal and
departmental governments will continue to report to the
Military Governor, and be subject to his administrative
supervision and control, under your direction, but that
supervision and control will be confined within the narrowest
limits consistent with the requirement that the powers of
government in the municipalities and departments shall be
honestly and effectively exercised and that law and order and
individual freedom shall be maintained. All legislative rules
and orders, establishments of Government, and appointments to
office by the commission will take effect immediately, or at
such times as it shall designate, subject to your approval and
action upon the coming in of the commission's reports, which
are to be made from time to time as its action is taken.
Wherever civil Governments are constituted under the direction
of the commission, such military posts, garrisons, and forces
will be continued for the suppression of insurrection and
brigandage, and the maintenance of law and order, as the
military commander shall deem requisite, and the military
forces shall be at all times subject, under his orders to the
call of the civil authorities for the maintenance of law and
order and the enforcement of their authority.
"In the establishment of Municipal Governments the commission

will take as the basis of its work the Governments established
by the Military Governor under his order of Aug. 8, 1899, and
under the report of the board constituted by the Military
Governor by his order of January 29, 1900, to formulate and
report a plan of Municipal Government, of which his Honor
Cayetano Arellano, President of the Audencia, was Chairman,
and it will give to the conclusions of that board the weight
and consideration which the high character and distinguished
abilities of its members justify. In the constitution of
Departmental or Provincial Governments it will give especial
attention to the existing Government of the Island of Negros,
constituted, with the approval of the people of that island,
under the order of the Military Governor of July 22, 1899, and
after verifying, so far as may be practicable, the reports of
the successful working of that Government, they will be guided
by the experience thus acquired, so far as it may be
applicable to the conditions existing in other portions of the
Philippines. It will avail itself, to the fullest degree
practicable, of the conclusions reached by the previous
commissions to the Philippines. In the distribution of powers
among the Governments organized by the commission, the
presumption is always to be in favor of the smaller
sub-division, so that all the powers which can properly be
exercised by the Municipal Government shall be vested in that
Government, and all the powers of a more general character
which can be exercised by the Departmental Government shall be
vested in that Government, and so that in the governmental
system, which is the result of the process, the Central
Government of the islands, following the example of the
distribution of the powers between the States and the National
Government of the United States, shall have no direct
administration except of matters of purely general concern,
and shall have only such supervision and control over local
Governments as may be necessary to secure and enforce faithful
and efficient administration by local officers.
"The many different degrees of civilization and varieties of

custom and capacity among the people of the different islands
preclude very definite instruction as to the part which the
people shall take in the selection of their own officers; but
these general rules are to be observed: That in all cases the
municipal officers, who administer the local affairs of the
people, are to be selected by the people, and that wherever
officers of more extended jurisdiction are to be selected in
any way, natives of the islands are to be preferred, and if
they can be found competent and willing to perform the duties,
they are to receive the offices in preference to any others.
It will be necessary to fill some offices for the present with
Americans which after a time may well be filled by natives of
the islands. As soon as practicable a system for ascertaining
the merit and fitness of candidates for civil office should be
put in force. An indispensable qualification for all offices and
positions of trust and authority in the islands must be
absolute and unconditional loyalty to the United States, and
absolute and unhampered authority and power to remove and
punish any officer deviating from that standard must at all
times be retained in the hands of the central authority of the
islands.
{391}
In all the forms of government and administrative provisions
which they are authorized to prescribe, the commission should
bear in mind that the government which they are establishing
is designed not for our satisfaction, or for the expression of
our theoretical views, but for the happiness, peace, and
prosperity of the people of the Philippine Islands, and the
measures adopted should be made to conform to their customs,
their habits, and even their prejudices, to the fullest extent
consistent with the accomplishment of the indispensable
requisites of just and effective government.
"At the same time the commission should bear in mind, and the
people of the islands should be made plainly to understand,
that there are certain great principles of government which
have been made the basis of our governmental system which we
deem essential to the rule of law and the maintenance of
individual freedom, and of which they have, unfortunately,
been denied the experience possessed by us; that there are
also certain practical rules of government which we have found
to be essential to the preservation of these great principles
of liberty and law, and that these principles and these rules
of government must be established and maintained in their
islands for the sake of their liberty and happiness, however
much they may conflict with the customs or laws of procedure
with which they are familiar. It is evident that the most
enlightened thought of the Philippine Islands fully
appreciates the importance of these principles and rules, and
they will inevitably within a short time command universal
assent. Upon every division and branch of the government of
the Philippines, therefore, must be imposed these inviolable
rules: That no person shall be deprived of life, liberty, or
property without due process of law; that private property
shall not be taken for public use without just compensation;
that in all criminal prosecutions the accused shall enjoy the
right to a speedy and public trial, to be informed of the
nature and cause of the accusation, to be confronted with the
witnesses against him, to have compulsory process for
obtaining witnesses in his favor, and to have the assistance
of counsel for his defense; that excessive bail shall not be
required, nor excessive fines imposed, nor cruel and unusual
punishment inflicted; that no person shall be put twice in
jeopardy for the same offense, or be compelled in any criminal
case to be a witness against himself; that the right to be
secure against unreasonable searches and seizures shall not be
violated; that neither slavery nor involuntary servitude shall
exist except as a punishment for crime; that no bill of
attainder or ex post facto law shall be passed; that no law
shall be passed abridging the freedom of speech or of the
press, or the rights of the people to peaceably assemble and
petition the Government for a redress of grievances; that no
law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof, and that the free
exercise and enjoyment of religious profession and worship
without discrimination or preference shall forever be allowed.
"It will be the duty of the commission to make a thorough

