Table of Contents

Answer: C.64:..............................................................................................................................................2
Answer: 4.8[2]:............................................................................................................................................3
Answer: 4.8[3]:............................................................................................................................................3
Answer: 4.8[4]:............................................................................................................................................4
Waste Management Inc [1]:........................................................................................................................4
Waste Management Inc [4]:........................................................................................................................5
Waste Management Inc [6]:........................................................................................................................5
Burlingham Bees [2]:...................................................................................................................................5
Burlingham Bees [3]:...................................................................................................................................6
Burlingham Bees [4]:...................................................................................................................................6

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Answer: C.64:
Facts of the case:

Here in the present case; Donovan & Company has been appointed to conduct the audit of McCoy
Forging Corporation. McCoy; the president of McCoy Forging Corporation is in receipt of material
information; however he didn’t share with the auditor and forging Donovan & Company to render an
opinion that the presented financial statements are accurate and proper. There was usual engagement
letter was signed between both the parties and audit was also performed as per GAAS. Harper; who was
the assistant treasurer of McCoy Forging Corporation was siphoning the material amount of funds and
the same has been discovered by the new internal auditor of McCoy’s. Now; McCoy demands from
Donovan for the entire embezzlement occurred before and after the audit and Donovan denied and
refused to pay any amount.

Analysis of the case:

Consideration of fraud in the audit of financial statements is responsibilities of the auditor wherein it is
the responsibilities of the auditor to plan and perform the entire audit in such a way so that the
reasonable amount of assurance can be put that the audited financial statements are free from any
material misstatements; whether it may be caused by fraud or error. Simultaneously, identification and
assessment of the risks of material misstatement is prime responsibility of an auditor for that auditor
needs to put in process an effective audit procedure so that such kind of risks can be identified. The
auditor is required to perform the risk assessment procedures that help him to have a reasonable basis
for identification and assessment of the risks of material misstatement. Here auditor is required to
perform few tasks like gathering the information of the company and its working, how internal control is
established and its effectiveness, movement of the funds in the company, performing analytical audit
procedures, etc. Sometimes; auditor is required to perform brainstorming while gathering the
information from management; because information collection and information analysis has been
performed by auditor throughout an audit; so every time auditor is required to look for an opportunity
to brainstorm all the possible way through.

Here if we analyze; Harper; the assistant treasurer who was siphoning the substantional amount of
funds had been discovered by the internal auditor so it is evident that if the Donovan & Company could
have extend their audit procedures; they could have find the same before issue of any opinion on the
financial statements. Additionally; Herbert McCoy asks to render an opinion on the financial statements
that the audited financial statements are accurate and proper and there is no risk of any material
misstatements. This is clear violation of audit procedures and against the duty of care that the auditor
must have shown while examining the accounts and of McCoy and shows that Donovan didn’t employed
proper audit procedures whether McCoy has shared that letter or not. So; here Donovan is responsible
for non-detection of embezzlement of funds done by treasurer and McCoy Forging could prevail in part
a lawsuit against Donovan under the law because at the same McCoy is also responsible for hiding of
material information from auditor when he was in receipt of that letter.

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Answer: 4.8[2]:
Here in the given case; Koss Management fails to establish a strong internal control system that resulted
into fraud conducted by its President cum Chief Operating Officer over the several years. Here; the
internal control system of Koss Incorporation was not so strong that it can identify this kind of fraud.
Michael J. Koss has hired Sue Sachdeva as a temporary helper in the company who later on given the
status of President cum Chief Operating Officer in the company.

Each organization is required to establish a strong internal control system in the organization and the
top management must be in control of that system so that any employee of the company cannot such
system. During 1992; The Committee of Sponsoring Organizations of the Treadway Commission (COSO)
had developed a model that helps in evaluation of internal control system of an organization. As per
guidelines provided by COSO; the internal control system set in organization must achieve the following
objectives:

 Reliability with respect to financial reporting

 Effectiveness and efficient operating of internal working
 Compliance to various laws and regulations applicable to organization

Here; Michael Koss has hired Sue as a temporary helper and then provided her higher authority and
over the several years; she was using her position in making fraud with the company with the help of her
assistant Julie Mulvaney and Senior Accountant Tracy Malone. The fraud was continued for last 12 years
that resulted into massive embezzlement and accounting fraud. There is no system in the management
for control over the working of the accountant as well as Chief Operating Officer.

Answer: 4.8[3]:
The auditor (Grant Thornton) of Koss Corporation also failed to detect the fraud ongoing in the
organization for more than 12 years and failed to identify any clue with respect to such embezzlement
and accounting fraud. Here Sue Sachdeva was herself in the position of Chief Operating Officer and her
assistant as well as Senior Accountant was also with her in fraudulent activities; so Auditor was not in
position to have material clue from any of them unless they themselves find something doubtful by
making investigation of the internal control system of Koss Corporation.

Based on conversation of Sue Sachdeva; it is discovered that Auditor didn’t have employed any strong
efforts in analyzing of the internal control system of the organization rather they have relied on the
memo provided by them to Auditor. If the fraud was ongoing over the 12 years; it must have been
discovered in auditing. It is the responsibilities of the Auditor to detect any material misstatement lies in
the provided financial statements by making various audit procedures for detection of fraud or any
error. Here auditor was required to check in details the payment controlling system, internal
information system, checking and authorizing of payment, etc. These are the very clear red flags in audit
procedure that auditor could have employed and able to discover these fraud done by Sue Sachdeva.

