United States Surgical Corporation Audit - Article Example

Running Head: UNITED S SURGICAL CORPORATION AUDIT United s Surgical Corporation Audit Papers in APA Style QUESTION 1: Identify audit procedures that, if employed by Ernst & Whinney during the 1981 USSC audit, might have detected the overstatement of the leased and loaned assets account that resulted from the improper accounting for asset retirements. ANSWER: During the 1981, Ernst & Whinney resigned as the audit group of United States Surgical Corporation due to a discrepancy made in the audit to mold and dies tooling. The discrepancy was about the tooling purchases that were classified as capital expenditures. For this reason, the company lost a big percentage, plunging down a dramatic fall from $14.375 to $5.625. The unreliable, late and incomplete report resulted to improper accounting that even affected the asset retirements. QUESTION 2: In 1981, USSC extended the useful lives of several of its fixed assets and adopted salvage value for many of these same assets for the first time. Are these changes permissible under generally accepted accounting principles Assuming these changes had a material effect on USSC's financial condition and results of operations, how should the change have affected Ernst & Whinney's 1981 audit opinion Assume that the current reporting standard were in effect at the time. ANSWER: The Securities and Exchange Commission was able to identify Michael S. Hope, a former partner of Ernst & Whinney. He did the audit of the financial statements of United States Surgical Corporation in 1980 and 1981. Such statements appeared to be steady when it comes to the earnings of the company. However, on the contrary, the company was losing money. This case led to some charges filed against US Surgical. In an investigation in 1984, it turned out that there were executives alleged of engaging in illegal practices. Though SEC had pointed out US Surgical's to be guilty of fraud, this was not a basis of defense against Ernst & Whinney. Ernst & Whinney is a combination of companies with different cultures. Such differences raised conflicts of interest between consulting and auditing. Client opposition and antitrust issues caused so many problems. Should the company focused on consulting, it could have had provided a better avenue for openness. As consulting appears to be a friend of companies, on the other hand, conservative auditing was apparently an injustice to many companies. During this time, the auditor's report-- though should have been substantiated by figures-was dependent on the subjective opinion of the auditor. If the present professional means of audit in an objective approached is used during this time, it could have had been effective if coupled with consulting services. This would help the clients progress on their financial stability. They would concentrate on their strengths and work on their limitations to balance it off. QUESTION 3: Prepare common-sized financial statement for USSC for the period 1979-1981. Also compute key liquidity, solvency, activity, and profitability ratio for 1980 and 1981. Given these data, identify what you believe were the high-risk financial statement items for the 1981 USSC audit. ANSWER: The high risk financial statement items for 1981 USSC audit is in its profitability ratio. Retirement assets are recorded to be high. However, there is no concrete basis that supports nor aligns profit to assets, subjecting it to a doubt. QUESTION 4: What factors in the auditor-client relationship create a power imbalance in favor of the client Discuss measures that the profession could take to minimize the negative consequences of this power imbalance. ANSWER: Audit reports greatly rely on the auditor. Misstatements would lead to a false report that often became the basis of taking legal actions. A declaration of financial distress is crucial as it could create damage. On the other hand, the report of an auditor is affected by the way he understands the company. Although financial distress could be detected by auditors, it is best that the business, capital structure and the composition of the owners of the company should be well understood. Reports may alter the accuracy of accounting methods and such misstatements may make an analytical review complicated. However, sometimes, misstated financial statement is a means of strategy to cover up a financial distress. It is best the auditor and the client work hand-in-and to identify potential financial distress. It is the reponsibility of the client to tell what has to be revealed when it comes to the financial condition of the company for easy assessment. Telling the real story would help create an ambience of trust and support. Although there are risks involved, yet the more specific the transaction is, the easier the auditor will come up with a cost-effective audit. This will enable the auditor to focus much on the client's strengths to undermine the potential problems. By means of a valued analytical technique, the auditor will be able to come up with a good report. QUESTION 5: Regarding the cost incurred for USSC by Braden, identify A, the evidence Hope collected that support USSC's claim that the cost involved tooling modifications and b, the audit evidence that support the position that the costs were generic production expenses. What do generally accepted auditing standards suggest are the key evaluative criteria; do you believe Hope was justified in deciding that the costs in question were for tooling modification Why or why not ANSWER: Hope didn't have support justification as to declaring the tooling modification as capital expenditures. Auditing standards suggest factual information. This should come from the client by means of an open communication for verification and further examination. This could have had somehow resolved the issue. He could have identified fraud from the beginning. ANSWER: QUESTION 6: In your opinion, did Hope satisfactorily investigate the possibility that there were additional suspicious tooling chares being paid and recorded by USSC If not, what additional steps should he has taken to further explore this possibility If Hope believed there was some like hood that his clients had committed an illegal act, what additional audit procedures, if any, would have been appropriate (Assume that current auditing standards were in effect at the time) ANSWER: Hope did not satisfactorily investigated the possibility that there were additional suspicious tooling chares being paid and recorded by USSC. He could have had probed more. From the audit itself the problem could have been identified. However, although this information was soon given to Hope, he still disregarded it. His counter claim of having the client false reports was not a basis for the acquittal of such mistake. It was a clear manifestation of negligence that resulted to much damage. Being the auditor, he could have had given his opinions and analysis also regarding this matter. QUESTION 7: When a CPA firm has two audit clients that transact business with each other, should the two audit teams be allowed to share information regarding their clients Why or Why not ANSWER: As an ethical standard, during the course of examination, it is best that the two refrain from giving information as this could affect the conclusion of the audit. Once the report has been done, then they could compare notes for check and balance purposes. List of References May, Robert G., (March 24, 1983), Analytical Review Techniques for Auditors, University of Texas at Austin http://newman.baruch.cuny.edu/digital/saxe/saxe_1982/may_83.htm The New York Times, (August 7, 1986) COMPANY NEWS; S.E.C. Censure Over an Audit http://query.nytimes.com/gst/fullpage.htmlres=9F0DEEDA1438F932A15751C1A965948260 Sarbanes-Oxley Act Periodic Reports, Release No. 33-8238 (June 5,2003), http://www.sec.gov/rules/final/33-8238.htm Wikipedia GAAP and US SEC, (23 Jan, 2007) http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission (6 Jan, 2007) http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles Read More