AUDITING Program Instructor Bachelor in Management Associate Professor William H. Coyle Ph.D. C.P.A.

Course status Elective Concentra International Management, Marketing, Financial Management, Public tion Administration Year Term Workload 4th year Fall 2011 3 ECTS, 45 hours of classes

Prerequisites Financial accounting, Managerial accounting, Financial analysis, Business Law General Information: This will be the second year where Babson and GSOM (the Graduate School of Management of St. Petersburg State University, Russia) will simultaneously have Auditing taught to their respective students. We will be accomplishing this through the help of our respective technology professionals and the video-conferencing technologies present at both universities. This cooperation between educational institutions is illustrative of how both universities are doing all they can to enhance the educational experience of their students. This will be the first year that all Babson Auditing students will be part of this unique course format. Last year, we tested this format on a handful of Babson students and it worked well and was assessed well by both the Babson students who participated and the GSOM students. The class will work in the following way. Professor Coyle will be in St. Petersburg for the first seven classes of the course. Undergraduate Dean Hanno of Babson will teach the eighth class and then Prof. Coyle will teach the remaining classes of the semester from Babson. The technology allows the Babson and GSOM students to see each other and speak to each other so even though the students are located 8/9 time zones away, they will be together in class. Professors Background Information: Professor Bill Coyle will be the primary professor for the class. Professor Coyle graduated from the University of Notre Dame and majored in accounting. He took a job with the Boston office of what was then known as Price Waterhouse and worked there for four years, including a six month engagement in Saudi Arabia where he was part of the Price Waterhouse launch team to establish a firm presence in Saudi Arabia. While at Price Waterhouse he attained his Certified Public Accountant (CPA) credentials from the Commonwealth of Massachusetts which he still maintains. He attained his Ph.D. from Texas A&M University and took a position of Assistant Professor at Babson in the fall 1992 semester. Soon thereafter he travelled to Russia in January 1993 as part of Babsons first MBA off-shore elective to St. Petersburg and Moscow, Russia. Since 1995 Prof. Coyle has been the Director of Russian Programs at Babson, has led or co-led 24 undergraduate or graduate off-shore electives in Russia and has been a Visiting Professor

at GSOM. With this course this marks the fourth consecutive year that Prof. Coyle has taught a course at GSOM. Course Logistics: Both Babson and GSOM are innovative institutions. This course is just another way that both institutions cooperate with each other and provide a unique educational experience for its students. This course represents an excellent opportunity for Babson and GSOM students to learn about each others countries and learn about each other. This course is first an auditing course but it is also an opportunity to have a rich international experience without leaving home. The course will force interactions between the Babson and GSOM students, but the hope is that the individuals in each group will interact with each other without the direction of the course or the professor. There is much students can learn from each other and that knowledge goes well beyond auditing. It is up to the students to take advantage of this opportunity. The class days and times are driven by the Babson schedule so unfortunately for our GSOM colleagues, they have to adjust as needed. Classroom: At Babson, Olin 220; at GSOM, to be determined but likely in the Dekabristov Building on the fifth floor Class Days: Every Tuesday and Thursday starting on September 1 until December 8 except for Tuesday October 11 (Columbus Day holiday in the USA and November 22 and 24 (Thanksgiving Day holiday in the USA). No class will be held on October 11, November 22 and November 24 Class Time: For Babson, 9:45 to 11:20 Tuesdays and Thursday. For GSOM it gets complicated because Russia no longer changes its clocks in the fall and spring. From the beginning of class until November 6, St. Petersburg is 8 hours ahead of the Babson (eastern time zone in the USA). So class will be held from 17:45 to 19:20 for all classes through Thursday November 3. For all classes starting on Tuesday November 8, class will be held from 18:45 to 20:20 as St. Petersburg will then be 9 hours ahead of Babson. Office Location at Babson: Luksic 306 Office Phone Number at Babson: extension 4366 or +1-781-239-4366 for GSOM students Office Hours: For Babson students there will be no office hours until I return from Russia. Then office hours will be established. For GSOM students, the best thing to do is email me Email: coyle@babson.edu While in Russia for everyone, email is the best way to communicate with me. Upon returning to the USA, this is still the best way for the GSOM students to communicate with me. Just be aware of time zone differences. I have an iphone and I receive emails on it wherever I am so I should always be in contact with you if you need me. Required Texts: 1. Auditing and Assurance Services: An Integrated Approach. Fourteenth Edition, by Alvin A. Arens, Randal J. Elder and Mark S. Beasley. Prentice Hall. 2012 2. Contemporary Auditing: Real Issues and Cases. Eighth Edition. Michael C. Knapp. South-western Cengage Learning. 2011. Supplemental Text:

1.