investigation into the titles to the large tracts of land held
or claimed by individuals or by religious orders; into the
justice of the claims and complaints made against such
landholders by the people of the island or any part of the
people, and to seek by wise and peaceable measures a just
settlement of the controversies and redress of wrongs which
have caused strife and bloodshed in the past. In the
performance of this duty the commission is enjoined to see
that no injustice is done; to have regard for substantial
rights and equity, disregarding technicalities so far as
substantial right permits, and to observe the following rules:
That the provision of the treaty of Paris pledging the United
States to the protection of all rights of property in the
islands, and, as well, the principle of our own Government,
which prohibits the taking of private property without due
process of law, shall not be violated; that the welfare of the
people of the islands, which should be a paramount
consideration, shall be attained consistently with this rule
of property right; that if it becomes necessary for the public
interest of the people of the islands to dispose of claims to
property which the commission finds to be not lawfully
acquired and held, disposition shall be made thereof by due
legal procedure, in which there shall be full opportunity for
fair and impartial hearing and judgment; that if the same
public interests require the extinguishment of property rights
lawfully acquired and held, due compensation shall be made out
of the public Treasury therefor; that no form of religion and
no minister of religion shall be forced upon any community or
upon any citizen of the islands; that, upon the other hand, no
minister of religion shall be interfered with or molested in
following his calling, and that the separation between State
and Church shall be real, entire, and absolute.
"It will be the duty of the commission to promote and extend,

