EBK AUDITING: A RISK BASED-APPROACH
11th Edition
ISBN: 9781337670203
Author: RITTENBERG
Publisher: YUZU
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Textbook Question
Chapter 4, Problem 23FF
KPMG
(LO 1, 2, 3)
KPMG LLP served as the external auditor for some of the largest sub-prime mortgage lenders in the U.S. leading up to and during the housing market crisis of the mid to late-2000s. The audits of two of their largest lending clients, New Century Financial Corporation and Countrywide, ultimately led the firm to settle litigation charges in 2010 for $44.7 and $24 million, respectively. The business model of these two subprime mortgage lenders consisted of providing loans to borrowers with weak credit histories. The business model had begun to fail during 2007, when the economy weakened, borrowers began defaulting, and home prices declined drastically. New Century filed for bankruptcy and Countrywide was purchased by Bank of America, which subsequently suffered massive losses related to business failures at Countrywide.
Just before the housing crash of 2007 put the companies in severe financial crises, KPMG had given both companies unqualified audit opinions. In both cases, KPMG was subsequently accused of violating professional standards, lacking independence, and being negligent. K PMG defended itself by arguing that its audits were not the cause of the financial woes at New century and Countrywide. Rather, the firm contended that the failed business model of the two companies led to investor losses.
a. How does the economic environment affect the litigation risk faced by audit firms?
b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect?
c. What defenses do auditors use in response to litigation?
d. What actions can auditors take to minimize litigation exposure?
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Barley Company is a medium-sized industrial firm that has been audited by your firm for several years. The only interest-bearing debt owed by Barley is long-term notes payable of $300,000 held by First National Bank. The notes were issued 4 years earlier and will mature in 8 more years. Barley is highly profitable, has no pressing needs for additional financing, and has excellent internal controls of the recording of loans and related interest cost transactions.
REQUIRED:
1. Based on this scenario, describe the auditing procedures that you think will be necessary for notes payable and related interest accounts.
2. How will your answer differ if instead Barley Company was unprofitable, needed additional financing, and had ineffective internal controls?
the following independent situation, discuss the issue and describe the impact on the audit record:
Iv. ZSZA Sdn. Bhd. Has been audited via your firm for the last six years. For the past three years, their monetary circumstance has been declining steadily. In the contemporary yr, for thefirst time, the modern ratio is underneath 2:1, that's the minimal requirement certain in ZSZA’s important mortgage agreement. You now have doubt about the potential of ZSZA to retain in operation for the next year.
High Voltage Corp., an electric company that supply power to more than 1/3 residential and commercial establishments in one of the largest cities in South America, submitted the following financial ratios to the fraud examiner.
CY2018 CY2017 CY2016
Current ratio 2.45 1.56 1.20
Acid-test ratio 1.52 0.74 0.83
Total debt to equity 0.82 0.84 0.86
Long term debt to equity 0.65 0.74 0.73
Fixed assets to revenue ? ? ?
Fixed assets to total assets 0.80 0.55 0.50
Total asset turnover 1.80 1.76 1.24
Required:
1. Compute for the fixed assets to revenue ratio (in 2 decimal places) for CY 2016 to 2018.
2. What are the relevant ratios that would indicate analytical symptoms? Give three and explain why.
3. What other accounting/documentary symptoms that the fraud examiner should review to support the occurrence of fraud. Give three and explain why
Chapter 4 Solutions
EBK AUDITING: A RISK BASED-APPROACH
Ch. 4 - Prob. 1CYBKCh. 4 - Prob. 2CYBKCh. 4 - Prob. 3CYBKCh. 4 - Prob. 4CYBKCh. 4 - Prob. 5CYBKCh. 4 - Prob. 6CYBKCh. 4 - Prob. 7CYBKCh. 4 - Prob. 8CYBKCh. 4 - Prob. 9CYBKCh. 4 - Prob. 10CYBK
Ch. 4 - Prob. 11CYBKCh. 4 - Prob. 12CYBKCh. 4 - Prob. 1RQSCCh. 4 - Prob. 2RQSCCh. 4 - Prob. 3RQSCCh. 4 - Prob. 4RQSCCh. 4 - Prob. 5RQSCCh. 4 - Prob. 6RQSCCh. 4 - Refer to the Focus on Fraud feature “Moss Adams...Ch. 4 - Prob. 8RQSCCh. 4 - Prob. 9RQSCCh. 4 - Prob. 10RQSCCh. 4 - Prob. 11RQSCCh. 4 - Prob. 12RQSCCh. 4 - Prob. 13RQSCCh. 4 - Prob. 14RQSCCh. 4 - Prob. 15RQSCCh. 4 - Prob. 16RQSCCh. 4 - Prob. 17RQSCCh. 4 - Prob. 18RQSCCh. 4 - Prob. 19RQSCCh. 4 - Prob. 20RQSCCh. 4 - Prob. 21RQSCCh. 4 - Able Corporation decided to make a public offering...Ch. 4 - KPMG (LO 1, 2, 3) KPMG LLP served as the external...Ch. 4 - ToshIba, EY (LO 1, 2, 3) In 2015, the business...
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