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Summary of Auditing (Seminars)
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This is a summary for the seminars of auditing. See for more detail of the contents, the contents pages.
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20212022
Auditing
A SUMMARY OF THE SEMINARS
LOUIST
A summary made by LouisT for the course: Auditing given in 2021/2022
,Contents
Chapter 1. Case: Flash Technologies ...................................................................................................... 4
1.1 Business Risk ........................................................................................................................... 4
1.2 Financial & Reporting Risk ...................................................................................................... 5
1.3 Positive .................................................................................................................................... 5
1.4 Accept or Reject ...................................................................................................................... 5
1.5 Real-Life Case .......................................................................................................................... 5
1.5.1 CEO .................................................................................................................................. 5
1.5.2 Fraud ............................................................................................................................... 6
1.5.3 Aftermath ........................................................................................................................ 6
Chapter 2. Case: Waste Management and Mandatory Firm Rotation ................................................. 7
2.1 Paper: Are There Consequences of Mandatory Auditor Rotation by Cameran et al. (2015)7
2.2 Case: Waste Management.................................................................................................... 10
Chapter 3. Case: Ocean Manufacturing and Independence................................................................ 13
3.1 Paper: Auditor Fees and Fraud Firms by Markelevich & Rosner (2012) ............................. 13
3.2 Case: Ocean Manufacturing ................................................................................................. 16
Chapter 4. Eyemax and Audit Committee vs CFO................................................................................ 19
4.1 Paper: Who’s really in charge? By Beck & Mauldin (2014) ................................................. 19
4.2 Case Eyemax ......................................................................................................................... 22
Chapter 5. Laramie Wire Manufacturing and ...................................................................................... 26
5.1 Paper: Fee Pressure and Audit Quality by Ettredge et al. (2014) ....................................... 26
5.2 Laramie Wire Manufacturing ............................................................................................... 29
Chapter 6. Surf and Binary Reporting .................................................................................................. 31
6.1 Paper: The loss of information associated with Binary Audit Reports: Evidence from
Auditor’s internal Control and Going Concern Opinions by Christensen et al. (2019)................... 31
6.2 Case: Surfer Dude Duds, Inc. ................................................................................................ 33
A summary made by LouisT for the course: Auditing given in 2021/2022
,Chapter 1. Case: Flash Technologies
Welcome to this summary. In this chapter, we will discuss the case: “Flash Technologies.” No paper
will be discussed as it is the first week of this course.
1.1 Business Risk
There are a few business risks that can be found within the case. A list of this will be given and why it
could matter for an auditor:
Risk Why auditors might care
Public High Tech Company A public organization normally has a lot of attention from
analysts.
Industry Risk High competition, might drive Flash Technologies out of this
market, which is a going-concern risk.
Korean Venture and other No assurance can be given that Flash Korea will commence
Acquisitions operations on schedule, or that it will not experience significant
and unforeseen costs, and delays. For auditors, it might be
difficult as there is a language barrier and requires more effort
to also check Flash Korea (like hiring another auditor in Korea).
Also, going-concern risk)
Reliance on 1 product They rely on only flash drives, which is very risky if they get out
or something happens like new technology. Going concern risk.
Additionally, they claim a sale price of 300 with COGS 20, a high
margin, maybe too good to be true. The fair value of this
product is also not determinable because there is only one
client.
Suppliers There are shortages and only one supplier for them, which are
also not specifically indicated (going concern risk)
Two major customers account They have a lot of negotiation power and if they leave, this
for 25% of sales could impact the organization significantly. (Going Concern-risk)
Extreme growth This could be an overstatement, this could be aggressive
revenue recognition.
Short sales of the stock The market might know something we do not know. Shorts of
increasing stocks is where traders guess the stock will go down.
Flashwall 2014 was sold to one In terms of Governance, this is not good.
company, which may or not be
a related party as the CEO of
this company wants to join the
board.
SEC Investigations SEC only investigates if it is serious.
Allegations concerning CEO The CEO is very demanding, there are possibilities that this
person can demand and override procedures, giving a risk of
fraud.
AT&T's contract might not go AT&T is also denying this contract, which is a red flag. This could
through. be done to increase stock price, which benefits the CEO.
4
A summary made by LouisT for the course: Auditing given in 2021/2022
, 1.2 Financial & Reporting Risk
Risk Why auditors might care
Accounts receivable increased but Generally, when accounts receivable go up, the
allowance for doubtful accounts and allowance and payable also go up, this requires a check.
payable did not A possible explanation would be that they want to pay
on time and fast, which could indicate why payable did
not increase.
Increase in other current assets Not mentioned in the case, so what are other current
assets?
Inventory increased (turnover only 1,8, There might be obsolete inventory or useless inventory
while the market is 8.1) giving a low turnover.
The rapid increase in sales There could be revenue recognition issues
Sales increased by 204%, general Something does not add up in this case.
administrative expenses with only 36%
High increase in COGS, decrease in This could indicate an increase in resource costs or
gross profit possible manipulation in the COGS.
Negative cashflow There is currently a negative cash flow but with the
increase in net income, it will at some point reverse.
High operating profits (20%) relative to This doesn’t add up as there is high competition, you
the industry, high competition but R&D would want to get more money into R&D to beat the
expenses low in reports. competition.
1.3 Positive
However, we have to be honest. In this case, we have to be honest that there are also positive points
of this company. They have a strong cash position, the industry has a lot of potentials, they have
alliances with reputable firms, strong growth, and excellent market performance. Additionally, they
have an ISO 9001 certification.
Additionally, mentioned in the case, they have old manufacturing buildings and do it manually but
based on the tour, there are not many defective products.
1.4 Accept or Reject
The question: Do you want to accept Flash Technologies as a new client for your audit firm?
Yes, there is always a risk but this company seems to have its thing in order, have good
manufacturing (even though old), and ISO9001 certification. Additionally, based on the financials
(considering the risks), look in order.
1.5 Real-Life Case
This case is based on Centennial Technologies with the CEO: Emmanual “Manny” Pinez. This was a
large-scale accounting fraud, with approximately 23 million dollars in fictitious revenue spread out
over several years. As you could see, even though, we thought there are a lot of risks. There were
positives and even though it is hard to determine whether you want to accept them because
everything looks fine, there still could be a fraud.
1.5.1 CEO
CEO claimed to have a degree from the Hebrew University, and a Master’s degree from the London
School of Economics but it was fake. He didn’t get these degrees and in fact, possibly didn’t get the
bachelor's degree as well.
5
A summary made by LouisT for the course: Auditing given in 2021/2022
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