and, as it finds occasion, to improve, the system of education
already inaugurated by the military authorities. In doing this
it should regard as of first importance the extension of a system
of primary education which shall be free to all, and which
shall tend to fit the people for the duties of citizenship and
for the ordinary avocations of a civilized community. This
instruction should be given in the first instance in every
part of the islands in the language of the people. In view of
the great number of languages spoken by the different tribes,
it is especially important to the prosperity of the islands
that a common medium of communication may be established, and
it is obviously desirable that this medium should be the
English language. Especial attention should be at once given
to affording full opportunity to all the people of the islands
to acquire the use of the English language. It may be well
that the main changes which should be made in the system of
taxation and in the body of the laws under which the people
are governed, except such changes as have already been made by
the military Government, should be relegated to the civil
Government which is to be established under the auspices of
the commission. It will, however, be the duty of the
commission to inquire diligently as to whether there are any
further changes which ought not to be delayed, and, if so, it
is authorized to make such changes, subject to your approval.
In doing so it is to bear in mind that taxes which tend to
penalize or to repress industry and enterprise are to be
avoided; that provisions for taxation should be simple, so
that they may be understood by the people; that they should
affect the fewest practicable subjects of taxation which will
serve for the general distribution of the burden.
{392}
"The main body of the laws which regulate the rights and
obligations of the people should be maintained with as little
interference as possible. Changes made should be mainly in
procedure, and in the criminal laws to secure speedy and
impartial trials, and at the same time effective
administration and respect for individual rights. In dealing
with the uncivilized tribes of the islands the commission
should adopt the same course followed by Congress in
permitting the tribes of our North American Indians to
maintain their tribal organization and government, and under
which many of those tribes are now living in peace and
contentment, surrounded by a civilization to which they are
unable or unwilling to conform. Such tribal governments
should, however, be subjected to wise and firm regulation;
and, without undue or petty interference, constant and active
effort should be exercised to prevent barbarous practices and
introduce civilized customs. Upon all officers and employés of
the United States, both civil and military, should be
impressed a sense of the duty to observe not merely the
material but the personal and social rights of the people of
the islands, and to treat them with the same courtesy and
respect for their personal dignity which the people of the
United States are accustomed to require from each other. The
articles of capitulation of the City of Manila on the 13th of
August, 1898, concluded with these words: 'This city, its
inhabitants, its churches and religious worship, its
educational establishments, and its private property of all
descriptions, are placed under the special safeguard of the
faith and honor of the American Army.' I believe that this
pledge has been faithfully kept. As high and sacred an
obligation rests upon the Government of the United States to
give protection for property and life, civil and religious
freedom, and wise, firm, and unselfish guidance in the paths
of peace and prosperity to all the people of the Philippine
Islands. I charge this commission to labor for the full
performance of this obligation, which concerns the honor and
conscience of their country, in the firm hope that through
their labors all the inhabitants of the Philippine Islands may
come to look back with gratitude to the day when God gave
victory to American arms at Manila and set their land under
the sovereignty and the protection of the people of the United
States.
WILLIAM McKINLEY."
PHILIPPINE ISLANDS: A. D. 1900 (April).

Speech of Senator Hoar against the subjugation and
retention of the Islands by the United States.
See (in this volume)

UNITED STATES OF AMERICA: A. D. 1900 (APRIL).
PHILIPPINE ISLANDS: A. D. 1900 (May).

Filipinos killed, captured and surrendered from the breaking
out of hostilities with them to May, 1900.
Losses of American army.
In response to a resolution of the United States Senate, May

17, 1900, the following report, by cable, from Manila, was
made by General MacArthur:
"Filipinos killed, 10,780;

wounded, 2,104;
captured and surrendered, 10,425;
number prisoners in our possession, about 2,000.
No systematic record Filipino casualties these headquarters.

Foregoing, compiled from large number reports made immediately
after engagements, is as close an approximation as now
possible, owing to wide distribution of troops. More accurate
report would take weeks to prepare. Number reported killed
probably in excess of accurate figures; number reported
wounded probably much less, as Filipinos managed to remove
most wounded from field, and comparatively few fell into our
hands. Officers high rank and dangerous suspicious men have
been retained as prisoners; most other men discharged on field
as soon as disarmed. Propose to release all but very few
prisoners at early date."
56th Congress, 1st Session,

Senate Doc. 435.
For returns of casualties in the American army during the same

period,

UNITED STATES OF AMERICA: A. D. 1900 (JUNE).
PHILIPPINE ISLANDS: A. D. 1900 (May-November).

The question in American politics.

UNITED STATES OF AMERICA: A. D. 1900 (MAY-NOVEMBER).
PHILIPPINE ISLANDS: A. D. 1900 {July).

Appeal of citizens of Manila to the
Congress of the United States.
An appeal "to the Congress of the United States," dated at

Manila, July 15, 1900, and signed by 2,006 of the inhabitants
of the city, who were said by Senator Hoar and Senator Teller
to be "the leading people of that section of country—lawyers
and bankers and professional men generally" was presented to
the Senate on the 10th of January, 1901. It opens as follows:
"The undersigned, Filipinos and peaceful inhabitants of this