CPA Review: Auditing and Attestation. Gleim and Hillison. Gleim Publications Inc; 2011 Edition.

For the Babson students: We will go through most of the chapters in the Arens book and read most of the cases in the Knapp book. So if you buy the books, you will get your moneys worth. Not everyone needs one but you must have access to it for the exams. If you call Gleim at 800-874-5346, tell them you want to buy this book and that you are a Babson student, you can get it at a discounted price + shipping. For the GSOM students: On reserve in the library there are copies of the 14th edition of the Arens book and the 13th edition of the Arens book. There are differences between the two editions and I will try to keep you informed of where those differences are. Also on reserve in the library are copies of the eighth edition of the Knapp book and earlier editions as well. There were cases added and deleted between the 6th, 7th and 8th edition of the Knapp book. You need to be aware of these case additions and deletions. I found last year there were enough copies to go around. There are copies of the 2011 and 2010 editions of the Gleim book on reserve in the library. I will try to reconcile the sections for both editions so you will know which questions you need to familiarize yourself with for the midterm and final exam. Course Objective: This is a very focused senior-level or fourth-year level course. Financial auditing is the process of rendering an opinion on a clients financial statements. This course will teach the responsibilities associated with being in the auditing profession, what an audit opinion is, the risks associated with rendering that opinion, how an auditor plans and executes an audit engagement, including the assessment of a clients internal control structure and the evidence gathered to support the assertions of management with respect to the account balances within the financial statements. You will become familiar with generally accepted auditing standards (GAAS), which are the guidelines by which an auditor professionally conducts a financial audit. You will see the effects that the Sarbanes-Oxley Act has had on the auditing profession. By the end of the course, you will have learned the fundamental concepts, risks, and procedures needed to audit all of the major financial statement areas within a typical audit. For the Babson students, a secondary objective is that this course will prepare you to successfully complete the Auditing and Attestation section of the CPA exam. For the GSOM students, this course is focused on conducting an audit in the USA. This is especially true for the Arens book. The Knapp book has international cases which makes it less US-focused. However, you are not at a disadvantage learning Auditing in this way because good auditing is done the way you will learn it in this course. The Big 4 international accounting firms (PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte and Touche) all conduct their audits worldwide based on the principles and procedures you will learn in this course. Nature of the Course:

This course is the least quantitative accounting course offered in the accounting curriculum. Auditing is more risk assessment, planning, and execution which requires analytical skills but of a more subjective type. That does not mean that you will not need the knowledge learned in other accounting courses. To audit accounts such as inventory, leases, and pensions, an auditor must know how they are constructed. However auditors do not prepare the financial statements; that is managements task. It is the auditors responsibility to gather enough evidence in order to conclude that the account balances as presented by management are fairly stated in all material respects. The auditor must know the nuances in determining an account balance so that the appropriate and sufficient amount of evidence supporting the clients balance is obtained. Nature of the Auditing Profession: By the end of 2001, Enron was just breaking heavily into the US news. At that time no one, including me, would have expected the magnitude and effect of Enron, Worldcom, and Global Crossing, to name a few companies with fraudulent financial statements. No one would have expected the complete collapse of Arthur Andersen, at the time one of the Big Five international accounting firms. No one would have thought about the establishment of a Public Company Accounting Oversight Board in the US through an act of Congress named Sarbanes-Oxley. Then in 2008 the financial markets, the banking sector and the housing market simultaneously collapsed. In part this was due to opaque and sometimes deceptive financial statements that did not adequately disclose the risks being undertaken by especially the companies in the financial sector of the economy. Madoff had financial reports that were supposedly examined by an auditor. The profession is going through a turbulent time right now. If anything, it reinforces the importance for honesty and transparency in the financial markets and the significant role an auditor needs to play in order to promote an efficient capital market. The role of the auditor is never more crucial than it is in todays environment. I always said that auditing was an exciting and crucial profession. In the past, students would not quite believe me. Perhaps that is not the case anymore. Course Conduct: I expect you to be highly motivated. Therefore, my expectation level of your performance is very high. The Babson students are seniors and the GSOM students are likely to be fourth year students or graduate students and therefore you deserve to be treated as professionals, but that also means you have the responsibility to act like professionals. Also, I feel I owe it to you to conduct the class in such a way that is consistent with the business environment that you will soon be dealing with every day. Expectations include, but are not limited to the following: Preparation: I am assuming all of the Babson students intend to work for a public accounting firm as an auditor or tax accountant and that you will take the CPA exam. Many of the GSOM may follow the same career path in public accounting. Therefore, since auditing is what many of you will do, and in the US, auditing is one-fourth of the CPA exam, I will expect that you would have fully read and thought about the chapters and cases assigned and that you are prepared to fully participate in class. This class should be of the very highest priority. Class Attendance: I expect you to attend class. I understand you may have job interviews and stuff happens, so when possible, inform me in advance by email (coyle@babson.edu) in the event you will not be attending class. The Bbason students

may not appreciate the difficulty, time and distance some GSOM students have to travel in order to get to class. I do and so I may be more lenient with the GSOM students because they do not control the environment around them as much as the Babson students do. Still, every effort should be made to get to class and get to class on time. Arriving Late: Class will begin promptly as scheduled. In fact, most classes will start with a quiz so you really need to be in class on time. Leaving Class: Only in rare circumstances should it be necessary to leave class. In a business meeting setting, you will not have such an opportunity. This is more of a cultural issue for Babson students than St. Petersburg State students. Another cultural difference that will become apparent. GSOM students and Russian students in general do not bring food and liquids into class. Given what Babson students will do, GSOM students may think Babson students live in a desert. It is culturally OK in the US for students to bring food and drink into the classroom. So perhaps more for the Babson students, for the benefit of students that will follow you into the classroom, leave the seating area neat and dispose of any trash. For the Babson students, in the event a university-excused absence is needed, it is the sole responsibility of the student to secure such an excuse. Grading: Grading Components are as follows: Quizzes Group Projects Audit Case Write-ups Midterm Exam Final Exam Total

250 points 150 points 150 points 200 points 250 points 1,000 points

Expect that there will be a quiz given every day. Quizzes will be graded on a 10 point scale. Quizzes will be worth a total of 250 points, but that does not mean there will be 25 quizzes. Point totals will be based on the overall percentage attained on those quizzes given in class during the course of the semester. For example, if 17 quizzes are taken and a student scores 136 out of 170 (or 80%), then they will receive 200 points (80% of 250) for grading purposes. Material on the quizzes will be from the Arens book chapters and Knapp cases assigned for that day. The questions on the quizzes will be on major issues raised in that days readings, such that a reasonably careful reading of that days material should allow for excellent results on the quizzes. All quizzes count, therefore, you do not get to drop any. In the event of an excused absence, your average grade on the quizzes you took during the semester will be assumed to be your score for any missed quizzes. During the semester there will be two group projects that need to be completed. The groups will consist of a mixture of Babson and GSOM students. Prof. Coyle will determine who will be in what group. The group exercises will allow an opportunity for the Babson and GSOM students to work together and learn from each other. You may need to work through language problems, cultural differences and certainly time differences. But everyone will face these issues when they are working. You live in a very small world. I guarantee you will be working with people from other countries so these assignments will help you prepare for that.

