a.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: The statement of company contained any material weakness or not.
b.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: If the report filed by the company of internal control over financial reporting with SEC was accurate or not.
c.
Introduction: Internal control is an important part of every organization. It helps in maintaining the efficiency of the management. It is a policy used by the management to avoid fraudulent behavior and increasing accountability in the organization.
To state: The material weaknesses that existed in the fraud committed by company DF.
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Auditing: A Risk Based-Approach (MindTap Course List)
- Diamond Foods, Inc. (LO 8, 9) In February 2012, the Wall Street Journal reported that Diamond Foods, Inc. fired its CEO and CFO, and would restate financial results for two years. The restatement was required after the company found that it had wrongly accounted for crop payments to walnut growers. The investigation focused primarily on whether payments to growers in September 2011 of approximately $60 million and payments to growers in August 2010 of approximately $20 million were accounted for in the correct periods. Shareholders suing the company allege the payments may have been used to shift costs from a prior fiscal year into a subsequent fiscal year. In a February 2012 filing with the SEC, the audit committee stated that Diamond had one or more material weak nesses in its internal control over financial reporting. In January 2014, the SEC charged Diamond Foods and two former executives for their roles in the accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. Diamond Foods agreed to pay $5 million to settle the SEC’S charges. a. Does the restatement suggest that the company’s internal controls contained a material weakness? Explain your rationale. b. In September 2011, the company filed its annual report with the SEC for its fiscal year ended July 31, 2011. As part of that filing, the company maintained that it had effective internal controls over financial reporting as of its year-end date. Do you believe that management’s report on internal control over financial reporting was accurate? c. In February 2012, the audit committee indicated that the company had ineffective internal controls. What types of material weaknesses do you think might exist at Diamond?arrow_forwardWilliams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2006 by two talented engineers with little business training. In 2018, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2018 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years. A five-year casualty insurance policy was purchased at the beginning of 2016 for $40,000. The full amount was debited to insurance expense at the time. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $650,000 on December 29, 2007, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $110,000. Declining real estate values in the area indicate that the salvage value will be no more than $27,500. On December 31, 2017,…arrow_forwardWilliams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2006 by two talented engineers with little business training. In 2018, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2018 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years. A five-year casualty insurance policy was purchased at the beginning of 2016 for $33,500. The full amount was debited to insurance expense at the time. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $598,000 on December 29, 2007, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $110,000. Declining real estate values in the area indicate that the salvage value will be no more than $27,500. On December 31, 2017,…arrow_forward
- Horizon Corporation manufactues personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition and price slashing in the industry, 2020's income statement reported a loss of $20 million. Just before the end of 2021 fiscal year, a memo from the company's chief financial officer (CFO) to Jim Fielding, the company controller, included the following comments: "If we dont do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. The resulting loss for 2021 will cause a violation of our debt convenants and force the company into bankruptcy. I suggest that you ship half of out inventory to J.B. Sales, Inc., in Oklahoma City. I know the company's presdient, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost our loss to a profit. Then J.B. Sales will simply return…arrow_forwardDavid H. Brooks, a university graduate with an accounting degree and the former CEO of DHBIndustries, Inc., was charged in October 2007 with accounting and securities fraud for failing toreport the company’s inventory at the lower of cost or market. From 2001 to 2005, DHB purchasedlarge quantities of a material called Zylon and used it in making bulletproof vests that were sold tothe U.S. military and local law enforcement agencies. During this same period, DHB learned thatZylon deteriorated rapidly when exposed to light, heat, and body perspiration. DHB knew that oneof its competitors, Second Chance Body Armor, had stopped using Zylon in its vests and, eventually, discontinued its business because customer demand for its Zylon-based vests had evaporated.DHB did not write down its own inventory of Zylon and Zylon-based vests because it had a largecontract to supply the U.S. military with bulletproof vests. In its financial statements for the yearended December 31, 2004, DHB reported…arrow_forwardLate in 2017, Joan Seceda and four other investors took the chain of Cheyenne Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Cheyenne Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Cheyenne Department Stores contain the following amounts on November 30, 2020, the end of the fiscal year. Beginning inventory Purchases Net markups Net markdowns Sales revenue Cost $66,600 263,186 Retail $101,100 400,000 50,700 108,900 319,900 According to the November 30, 2020, physical inventory, the actual inventory at retail is $118,200.arrow_forward
- Late in 2017, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2020, the end of the fiscal year. Cost Retail Beginning inventory $ 68,000 $100,000 Purchases 255,000 400,000 Net markups 50,000 Net markdowns 110,000 Sales revenue 320,000 According to the November 30, 2020, physical inventory, the actual inventory at retail is $115,000. Instructions a. Describe the circumstances under which the…arrow_forwardOn Feb, 5, 2017, an employee filed a P 2,000,000 lawsuit against Sans Co. for damages suffered when one of Sans' plant exploded on Dec, 29, 2016. The legal counsel believed the entity would probably lose the lawsuit and estimated the loss to be P 500,000. The employee offered to settle the lawsuit out of court for P 900,000 but the entity dis not agree to the settlement. On December 31, 2016, what amount should be reported as liability from lawsuit?arrow_forwardIn May 2001, the Securities and Exchange Commission sued the former top executives at Sunbeam, chargingthe group with financial reporting fraud that allegedly cost investors billions in losses. Sunbeam Corporationis a recognized designer, manufacturer, and marketer of household and leisure products, including Coleman,Eastpak, First Alert, Grillmaster, Mixmaster, Mr. Coffee, Oster, Powermate, and Campingaz. In the mid-1990s,Sunbeam needed help: its profits had declined by over 80% percent, and in 1996, its stock price was down over50% from its high. To the rescue: Albert Dunlap, also known as “Chainsaw Al” based on his reputation as aruthless executive known for his ability to restructure and turn around troubled companies, largely by eliminating jobs.The strategy appeared to work. In 1997, Sunbeam’s revenues had risen by 18 percent. However, in April 1998,the brokerage firm of Paine Webber downgraded Sunbeam’s stock recommendation. Why the downgrade? PaineWebber had noticed unusually…arrow_forward
- Williams-Santana Inc. is a manufacturer of high-tech industrial parts that was started in 2002 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years. a. A five-year casualty insurance policy was purchased at the beginning of 2014 for $35,000. The full amount was debited to insurance expense at the time. b. On December 31, 2015, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system. c. The company changed inventory cost methods to FIFO from LIFO at the end of 2016 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2015. d. At the end of 2015, the company…arrow_forward(Current Liabilities) Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year.(a) On December 20, 2017, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.(b) Bonuses to key employees based on net income for 2017 are estimated to be $150,000.(c) On December 1, 2017, the company borrowed $600,000 at 8% per year. Interest is paid quarterly.(d) Accounts receivable at December 31, 2017, is $10,000,000. An aging analysis indicates that Baylor’s expense provision for doubtful accounts is estimated to be 3% of the receivables balance.(e) On December 15, 2017, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2018.(f) During the year, customer…arrow_forwardIn May of 2016, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2016, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2016 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2016, balance sheet of: a.$770,000. b.$900,000. c.$970,000. d.$1,170,000.arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning