Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
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?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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.
The Beyond the Page feature, “Goldman Sachs Causes a Ruckus,” describes the controversial involvement of Goldman Sachs in a mortgage-backed securities deal in 2006. When this involvement was revealed, the market value of Goldman Sachs' common stock fell overnight by $10 billion. This was far more than any fine that might have been imposed. Explain.
Chapter 4 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm had total current assets of $1,907,570,000 and current liabilities of $1,362,550,000. a. What is the firm's current ratio? b. If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? c. If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal? Question content area bottom Part 1 a. What is the firm's…arrow_forwardHatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forwardHatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forward
- 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 whyarrow_forwardHatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and possible legal violations in the presentation of the company’s financial statements. A due diligence team from the SEC has been sent to Hatfield’s corporate headquarters in Philadelphia for a complete audit in order to further assess the situation.Several unique circumstances at Hatfield are discovered by the SEC due diligence team during the course of the investigation:∙ Management has been involved in ongoing negotiations with the local labor union, of which approximately 40% of its full-time labor force are members. Labor officials are seeking increased wages and pension benefits, which Hatfield’s management states is not possible at this time due to decreased profitability and a tight cash flow situation. Labor officials have…arrow_forwardWashington D.C., August 15, 2017 — The Securities and Exchange Commission announced today that KPMG has agreed to pay more than $6.2 million to settle allegations that it failed to properly audit the financial statements of oil and gas companies, resulting in investors being misinformed about the value of energy companies. The KPMG engagement partner in charge of the audit also agreed to settle the claim against him. According to an SEC order, KPMG was hired as an outside auditor for Miller Energy Resources in 2011 and issued an unqualified audit report despite the grossly overstated value of major oil and gas assets. KPMG and engagement partner John Riordan failed to properly assess the risks associated with accepting Miller Energy as a client and did not perform the audit properly, which overlooked an over-assessment of certain oil and gas interests the company had purchased in Alaska the previous year. Among other audit failures, KPMG and Riordan did not adequately consider and…arrow_forward
- When firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm has total current assets of $1,780,195,300 and current liabilities of $1,369,381,000. What is the firm’s current ratio? If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal?arrow_forwardWashington Mutual, was a US Bank which went bankrupt at the end of 2008 due to a number of risk management issues. Read the case noted in the link below and answer the following questions: https://www.thebalancemoney.com/washington-mutual-how-wamu-went-bankrupt-3305620 a. Discuss in a paragraph format the importance of an internal risk assessment and auditing process in relation to this case.arrow_forwardWhich of the following is not true regarding the Financial Reform Act of 2010? O It required banks to maintain a stake in the mortgage portfolios that they sell. O It created Volcker Rule which enables and encourages proprietary trading by banks. O It established a Consumer Financial Protection Bureau to regulate consumer finance products and services offered by commercial banks and cther financial institutions. O It set more stringent standarcls for mortgage applicants.arrow_forward
- Washington Mutual, was a US Bank which went bankrupt at the end of 2008 due to a number of risk management issues. Read the case noted in the link below and answer the following question: https://www.thebalancemoney.com/washington-mutual-how-wamu-went-bankrupt-3305620 Discuss the importance of an internal risk assessment and auditing process in relation to this case.arrow_forwardThe Dodd-Frank Act: O A regulatory bill meant to guard against the irresponsibility that caused the subprime mortgage crisis. OA bill that imposed new, strict, regulations on mortgage companies and investment banks. O An act that dispersed additional funds to aid in the recovery of the troubled financial institutions (Fls) O Created a program that monitors both mortgage issuers and borrowers, preventing unethical and predatory lending. O Does all of the abovearrow_forwardBengston, CPA, is conducting the audit of Pollution ControlDevices, Inc. In addition, a supplemental negative assurance report is required to a majormortgage holder. The supplemental report concerns indenture agreements to keep theclient from defaulting on the mortgage. Total assets are $14 million and the mortgage isfor $4 million. The major provisions of the indentures are as follows:1. The current ratio must be maintained above 2.3 to 1.2. The debt/equity ratio must be maintained below 3.0.3. Net earnings after taxes must exceed dividends paid by at least $1 million.a. Write the appropriate supplemental report if all three indenture agreement provisions have been satisfied.b. How would the supplemental report change if net earnings after taxes were $1,010,000and dividends paid were $60,000?c. Assume the same situation as in part b. and also assume that the client refuses tomodify the financial statements or disclose the violation of the indenture agreementprovisions on the grounds…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
The Main Types of Mortgages (EXPLAINED); Author: Bankrate;https://www.youtube.com/watch?v=tp284BA6Zxg;License: Standard Youtube License