Throughout the semester, there will be case readings from the Knapp casebook. All of the cases have questions at the end of the case. Everyone is expected to be prepared to discuss those questions in class, but two times during the semester, you will do a formal write-up and analysis of a case. Each write-up will be worth 75 points but will be graded on a 100 point scale. Because some cases are very short, not all cases are eligible for write-ups. In the Course Outline section of the syllabus, all cases noted with a (*) at the end of the case could be used for write-up purposes. There are many cases with a (*) next to it, so there are plenty of choices available and note that most, although not all class days have an opportunity to hand in a case write-up. The length of the write-up will depend on the nature and number of the questions asked. Grading will be based not only on the content of the answers, but for the Babson students, also based on how well written it is. Allowances will be given to the GSOM students as English is their second language. The write-ups are to be done on an individual basis. That means no discussion or consultation with anyone in the class other than the professor is allowed. I will leave it to you to decide which cases you wish to write-up. In this way, I am trying to make your life a little easier, as you can look at your calendar and determine when you will have more time to do these write-ups. I leave it to you to manage your time appropriately. Case write-ups are due by the beginning of the class in which they will be discussed. Please email me the case writeups using Microsoft Word. To be more specific regarding what I expect of the write-ups, the case write-ups should be written with clearly distinguishable sections. Every case write-up should start with a Case Summary section that within a paragraph or two, should state the company involved, what it does, who the major players are in the case, and most importantly, what the issues are in the case. Following the Case Summary section should be a separate section addressing each individual question at the end of the case. Each question should be answered separately. In answering these questions, you are highly encouraged to cite relevant material from the book, including Statements of Auditing Standards (SAS). The key here is that if a question asks for an opinion or a conclusion on your part, you should be able to cite relevant support for your position. The final section for all case write-ups should be a one paragraph Case Conclusion section where you should state whether you agree or disagree with how the case was actually resolved, and why. The midterm exam will cover Chapters 1-13, and the final will cover Chapters 14-24. The midterm exam is worth 200 points and the final is worth 250 points. The final is not explicitly cumulative, in the sense that it will not contain a question specifically concerning the first 13 chapters. However, the final is cumulative in the sense that an understanding of the first 13 chapters is essential in order to do well in the last 11 chapters. For all students the midterm exam will be held in class. The final exam will be given based on what Babson and the GSOM registrar/administration tell me. I will inform you as soon as I learn what Babson and GSOM decide regarding the timing of the final exam. Both the midterm and the final will include multiple choice questions taken word for word from the Gleim and Hillison CPA Review book. For the Babson students, I believe that you should get used to the type and style of questions you will see on the CPA exam. For the GSOM students, although it is likely you will not be taking the CPA exam, the CPA multiple choice questions do a very good job of testing your auditing knowledge.

In addition to CPA questions, exams will contain problems and essays written by me, based on material discussed in class. Undergraduate Learning Goals: This section is specifically addressed to the Babson students but the GSOM students may find it interesting. Babson has undergraduate learning goals, which are areas/concepts/skills that we at Babson believe should be an important component to a Babson students education. This course will promote your development in all seven Babson undergraduate learning goals: Rhetoric: through class participation and written assignments Quantitative Analysis: although less so than in intermediate or advanced accounting classes, still in auditing you need to be able to work with amounts, accounts, financial statements, and the relationships between and among them. Entrepreneurship and Creativity: particularly in creativity, the way an auditor decides what evidence and how much evidence needs to be gathered to support a management assertion or account balance. Ethics and Social Responsibility: chapter four in the text is all about professional ethics and there is an ethical code within the AICPA (American Institute of Certified Public Accountants). Furthermore, auditors have a high social responsibility as the independent monitor on behalf of shareholders, creditors, suppliers, customers, etc. Ethics and Social Responsibility is extremely important to the profession. Certainly the past few years have taught us that. Global and Multicultural Perspectives: this one should be obvious given the nature of the course. I will also rely on my travels and experiences, as we will discuss differences in the auditing environments in different countries. More and more, auditors are involved with multi-national clients, so understanding those different business and social environments is important. Leadership and Teamwork: the teamwork aspect in this course will be your crosscountry, cross-cultural group assignments. As auditors you work in a team, and your ability to work with others is crucial to your success in the profession. Critical and Integrative Thinking: You will have to use your knowledge from all your accounting classes and from most of your business classes as decisions made in other functional areas, such as marketing, finance, operations and organizational behaviour all are reflected on the financial statements. This then affects the risks associated with an audit. Based on the nature of the client and the environment in which it operates, an auditor must critically evaluate how they will obtain enough assurance so as to render an opinion on the financial statements. CPA Eligible: I am assuming that all of the Babson students intend to take the CPA exam. Therefore you need to consider in which state do you intend to work, what the educational requirements are in that state to make you eligible to sit for the CPA exam, and finally, how do you intend to meet those educational requirements? I am here to help you answer those questions, or at least the last two parts of that question. It is probably a good idea for the Babson students to meet me fairly soon after I return from Russia or if you prefer, Professor Joanne Williams early on in the semester so I or Prof. Williams can discuss how you can get CPA exam eligible. For those interested in the Babsons MSA Program, I am one of the faculty teaching in the MSA program, and along with the MSA Director,

Professor Joanne Williams, we are a good resource to use in that regard. However, please do not feel that you have to get an MSA, especially if you do not intend to practice in a 150 hour state. I will give you advice on non-MSA ways to make you CPA exam eligible as well. I believe my role is to give you all the alternatives I can think of and then leave it to you to decide what path to take. Accommodations: Any Babson student who feels he or she may need an accommodation based on the impact of a disability should contact me privately by email and in a timely fashion to discuss your specific needs. Students must also contact the Manager of Disability Services at 781-239-4508 or in Hollister Hall to coordinate reasonable academic accommodations.

Course Outline: Take the following outline as my vision of what we will be doing this semester. Note that only those cases which are followed by a (*) are eligible for a case write-up. (#) cases do not appear in the 6th Edition of the casebook. Case numbers refer to the 8th edition. CLASS TEXTBOOK CHAPTER AUDIT CASE ASSIGNMENT Sept 1Introduction Sept 6 Chapter 1 Case 1.1 Enron Corporation (*) Sept 8 Chapter 2 Case 4.3 Suzette Washington Case 6.1 Leigh Ann Walker Sept 13 Chapter 3 Case 5.6 American Fuel and Supply (*) Sept 15Chapter 4 Case 4.2 F&C International, Inc. (*) Case 5.5 Koger Properties, Inc. Sept 20Chapter 5 Case 3.4 Triton Energy, Ltd. (*) Case 7.7 Fred Stern & Company (*) Sept 22Chapter 6 Case 7.8 First Securities Co. Chicago (*) Case 6.4 Tommy OConnell Case 6.7 Hamilton Wong, In-Charge Acct Sept 27Chapter 7 Case 1.7 Lincoln S&L Association (*) Case 6.2 Bill DeBurger, In-Charge Acct. Sept 29Chapter 8 Case 1.5 The Leslie Fay Companies (*) Oct 4 Chapter 9 Case 8.1 Livent, Inc. (*) Case 1.2 Just for FEET, Inc. (*) (#) Oct 6 Chapter 10 Case 1.11 New Century Finl Corp (*) (#) Oct 13 Chapter 11 Case 1.9 ZZZZ Best Company, Inc. (*) Oct 18 Chapter 12 Case 1.6 NextCard, Inc (*) Oct 20 Chapter 13 Case 1.12 Madoff Securities (*) (#) Oct 25 Midterm Exam on Chapters 1-13 Oct 27 Chapter 14 Case 1.3 Jamaica Water Properties (*) Nov 1 Chapter 15 Case 2.3 Happiness Express, Inc. (*) Nov 3 Chapter 16 Case 7.1 Ligand Pharmaceuticals (*) (#) Nov 8 Chapter 17 Case 2.2 Golden Bear Golf, Inc. (*) Nov 10 Chapter 18 Case 2.6 CBI Holding Company, Inc. (*) (#) Nov 15 Chapter 19 Case 8.5 Zuan Yan (*) (#) Nov 17 Chapter 20 Case 3.1 The Trolley Dodgers Case 3.3 United Way of America (#) Case 8.15 Tae Kwang Vina (#) Nov 18-27 Thanksgiving Break (no class) Nov 29 Chapter 21 Case 1.8 Crazy Eddie, Inc. (*) Dec 1 Chapter 22 Case 6.3 David Myers, Controller Case 8.7 Australian Wheat Board (*) (#) Dec 6 Chapter 23 Case 2.4 CapitalBanc Corporation Case 3.2 Howard Street Jewelers, Inc Case 8.9 Tata Finance Limited (#) Dec 8 Chapter 24 Case 8.8 OAO Gazprom (*) ???? Final Exam