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Answer: 4.8[4]:
Since 1997; there was embezzlement was continuing in the company and Auditor could not find any clue
during their audit tenure. When Koss Corporation was forced to restate its financial statements for the
financial years 2005 to 2009; there was major differences being observed in their reporting. The restated
amount of sales for 2009 was $ 41,717,114 that is $ 3,532,964 higher as compared to originally
reported, and 2008 net sales amount restated in 2008 was $ 49,084,321 that was higher by $ 2,141,028
compared to originally reported. During her employment; Sue Sachdeva had done embezzlement of
more than $ 34 million; so $ 8.5 million embezzlement in a single year can be considered as material
effect on the part of audit procedure. If Grant Thornton has followed the analytical
procedure in auditing then he might in possession of this abnormal transaction
where $ 8.5 million embezzlement could be discovered by him during the audit
procedure. There is duty of auditor to establish a strong auditing procedure in order
to find any material misstatement lies in the financial statements so that an opinion
free of risk of material misstatement can be given.

Waste Management Inc [1]:

By making a review of the consolidated financial statements of the company for the financial year ended
on December 31, 1996 are based on the estimated techniques used by the management. So the below
are the detailed estimates with respect to such accounts and reasons for the estimation techniques used
in their valuation:

 Accounts Receivables: The management is made estimation for the doubtful accounts; so this
estimation can directly affect the value of the accounts receivables.
 Short-term investment: There are different short term investment lies in the financial statement
of the Waste Management like securities available for sale, other trading securities, etc. For
making valuation of these securities; there are different techniques used by different
companies; wherein management used different assumptions according to their intention with
respect to holding of the investment. There is open market value also required for some of
those securities; for that estimation of value is required.
 Earnings in excess of the billing: In case of long-term contracts there are cases; there are
significant amount of cases can be observed which due from the customers; so here estimation
is required in order to compute the earning from the ongoing projects.
 Employee Receivable: The allowances for uncollectible employees are based on the estimation
of the management and it directly affects the balance of account receivables.
 Intangible Assets: The market value of the assets acquired shows the differential amount of
goodwill that an organization possesses. Therefore; valuation of goodwill depends on the
estimation technique used by the management and directly impacted financial statements.
 Unearned Revenues: This is the revenues which are not earned by the organization however
expenses are incurred for the same, so for this also estimation is required by management.
 Accrued Expenses: This the amount expenses incurred by the organization however pending for
payment and directly impacted by the estimation used by the management.

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Waste Management Inc [4]:
Andersen auditors is required to make detailed analysis of the estimation techniques used by the
management in making different estimation used in preparation of the financial statements; and
estimation for the salvage value and useful life of the property and equipments are one of the important
estimates that cannot be overlooked in any situation.

Here the auditor could have compared the estimation techniques used by Waste Management with the
another organization engaged in the similar line of business; and based on that external evidence could
have relied upon the Waste Management’s technique of estimation.

Waste Management Inc [6]:

It is very obvious that the personal already worked as employee of the auditor firm are in possession of
the key material information about the working of the organization and able to harm the internal
control system and can embezzle materially. Therefore; before allowing the former auditor to work in
key accounting position; it is the responsibility of the management to change the working system of
internal control system which is already in mind of the ex-auditor. Under The Sarbanes-Oxley Act of
2002; there are certain prohibitions are marked out for these kinds of employees:

 A one year of cooling off period is required before hiring of certain types of individual who were
auditor of the company
 Company should not hire such types of individuals on a contingent fees basis or on commission
basis
 There must not be any direct or indirect relationship with the auditor firm
 Certain financial transaction and relationship must be prohibited

Burlingham Bees [2]:

Expectation of revenues for the fiscal year 2018:

Weekday Weekend
Weekday Weekend
Category of Games Promotional Promotional
Games Games
Games Games
Game Attendance
(Average) 6428 7712 7390 8868
Ticket Price (Average) 8.26 8.3 8.26 8.3
Game Revenue (Average) 53095.28 64009.6 61041.4 73604.4
Total Number of Games 36 19 8 9
Total Ticket Revenues 1911430.1 1216182.4 488331.2 662439.6

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Burlingham Bees [3]:
(a) For analysis of materially in the audit; it is required by the auditor to employ analytical as well as
substantive audit procedures so that audit evidences can be collected effectively. The analytical
audit procedure as a substantive test is more advisable here for the auditor because there are
few advantages of this method:
 It helps in substantive tests of the various transactions
 Combination of analytical thinking and audit implication
 The detailed balance can be tested
(b) If the auditor implement analytical procedures for Bees’ audit, the audit plan is differ; because
at each and every stage of audit analytical can be implemented. At the planning phase; the
analytical procedures helps in understand the clients business, also helps in assessment of
possible misstatements, and also reduce the detailed tests.
(c) The use of analytical procedure as substantive test; cost least and it is effective also; so it is
advisable for the auditor to use this technique.

Burlingham Bees [4]:

(a) The calculated expected prices and amount of revenue is very close the actual amount of
revenues for the fiscal year 2018; so the auditor could rely upon the reported revenue and can
be taken as fairly stated.
(b) If the reported revenue which out of the calculated estimated range; then it might have impact
of seasonal improvement wherein the number of visitors or game lovers goes increased in 2018.
(c) In case of moderate or low assurance with respect to substantive analytical procedure; a
detailed substantive test is more advisable in order to satisfy auditor to have suspect of any
material misstatement that could result into wrong opinion on the financial statements.

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