Ebook Contemporary auditing real issues and cases (9th edition): Part 1

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Cases from prior editions of Michael C. Knapp’s Contemporary Auditing are available exclusively online
via www.CengageBrain.com. In addition to the option to purchase the current edition in multiple formats,
CengageBrain.com offers the following cases from prior editions for purchase as an eBook or as individual
eChapters. This range of options allows you the flexibility to choose the content that best fits your needs!

Comprehensive Cases
1A Jamaica Water Properties
1B AMRE, Inc.
1C United States Surgical Corporation

audits of high-risk aCCounts
2A
2B
2C
2D
2E
2F
2G

CapitalBanc Corporation
Dollar General Stores, Inc.
General Technologies Group Ltd.
SmarTalk Teleservices, Inc.
Campbell Soup Company
Perry Drug Stores, Inc.
Rocky Mount Undergarment

Company, Inc.

internal Control issues
3A Saks Fifth Avenue
3B Triton Energy Ltd.
3C Troberg Stores

ethiCal responsibilities
of aCCountants
4A
4B
4C
4D

Oak Industries, Inc.
Thomas Forehand, CPA
Laurel Valley Estates
Jack Bass, Accounting Professor

ethiCal responsibilities
of independent auditors
5A
5B
5C
5D

Mallon Resources Corporation
The PTL Club
Zaveral Boosalis Raisch
Koger Properties, Inc.

professional roles
6A David Myers, WorldCom Controller

professional issues
7A
7B
7C
7D
7E

HealthSouth Corporation
PricewaterhouseCoopers Securities, LLC
Stephen Gray, CPA
Scott Fane, CPA
National Medical Transportation Network

international Cases
8A
8B
8C
8D

Royal Ahold, N.V.
Australian Wheat Board
Tata Finance Limited
Baan Company, N.V.

ClassiC litigation Cases
9A National Student Marketing Corporation

9B Equity Funding Corporation of America

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Contemporary auditing�
Real Issues

and

Ninth Edition

Cases

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Contemporary auditing�
Real Issues

and

Cases

Ninth Edition

Michael C. Knapp
University of Oklahoma

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States


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Contemporary Auditing: Real Issues
and Cases, Ninth Edition
Michael C. Knapp
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DEDICATION�

To Paula, Suzie, and Becky�


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BRIEF CONTENTS�
Preface
SECTION

xxi
1

Comprehensive Cases
Enron Corporation
Lehman Brothers Holdings, Inc.
Just for FEET, Inc.
Health Management, Inc.
The Leslie Fay Companies
NextCard, Inc.
Lincoln Savings and Loan Association
Crazy Eddie, Inc.
ZZZZ Best Company, Inc.
Gemstar-TV Guide International, Inc.
New Century Financial Corporation
Madoff Securities

2

Audits of High-Risk Accounts
Jack Greenberg, Inc.
Golden Bear Golf, Inc.
Happiness Express, Inc.

General Motors Company
Lipper Holdings, LLC
CBI Holding Company, Inc.
Geo Securities, Inc.
Belot Enterprises
Regina Company, Inc.

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Internal Control Issues
The Trolley Dodgers
Howard Street Jewelers, Inc.
United Way of America
First Keystone Bank
Goodner Brothers, Inc.
Buranello’s Ristorante
Foamex International Inc.

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4

Ethical Responsibilities of Accountants
Creve Couer Pizza, Inc.
F&C International, Inc.
Suzette Washington, Accounting Major
Freescale Semiconductor, Inc.
Wiley Jackson, Accounting Major
Arvel Smart, Accounting Major
David Quinn, Tax Accountant

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1.2

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SECTION

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2.3
2.4
2.5
2.6
2.7
2.8
2.9
SECTION

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3.2
3.3
3.4
3.5
3.6
3.7

SECTION

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4.2
4.3
4.4
4.5
4.6
4.7

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x

Brief Contents
SECTION 5

Ethical Responsibilities of Independent Auditors
Cardillo Travel Systems, Inc.
American International Group, Inc.
The North Face, Inc.
Waverly Holland, Audit Senior
Phillips Petroleum Company
American Fuel & Supply Company, Inc.

