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T AB L E OF CO N TENT S
INTR ODUCTION Professional Judgment . . . . . . . . . . . . . . . . 1
SECTION
1 Client Acceptance
CASE S I N C L U D E D I N T H I S SE C T I O N
.
1.1 Ocean Manufacturing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The New Client Acceptance Decision
Understanding the Client’s Business
SECTION
2 and Assessing Risk
CASE S I N C L U D E D I N T H I S SE C T I O N
2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Evaluating eBusiness Revenue Recognition, Information Privacy,
and Electronic Evidence Issues
2.2 Apple Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Evaluation of Client Business Risk
2.3 Flash Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Risk Analysis
2.4 Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Understanding of Client’s Business Environment
SECTION
3 Professional and Ethical Issues
CASE S I N C L U D E D I N T H I S SE C T I O N
3.1 A Day in the Life of Brent Dorsey . . . . . . . . . . . . . . . . . . . . . . . 67
Staff Auditor Professional Pressures
3.2 Nathan Johnson’s Rental Car Reimbursement . . . . . . . . . . . . . . . . 71
Should He Pocket the Cash?
3.3 The Anonymous Caller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Recognizing It’s a Fraud and Evaluating What to Do
3.4 WorldCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
The Story of a Whistleblower
3.5 Hollinger International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Realities of Audit-Related Litigation
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TABLE OF CON TENTS TABLE OF CON TENTS
SECTION
4 Accounting Fraud and Auditor Legal Liability
4.1 SEnron
CASE I N C L U Corporation and
D E D I N T H I S SE C TAndersen,
ION LLP . . . . . . . . . . . . . . . . . 103
Analyzing the Fall of Two Giants
.
4.2 Comptronix Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Identifying Inherent Risk and Control Risk Factors
.
4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
.
Assessing the Control Environment and Evaluating Risk of
Financial Statement Fraud
4.4 Waste Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Manipulating Accounting Estimates
4.5 Xerox Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Evaluating Risk of Financial Statement Fraud
4.6 Phar-Mor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Accounting Fraud, Litigation, and Auditor Liability
.
4.7 Satyam Computer Services Limited . . . . . . . . . . . . . . . . . . . . 175
Controlling the Confirmation Process
SECTION
5 Internal Control over Financial Reporting
CASE S I N C L U D E D I N T H I S SE C T I O N
5.1 Simply Steam, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Evaluation of Internal Control
Environment
5.2 Easy Clean, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Evaluation of Internal Control
Environment
5.3 Red Bluff Inn & Café . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Establishing Effective Internal Control in a Small Business
5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
5.5 Evaluation of Manual
Collins Harp and IT-Based
Enterprises . . Sales
. . .Accounting
. . . . . .System
. . Risks
. . . . . . . . . . . . . 209
Recommending IT Systems Development Controls .
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TABLE OF CON TENTS TABLE OF CON TENTS
SECTION
6 The Impact of Information Technology
CASE S I N C L U D E D I N T H I S SE C T I O N
6.1 Harley-Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Identifying eBusiness Risks and Related Assurance Services for
the eBusiness Marketplace
6.2 Jacksonville Jaguars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Evaluating IT Benefits and Risks and Identifying Trust Services
Opportunities
O T HE R CASE S T H AT D IS C U S S T O P I C S REL AT E D T O T H I S SE C T I O N
2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Evaluating eBusiness Revenue Recognition, Information Privacy,
and Electronic Evidence Issues
5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
Evaluation of Manual and IT-Based Sales Accounting System Risks
5.5 Collins Harp Enterprises . . . . . . . . . . . . . . . . . . . . . . . . 209
Recommending IT Systems Development Controls
9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Understanding the IT Accounting System and Identifying Audit
Evidence for Retail Sales
SECTION
7 Planning Materiality
CASE S I N C L U D E D I N T H I S SE C T I O N
7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
Determination of Planning Materiality and Tolerable Misstatement
O T HE R CASE S T H AT D IS C U S S T O P I C S REL AT E D T O T H I S SE C T I O N
5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Scoping and Evaluation Judgments in the Audit of Internal
Control over Financial Reporting
12.1 EyeMax Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 439
Evaluation of Audit Differences
12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
Considering Materiality When Evaluating Accounting Policies
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TABLE OF CON TENTS TABLE OF CON TENTS
and Footnote Disclosures
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TABLE OF CON TENTS TABLE OF CON TENTS
SECTION
8 Analytical Procedures
CASE S I N C L U D E D I N T H I S SE C T I O N
8.1 Laramie Wire Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . 277
Using Analytical Procedures in Audit Planning
8.2 Northwest Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Developing Expectations for Analytical Procedures
8.3 Burlingham Bees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Using Analytical Procedures as Substantive Tests
O T HE R CASE S T H AT D IS C U S S T O P I C S REL AT E D T O T H I S SE C T I O N
1.1 Ocean Manufacturing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 9
The New Client Acceptance Decision
2.3 .
Flash Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 43
Risk Analysis
SECTION
9 Auditing Cash, Fair Value, and Revenues
CASE S I N C L U D E D I N T H I S SE C T I O N
9.1 Wally’s Billboard & Sign Supply . . . . . . . . . . . . . . . . . . . . . . . 299
The Audit of Cash
9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
Understanding the IT Accounting System and Identifying Audit
Evidence for Retail Sales
9.3 Longeta Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Auditing Revenue Contracts
9.4 Bud's Big Blue Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 335
Accounts Receivable Confirmations
9.5 Morris Mining Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 341
Auditing Fair Value
9.6 Hooplah, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
Applying Audit Sampling Concepts to Tests of Controls and
Substantive Testing in the Revenue Cycle
9.7 RedPack Beer Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Estimating the Allowance for Bad Debts
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TABLE OF CON TENTS TABLE OF CON TENTS
.
.
.
O T HE R CASE S T H AT D IS C U S S T O P I C S REL AT E D T O T H I S SE C T I O N
4.7 Satyam Computer Services Limited . . . . . . . . . . . . . . . . . 175
8.2 Northwest Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
8.3 Burlingham Bees . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
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CASE S I N C L U D E D I N T H I S SE C T I O N
11.1 The Runners Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
Litigation Support Review of Audit Documentation
for Notes Payable
O T HE R CASE S T H AT D IS C U S S T O P I C S REL AT E D T O T H I S SE C T I O N
9.1-6 Section 9: Auditing Cash, Fair Value, and Revenues . . . . . . . . . 299
Various Cases
10.1-5 Southeast Shoe Distributor, Inc. . . . . . . . . . . . . . . . . . . . 369
An Audit Simulation
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CASE S I N C L U D E D I N T H I S SE C T I O N
12.1 EyeMax Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439
Evaluation of Audit Differences
12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
Considering Materiality When Evaluating Accounting Policies
and Footnote Disclosures
12.3 K&K Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455
Leveraging Audit Findings to Provide Value-Added Insights in a
Manufacturing Environment
12.4 Surfer Dude Duds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461
Considering the Going-Concern Assumption
12.5 Murchison Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 465
Evaluating an Attorney’s Response and Identifying the Proper
Audit Report
12.6 Going Green . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477
Sustainability and External Reporting
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A L P H A B E TI C C A S E I N D E X
7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
3.3 Anonymous Caller, The . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
2.2 Apple Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.4 Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
9.4 Bud's Big Blue Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
8.3 Burlingham Bees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
5.5 Collins Harp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
4.2 Enterprises
Comptronix Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
3.1 Day in the Life of Brent Dorsey, A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.2 Easy Clean, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
4.1 Enron Corporation and Andersen, LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
12.1 EyeMax Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439
2.3 Flash Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.6 Going Green . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477
6.1 Harley-Davidson, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
9.2 Henrico Retail, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
3.5 Hollinger International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.6 Hooplah, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
6.2 Jacksonville Jaguars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
12.3 K&K, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455
8.1 Laramie Wire Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
9.3 Longeta Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
9.5 Morris Mining Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
12.5 Murchison Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465
3.2 Nathan Johnson’s Rental Car Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.2 Northwest Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
1.1 Ocean Manufacturing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.6 Phar-Mor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
5.3 Red Bluff Inn & Café . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
9.7 RedPack Beer Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
11.1 Runners Shop, The . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
4.7 Satyam Computer Services Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
5.1 Simply Steam, Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
5.7 Société Générale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
10.1 Southeast Shoe Distributor, I nc.: Tests of Controls for the Revenue Cycle . . . . . . . . . . . . . 369
10.2 Southeast Shoe Distributor, I nc.: Substantive Tests for the Revenue Cycle . . . . . . . . . . . . . 383
10.3 Southeast Shoe Distributor, Inc.: Audit Tests and Risk Assessment for the Revenue Cycle . . . . . 391
10.4 Southeast Shoe Distributor, Inc.: Tests of Transactions for the Expenditure Cycle . . . . . . . . . 401
10.5 Southeast Shoe Distributor, Inc.: Tests of Balances for the Expenditure Cycle . . . . . . . . . . . 417
5.4 St. James Clothiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
12.4 Surfer Dude Duds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461
9.1 Wally’s Billboard & Sign Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
4.4 Waste Management, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
3.4 WorldCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4.5 Xerox Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
2.1 Your1040Return.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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A CK N OW L E D GEMENT S
We would like to thank our families for their understanding and support while writing this case-
book. We would also like to thank Jonathan Liljegren for his excellent work in the design and layout
of this casebook as well as Karen Kirincich and Ellen Geary for their editorial support.
We are grateful to the research assistants both past and present who have helped write,
revise, and review the cases in this edition. We especially thank Truman Rowley and Kyle Stubbs for
their assistance with this latest edition.
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