The PCAOB web site has a section titled “Settled Disciplinary Orders”. Locate th
ID: 2586238 • Letter: T
Question
The PCAOB web site has a section titled “Settled Disciplinary Orders”. Locate the findings involving Donna Lynn Johnson, of Westminster, Colorado, involving the audit of Sungame Corporation.
1) Describe the situations and accounting/audit issues that led to the disciplinary action by the PCAOB.
2) What do you think of the Johnson’s understanding of generally accepted auditing standards and generally accepted accounting principles? Name one specific area where auditing standards were violated.
3) If you had the chance to meet and speak to her, what three questions would you like to ask?
Explanation / Answer
Respondent refers to Donna Lynn Johnson
1. Situations
Sungame was, at all relevant times, a Delaware corporation with its principal office located in Las Vegas, Nevada. Sungame's public filings disclosed that it was a development stage company, seeking to develop a media content management and discovery platform, called "Flightdeck," and a business directory service, called "Vidirectory." During 2013, Sungame also began a new line of business, selling glasses-free 3D tablets. Sungame had no history of producing or selling such tablets. At all relevant times, Sungame's common stock was registered under Section 12(g) of the Securities Exchange Act of 1934, and was traded on the OTCBB exchange. At all relevant times, Sungame was an "issuer" as the term is defined in Section 2(a)(7) of the Act and PCAOB Rule 1001(i)(iii). 11. In its Form 10-K for the year ended December 31, 2012, filed on March 29, 2013,21 Sungame disclosed that it was "grossly undercapitalized in 2012 and unable to raise a significant amount of capital, other than receiving $653,593 in advances from our majority shareholder." Sungame reported that its only assets at year-end 2012 consisted of $2,604 in cash, $612 in fixed assets and $121,043 in capitalized software. At the same time, it reported $1.9 million in liabilities, virtually all of which were attributable to loans and accounts payable that were due to related-parties. Sungame further disclosed that it had "no significant revenues from operations," and that "if we do not begin to generate revenue or cannot raise additional needed funds, we will either have to suspend development operations until we do raise the funds, or cease operations entirely.
The Firm audited Sungame's financial statements for the year ended December 31, 2013, and issued an audit report, dated April 15, 2014, containing an unqualified opinion on those financial statements. The audit report also included going concern explanatory language regarding those financial statements. The audit report was included in a Form 10-K filed by Sungame with the U.S. Securities and Exchange Commission (the "Commission") on April 15, 2014.
Respondent was the only member of the engagement team besides the engagement partner during the fieldwork and completion phases of the audit. Respondent performed the majority of the substantive testing for the Audit, and prepared the majority of the audit documentation.
During the Audit, Respondent did not speak to any Sungame executive officer or director. Respondent only obtained written representations and brief responses to questionnaires from Sungame's CEO. All of Respondent's verbal communications with Sungame during the audit were either with a consultant or with Sungame's controller, who she understood acted as a bookkeeper.
Action for Violation
The matter concerns Respondent's violations of PCAOB rules and standards in connection with the Firm's issuance of an audit report on Sungame Corp.'s ("Sungame") financial statements for the year ended December 31, 2013 (the "Audit").
Respondent performed the majority of the procedures during the Audit, under the supervision of the engagement partner. Respondent, under the supervision of the engagement partner, failed to exercise due professional care, including professional skepticism, and failed to obtain sufficient appropriate audit evidence to support the opinion expressed in the auditor's report. Specifically, Respondent failed to perform sufficient appropriate procedures, and to obtain sufficient appropriate evidence, to address identified fraud risks related to Sungame's revenue and unearned revenue. Respondent also failed to adequately document critical aspects of the audit.
2. Johnson Lack of Understanding of AS and GAAP which can be proved by the following
Respondent failed to gain an understanding of the business rationale for the undocumented loan to determine whether it may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets
Respondent failed to evaluate red flags concerning Sungame's unearned revenue.
during the audit, Respondent learned that the vast majority of the deposits had been received directly from individuals, and not from the distributor. Additionally, the master distribution agreement wasn't signed until 2014 and stated that it was effective as of December 31, 2013 (i.e., it was not effective until the last day of the year under audit). Moreover, the agreement did not cover prepayments for tablets by third parties; the agreement provided for the distributor's purchase of tablets for resale and distribution, with payment occurring after delivery. Despite this information, Respondent, under the supervision of the engagement partner, failed to consider whether the master distributor was sufficiently knowledgeable to provide confirmation
AS 12 AS 13 AS 15 were violated
3) Three questions I would like to ask:
a. What was the purpose of doing the audit, whether any kick back is received by the company?
b. How many professional were deployed for auditing? Whether they were Qualified to do that Audit?
c. What is remuneration charged for audit work which resulted into such a lethargic approach towards Audit?
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