College aantekeningen
Tutorial summary auditing
- Instelling
- Universiteit Van Amsterdam (UvA)
Contains all tutorial slides + additional notes and explanations to the slides!
[Meer zien]Voorbeeld 4 van de 69 pagina's
Voorbeeld 4 van de 69 pagina's
In winkelwagengesponsord bericht van onze partner
Voorbeeld van de inhoud
Tutorial week 1Case: Flash Technologies
- Study case “Flash Technologies” for:
o General business and industry risks
o Financial accounting or reporting risks
- Decide if you want to accept Flash Technologies as a new client for your audit firm
First answers in class
- General business and industry risks
o Gross margin is decreasing as the revenues increase but costs of goods sold are going
up more.
o Suppliers
▪ Shortage of raw materials / components, will affect the company
o Low inventory turnover ratio compared to the industry (8 vs about 2) → may lead to
an impairment problem
▪ Old / overvalued inventory
o Competition → high-tech
▪ Not developing while it is a rapid industry, they have some R&D but we don’t
know whether that is sufficient.
• Low investments in R&D
▪ Does this company invest enough? We don’t have figures from other
industries here
o Two major customers
o Reputation CEO
o Pressure on employees
- Financial accounting or reporting risks
o Company’s revenues are going up a lot, liabilities are going up a lot. What is a risk
with companies that are growing very rapidly?
▪ If companies are going very quickly, the internal control system doesn’t keep
up with the work, might lead to poor quality of reporting etc.
▪ Might affect internal controls
Risk Analysis: General Areas of Risk
- Public high-tech company
o Public listed → downside for auditor: CEO might face incentives, more people are
relying on your publications
- Industry risk
o Competitive
- Korean Venture and other acquisitions
o Is expanding in 2 other companies, but it also imposes some risks (currency risks) →
make sure transactions are valued correctly
- Reliance on 1 product (98% of sales represented by Flash memory)
o If someone comes up with a new technique that might have impact
- Supplier relationships
, o Shortage of raw materials / components will affect the company
- Two major customers account for 25% of the sales
- Extreme growth
- Short sales of stock increasing
o More investors expect the share price to go down, they only do that if they have
some reason for this (bad news, overvalued company)
- Flashwall 2017 sales to one company, which is or will be a related party
o There is no market for this product (no indication of prices)
- SEC investigation: we would like to know what the SEC is investigating
- Allegations concerning CEO
- AT&T contract might not go through
Risk Analysis: Financial Statement Risk
- Accounts receivable increased, but allowance for doubtful accounts & accounts payable did
not
- Increase in other current assets
- Inventory increase, turnover only 1.8
o Some inventory might be overvalued, doesn’t exist → might lead to write-offs
- Rapid increase in sales – revenue recognition issues
o If you see a company for which the sales are increasing by over 200%, then you want
to know if all of those sales actually occurred.
- Sales increased by 204%, general administrative expenses only increased by 36%
o It sounds weird, you would expect supporting activities also going up
- High increase in cost of goods sold
o Decrease in gross profits as a percentage of sales
o Apparently, there is already some competition
- Negative cashflows from operations
o Surprising: normally you would expect them to go in the same direction with sales
Risk Analysis: Flash and the Industry
- Low turnover ratio (1.8) compared to industry (8.1)
o Obsolete inventory?