city, in their own name and in the name of the misnamed
'irreconcilables,' respectfully present themselves and submit
to the worthy consideration of the Congress of the United
States of America the following appeal: "The people of the
Philippine Islands, in view of their calamitous condition,
demand in the name of her sons, in the name of all races, in
the name of humanity, that an end be put to the misfortunes
which afflict them which, while they distress and agonize her,
compel her to struggle for the rights that are hers, and for
the maintenance whereof she must, if necessary, continue to
pour out her blood as she has so constantly and generously
done on battlefields, in the woods, on the mountains, in the
city, everywhere! The blood which has been shed and that is
still being shed, and which will continue to be shed until she
has secured her rights, is not shed because of the intrigues
of a few who, according to misinformed persons, desire to
exploit the people and enrich themselves at the cost of their
brother's blood. It has, gentlemen, sprung from the hearts of
the people, who alone are the real strength of nations, the
sovereign king of races, the producers of the arts, of
science, of commerce, of wealth, of agriculture, of
civilization, of progress, and of all the productions of human
labor and intelligence, in all of which the people of the
Philippine Islands had made great progress. The Filipinos were
not sunk in lethargy, as some untruthfully assert. They
suffered, but the hour to break their chains came to them in
August, 1896, and they proclaimed to the world their
emancipation."
{393}
The paper proceeds to review the circumstances of the revolt

against Spanish rule which broke out in 1896, and the later
circumstances of the conflict between Filipinos and Americans
at such length that it cannot be given in full. Its aim and
its spirit may be sufficiently shown by quotation of the
following passages from the closing parts of the appeal:
"Even supposing that America should force us to submit, and

after many years of war the country should submit, as the
lesser evil, to the proclamation of an ample autonomy, that
autonomy would not produce a sincere bond of friendship
between the two people, because, having sacrificed herself for
her independence, the country could not look with affection upon
those who would be the only obstacle to her happiness. She
would always retain her aspirations, so that autonomy would be
a short 'interregnum' which the country would necessarily take
advantage of to regain new strength to be used in the
attainment of her high political ideals, happen what may, and
perhaps in some hour of peril strike a fatal blow at a hated
oppressor. … In giving this warning we do not forget the good
Americans whom we sincerely respect; we are mindful of the
rupture of our good relations with the United States; we are
mindful of the blood which will again run on the soil of our
country. We see in that autonomy a new and sorrowful page in
the history of the Philippines, and therefore we can not but
look upon it with horror. Our people have had enough of
suffering. … They steadfastly believe that their independence
is their only salvation. Should they obtain it, they would be
forever grateful to whomsoever shall have helped them in their
undertaking; they would consider him as their redeemer, and
his name will be engraved with bright letters in the national
history, that all the generations to come may read it with
sublime veneration. America, consistent with her tradition, is
the only one which could play that great rôle in the present
and future of the Philippines. If she recognizes their
independence, they could offer her a part of the revenues of
the Philippine state, according to the treaty which shall be
stipulated; the protection in the country of the merchandise
of the United States, and a moral and material guarantee for
American capital all over the archipelago; finally, whatever
may bring greater prosperity to America and progress to the
country will, we doubt not, be taken into account in the
treaty which shall be celebrated.
"That the independence of the country will be attended with

anarchy is asserted only by those who, offending the truth and
forgetting their dignity, represent the Filipinos under
horrible colors, comparing them to beasts. Their assertions
are backed by isolated acts of pillage and robbery. What
revolution of the world was free from such deeds? At this
epoch passions are unrestrained; vengeance finds opportunity
to satisfy itself; private ambitions are often favored by the
occasion. Could such criminal deeds be avoided? Pythagoras
said: 'If you like to see monsters, travel through a country
during a revolution.' …
"In order to end our appeal we will say, with the learned
lawyer, Senor Mabini: 'To govern is to study the wants and
interpret the aspirations of the people, in order to remedy
the former and satisfy the latter.' If the natives who know
the wants, customs, and aspirations of the people are not fit
to govern them, would the Americans, who have had but little
to do with the Filipinos, be more capable to govern the
latter? We have, therefore, already proven—
1. That the revolution was the exclusive work of the public;
2. That in preparing it they were moved by a great ideal, the

ideal of independence;
3. That they are ready to sacrifice their whole existence in
order to realize their just aspirations;
4. That in spite of the serious difficulties through which

they are passing, they still expect from America that she will
consider them with impartiality and justice, and will
recognize what by right belongs to them, and thus give them an
opportunity to show their boundless gratitude;
5. That the annexation of the Philippines to America is not

