The Audit Firm is engaged to audit the financial statements of the Public Compan
ID: 432068 • Letter: T
Question
The Audit Firm is engaged to audit the financial statements of the Public Company. In the course of the audit, the Audit Firm sees that revenues of $1 million dollars, which comprised 75% of the annual revenues, were recognized on 12/31/2016, which is the last day of the fiscal year. The Audit Firm asks for backup, and is provided with copies of purchase orders, delivery receipts, and invoices from the Public Company's CFO. These documents reflect that the produce was delivered and paid for by 12/31/2016. The Audit Firm sends out confirms to the customer for confirmation. The customer says that the produce was not delivered until January 2, 2017, AND that the customer actually paid $2 million for the product.
1. Identify each relevant SEC statutory provision
2. In particular, discuss (a) the possible violations; and (b) what you would recommend that the Audit Firm do (and why) if you are asked to provide guidance.
3. What steps would you consider taking to investigate the claim that the customer paid $2 million for the product if you worked for the Audit Firm or a regulator.
Explanation / Answer
1. Identify each relevant SEC statutory provision
The facts that the public company’s documents reflect that the produce was delivered and paid for by 12/31/2016 while it was actually not delivered until January 2, 2017 impact the SEC statutory provision“§ 240.13b2-2 Representations and conduct in connection with the preparation of required reports and documents.”
(a) No director or officer of an issuer shall, directly or indirectly:
(1) Make or cause to be made a materially false or misleading statement to an accountant in connection with; or
(2) Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading, to an accountant in connection with:
(i) Any audit, review or examination of the financial statements of the issuer required to be made pursuant to this subpart; or
(ii) The preparation or filing of any document or report required to be filed with the Commission pursuant to this subpart or otherwise.
The documents may provide the wrong information on deliver date and understated the revenue. At the same time, the customer may also provide the wrong information.
SEC regulations require publicly owned companies to disclose certain types of business and financial data on a regular basis to the SEC and to the company's stockholders. The SEC also requires disclosure of relevant business and financial information to potential investors when new securities, such as stocks and bonds, are issued to the public, although exceptions are made for small issues and private placements.
1. In particular, discuss (a) the possible violations; and (b) what you would recommend that the Audit Firm do (and why) if you are asked to provide guidance.
The company violates the SEC statutory provision “§ 240.13b2-2 Representations and conduct in connection with the preparation of required reports and documents.” If I am asked to provide guidance on this case, I would audit the account receivable account, the sales revenue account, and check the bill of lading or other proof of shipping. I will evaluate the combined evidence provided by the confirmations. First, I need to consider the reliability of the confirmations and alternative procedures. Then, I will combine the evidence provided by other procedures with the confirmations received to determine whether additional evidence is needed. The most important step is to determine whether the combined evidence provided by the confirmations, alternative procedures, and other procedures is sufficient. If not sufficient, I would request additional confirmations or extend other tests, such as tests of details or analytical procedures.
1. What steps would you consider taking to investigate the claim that the customer paid $2 million for the product if you worked for the Audit Firm or a regulator
First, Iwill review following cash collections from every open account. Then, I will check the customer purchase order to identify the price. Third, I will review the bill of lading or other proof of shipping and the invoice to determine who lied to the auditing firm. What is more, I might examine all receiving reports for returned items prior to Dec 31. Finally, I will inspect all documentation on expanded credit terms to identify whether or not authorized the customer more credit line. For the revenue issue, I will perform the substantive tests. It will help me to find any errors or misstatements within the accounts or documentation associated with the revenue cycle. For example, checking the trial balance that the accountant creates at the end of the cycle, confirming receivable amounts with the company or person who owes money and evaluating the accuracy of the allowance for uncollectible accounts by reviewing the history of the entity. They also include vouching, tracing, and performing cutoff tests for all sales, sales returns, and cash receipts. I will also examines a journal entry either works forward from the initial sales order to the journal entry or backward from journal entry to initial sales order to determine accuracy.
I REQUEST YOU TO KINDLY RATE THE ANSWER AS THUMBS P. THANKS A LOT.
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