- High operating profits (20%) relative to industry (14%)
- Flash is a small player
- Industry is rapidly changing and extremely competitive
- R&D expenses seems relatively low
Positive aspects of Flash
- Strong cash position
- PC Card market is leading edge with a lot of potential
- Alliances with reputable firms
- Strong growth
- Excellent market performance
- ISO 9001 certified
,The Truth
- Case based on real company: Centennial Technologies
- CEO: Emanual “Manny” Pinez
- Large scale accounting fraud: approx. $23 million in fictious revenue
- Fraud spread out over a number of years
- Management fraud
About Emanual Pinez
- Claimed to have a degree from the Hebrew University, and a master’s degree from the
London School of Economics
- Fired from a Swiss computer company in 1971 for phony invoices
o Prepared but never sent out, but still booked as revenues
- CEO of ABL Technologies in early 1980’s which was involved in many lawsuits
- Claimed to have set a new world record swimming across the English Channel in 1958 (10
hours, 21 minutes)
- Said he was a paratrooper in the Israeli Army
- Pathological liar according to his wife
- Flamboyant (lover of fast cars, wine, food)
- Claimed to be close to a $300 million sales deal with AT&T
- Claimed to have never profited from the fraud (but used his shares as collateral for a $18.5
million loan)
The Fraud
- Flash 98 scam
o Cost 10 cents, sales price $500 (did in fact not exist)
o Sold to only 1 company (BBC computers)
o $1 million dollar wired by Pinez to St. Jude Management Corp (also his company),
which then paid Centennial on behalf of BBC Computers
▪ The products went out from Flash to BBC, and then Jude would ‘pay’ on
behalf of BBC
- PC Card scam
o Investor saw: “a room full of people banging on cards with rubber mallets” –
Subsequently dumped all Centennial shares
▪ They started producing cases, if those cases are defective, then they will be
sent back and restored. But there wasn’t any technology → this didn’t exist.
The only thing they did was making these outside cases.
o Fake cards sold to companies controlled by Pinez
- Fruit basket scheme
o Weights couple of kilos, memories weigh nothing, took shipping information
o Weighted before sending
o Used for paperwork to convince auditor packages with memory cards were sent to
customers
Financial restatements
- Sales were reduced from $37.8 to $33.4 million
- COGS was increased from $23.6 to $29.7 million
, - Net income went from a profit of $5 million to loss $4.2 million
- Inventory was reduced from $18 to $8 million
- PPE was reduced from $4.6 to $2 million
- Stockholder Equity was reduced from $45 to $32 million
- Cumulative adjustments:
o Reduction sales revenue by $21.2 million
o Increase COGS by $8.8 million
o Write-offs investments and advances of $15.8 million
→ Centennial was eligible for an $8.1 million federal tax refund!
How was the fraud detected?
- Auditor: Coopers & Lybrand → indicated it was a high-risk client
- Classified Centennial as “high-level risk alert” in 1996
- 1997: Auditor noticed “fishy bill and hold transactions” → revenue but no invoices were sent
out
- Informed board of directors and requested full financial review
- CFO James M. Murphy indicated Pinez as the mastermind behind the fraud
Aftermath
- Pinez sentenced to 5 years in prison
- Ordered to pay restitution of $150 million
- Paid $5.3 million to settle a civil complaint
- Chief Financial Officer (CFO), J.M. Murphy, sentenced to 15 months in a halfway house.
Ordered to make the same restitution.
- Chief Operating Officer (COO), B. Fletcher, sentenced to 15 months in a halfway house.
Ordered to pay $7 million restitution.
- SEC filed complaints against Murphy and Peretz (business partner who accepted a fruit
basket, claiming it were products)
o Peretz: business partner and friend of CEO, he said to the auditors that he received
products (instead of fruit baskets).
- Four days before Pinez was fired he placed an order for 5,400 option contracts betting the
stock would fall; proceeds were frozen
- Centennial survived the fraud and returned to profitability
- In 1999 Intel took a 16 percent share in Centennial and in 2001 Giant Solectron Corp.
purchased the company for almost $22 per share.
Tutorial week 2
Ethics in accounting & client acceptance
Is Audit Partner Identification Useful? Evidence from the KPMG ‘Steal the Exam’ Scandal
The Scandal
- PCAOB: oversight body (in the Netherlands AFM) → works in public interest
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper juvianti. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €6,79. Je zit daarna nergens aan vast.
Is Stuvia te vertrouwen?
4,6 sterren op Google & Trustpilot (+1000 reviews)
Afgelopen 30 dagen zijn er 77254 samenvattingen verkocht
Opgericht in 2010, al 14 jaar dé plek om samenvattingen te kopen