feasible;
6. That the American sovereignty is not favored by the

Philippine people;
7. That an ample autonomy can not be imposed without violating

the Filipino will;
8. That the Filipinos are firm for self-government.
"From this it results that the only admissible solution for

the present difficulties is the recognition by America of the
independence of the Filipinos. In saying this we do not
consider either the nullity or the legality of the Paris
treaty on our country, but the well-known doctrine of the
immortal Washington, and of the sons of the United States of
America, worthy champions of oppressed people. Therefore we,
in the name of justice and with all the energies of our souls,
demand—
1. That the independence of the Filipinos be recognized;
2. That all the necessary information regarding the events

which are taking place, concerning the peaceful towns and
places which are supporting the arms of the revolution, be
obtained from Filipinos who, by their antecedents and by their
actual conduct, deserve the respect and confidence of the
Filipino people."
Congressional Record,
January 10, 1901, page 850.
PHILIPPINE ISLANDS: A. D. 1900 (September).

Adoption of civil service rules.

CIVIL SERVICE REFORM: A. D. 1900.
PHILIPPINE ISLANDS: A. D. 1900 (September-November).

Civil government of the Islands by the President's Commission.
Legislative measures.
Report of the Commission.
"In April of this year the second Philippine commission, of

which Honorable William H. Taft, of Ohio, Professor Dean C.
Worcester, of Michigan, Honorable Luke I. Wright, of
Tennessee, Honorable Henry C. Ide, of Vermont, and Professor
Bernard Moses, of California, were members, sailed for Manila
with the powers of civil government prescribed in the
instructions of April 7, 1900 [see above]. After devoting
several months to familiarizing themselves with the conditions
in the islands, this commission on the 1st of September, 1900,
entered upon the discharge of the extensive legislative powers
and the specific powers of appointment conferred upon them in
the instructions, and they have since that time continued to
exercise all that part of the military power of the President
in the Philippines which is legislative in its character,
leaving the military governor still the chief executive of the
islands, the action of both being duly reported to this
Department for the President's consideration and approval. …
On consultation with the commission, and with the President's
approval, a note of amnesty was issued by the military
governor, dated June 21, 1900, and supplemented by a public
statement by the military governor, under date of July 2,
1900, based, in the main, upon the instructions to the
commission.
{394}
… In pursuance of them something over 5,000 persons, of all
grades of the civil and military service of the insurrection,
presented themselves and took the following oath: 'I hereby
renounce all allegiance to any and all so-called revolutionary
governments in the Philippine Islands and recognize and accept
the supreme authority of the United States of America therein;
and I do solemnly swear that I will bear true faith and
allegiance to that government; that I will at all times
conduct myself as a faithful and law-abiding citizen of said
islands, and will not, either directly or indirectly, hold
correspondence with or give intelligence to an enemy of the
United States, neither will I aid, abet, harbor, or protect
such enemy. That I impose upon myself this voluntary
obligation without any mental reservation or purpose of
evasion, so help me God.' This number included many of the
most prominent officials of the former Tagalog government. …
"The commission in its legislative action is following the

ordinary course of legislative procedure. Its sessions are
open, and its discussion and the proposed measures upon which
it is deliberating are public, while it takes testimony and
receives suggestions from citizens as if it were a legislative
committee. Its first legislative act was the appropriation, on
the 12th of September, of $2,000,000 (Mexican), to be used in
construction and repair of highways and bridges in the
Philippine Islands. The second act, on the same day, was an
appropriation of $5,000 (Mexican) for a survey of a railroad
to the mountains of Benguet, in the island of Luzon. The
proposed railroad, about 45 miles in length, extending from
the Manila and Dagupan road, near the Gulf of Lingayen, to the
interior, will open, at a distance of about 170 miles from
Manila, a high tableland exceedingly healthy, well wooded with
pine and oak, comparatively dry and cool, and where the
mercury is said to range at night in the hottest season of the
year between 50° and 60° F. The value of such a place for the
recuperation of troops and foreign residents will be very
great. The third act of the commission was an appropriation
for the payment of a superintendent of public instruction.
They have secured for that position the services of Frederick
W. Atkinson, recently principal of the high school of
Springfield, Massachusetts, who was selected by the commission
for that purpose before their arrival in Manila.
"Before the 1st of September a board of officers had been

engaged upon the revision of the tariff for the islands in the
light of such criticisms and suggestions as had been made
regarding the old tariff. The commission has considered the
report of this board, and after full public hearings of
business interests in the island has formulated a tariff law
which has been transmitted to the Department. … A
civil-service board has been constituted by the commission
[see, in this volume, CIVIL SERVICE REFORM: A. D. 1900). They
have secured from the United States Civil Service Commission
the experienced and capable services of Mr. Frank M. Kiggins,
and a civil-service law has been enacted by the commission
providing for the application of the merit system to
appointments in the island."
United States, Secretary of War, Annual Report,

November 30, 1900, pages 25-27.
A report by the Commission, dated November 30, was received at

Washington late in January, 1901. Of the legislative work on
which it entered September 1st, and which, at the time of
reporting, it had prosecuted during three months, the
Commission speaks as follows:
"It adopted the policy of passing no laws, except in cases of

emergency, without publishing them in the daily press after
they had passed a second reading, and giving to the public an

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Auditing A Risk Based-Approach to

Conducting a Quality Audit 10th Edition

Solutions for Chapter 12

The five management assertions relevant to long-lived assets are as follows:

a. Management’s motivation to overstate fixed assets is similar to other circumstances in

• Increase reported earnings

Potential fraud schemes related to long-lived assets include:

• Sales of assets are not recorded and proceeds are misappropriated.

• Current depreciation expense as a percentage of the previous year's depreciation expense,

• Review and analyze gains/losses on disposals of equipment (gains indicate

Control Procedure Purpose of Control Impact on Substantive Audit

6. Self-construction of Provide reasonable Perform a detailed review of all

Test of controls over tangible long-lived assets could include:

• Examine documentation corroborating that a tangible long-lived asset budget is prepared

CONTROL POSSIBLE TESTS OF CONTROLS

Compute the average balance: ($380,500 + $438,900) / 2 = $409,700

General substantive procedures for leases include:

Items 1 through 6 could have been found in the following way:

6. The auditor would become aware of a new plant in several ways:

• Volume would increase.

a. Impairment of assets refers to long-lived tangible assets and certain identifiable

a. Try again to convince management that the auditor’s estimates are

Step 5. Determine the likely consequences of each proposed course of action.

d. The auditor can gather various types of evidence including:

Fraud Focus: Contemporary and Historical Cases

Further, controls should be in place to:

c. An explanation of “Capitalization of line capacity per CFO, amounts were originally

Significant differences should be recorded as misstatements and projected to the statements as a

DRG Audits- Excerpts from PCAOB Order

DDM Audits- Excerpts from PCAOB Order

In terms of the qualifications of the specialist, AU-C 620.09 notes:

Further, AU-C 620.A44 notes:

It may be appropriate to refer to the auditor's external specialist in an auditor's report

AU-C 540.21 notes that:

AU-C 540.A133-A134 provides additional guidance:

Academic Research Cases

d. The authors perform an experiment using 20 partners (average of 12.1 years of

e. The authors self-identify four limitations of this study:

Additional weaknesses to consider may include:

Ford and Toyota

United States, 56th Congress, 1st Session,

PHILIPPINE ISLANDS: A. D. 1900 (April).

On the 7th of April, 1900, the President of the United States

"To give effect to the intention thus expressed I have

"You will instruct the commission to proceed to the City of

"Beginning with the 1st day of September, 1900, the authority

"In the establishment of Municipal Governments the commission

"The many different degrees of civilization and varieties of

"It will be the duty of the commission to make a thorough

"It will be the duty of the commission to promote and extend,

PHILIPPINE ISLANDS: A. D. 1900 (April).

See (in this volume)

PHILIPPINE ISLANDS: A. D. 1900 (May).

In response to a resolution of the United States Senate, May

"Filipinos killed, 10,780;

No systematic record Filipino casualties these headquarters.

56th Congress, 1st Session,

For returns of casualties in the American army during the same

See (in this volume)

PHILIPPINE ISLANDS: A. D. 1900 (May-November).

See (in this volume)

PHILIPPINE ISLANDS: A. D. 1900 {July).