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6

Professional Roles
Leigh Ann Walker, Staff Accountant
Bill DeBurger, In-Charge Accountant
Hamilton Wong, In-Charge Accountant
Tommy O’Connell, Audit Senior
Avis Love, Staff Accountant
Charles Tollison, Audit Manager

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7

Professional Issues
Ligand Pharmaceuticals
Sarah Russell, Staff Accountant
Bud Carriker, Audit Senior
Hopkins v. Price Waterhouse
Fred Stern & Company, Inc.�
(Ultramares Corporation v. Touche et al.)
First Securities Company of Chicago�
(Ernst & Ernst v. Hochfelder et al.)

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International Cases
Livent, Inc.
Parmalat Finanziaria, S.p.A.
Kansayaku
Registered Auditors, South Africa

Zuan Yan
Kaset Thai Sugar Company
Republic of Somalia
OAO Gazprom
Societe Generale
Institute of Chartered Accountants of India
Republic of the Sudan
Shari’a
Mohamed Salem El-Hadad, Internal Auditor
Tae Kwang Vina

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6.6
SECTION

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SECTION

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8.14

8

Index
Summary of Topics by Case
Summary of Cases by Topic

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CONTENTS�
Preface
SECTION

xxi
1

Case 1.1

Comprehensive Cases

1

Enron Corporation

3

Arthur Edward Andersen established a simple motto that he required his subordinates
and clients to invoke: “Think straight, talk straight.” For decades, that motto served Arthur
Andersen & Co. well. Unfortunately, the firm’s association with one client, Enron Corporation,
abruptly ended Andersen’s long and proud history in the public accounting profession.
Key topics: history of the public accounting profession in the United States, scope of
professional services provided to audit clients, auditor independence, and retention
of audit workpapers.

Case 1.2

Lehman Brothers Holdings Inc.

23

Wall Street was stunned in September 2008 when this iconic investment banking firm
filed for bankruptcy. Lehman’s bankruptcy examiner charged that the company had en�
gaged in tens of billions of dollars of “accounting-motivated” transactions to enhance
its apparent financial condition.
Key topics: “accounting-motivated” transactions, materiality decisions by auditors,
responsibility of auditors to investigate whistleblower allegations, auditors’ legal

exposure, communications with audit committee.

Case 1.3

Just for FEET, Inc.

39

In the fall of 1999, just a few months after reporting a record profit for fiscal 1998, Just
for FEET collapsed and filed for bankruptcy. Subsequent investigations by law enforce�
ment authorities revealed a massive accounting fraud that had grossly misrepresented
the company’s reported operating results. Key features of the fraud were improper
accounting for “vendor allowances” and intentional understatements of the company’s
inventory valuation allowance.
applying analytical procedures, identifying inherent risk and control risk
factors, need for auditors to monitor key developments within the client’s industry,
assessing the health of a client’s industry, and receivables confirmation procedures.

Key topics:

Case 1.4

Health Management, Inc.

54

The Private Securities Litigation Reform Act (PSLRA) of 1995 amended the Securities
Exchange Act of 1934. This new federal statute was projected to have a major impact
on auditors’ legal liability under the 1934 Act. The first major test of the PSLRA was
triggered by a class-action lawsuit filed against BDO Seidman for its 1995 audit of

Health Management, Inc., a New York–based pharmaceuticals distributor.
inventory audit procedures, auditor independence, content of audit workpapers, inherent risk factors, and auditors’ civil liability under the federal securities laws.

Key topics:

Case 1.5

The Leslie Fay Companies

71

Paul Polishan, the former chief financial officer of The Leslie Fay Companies, received
a nine-year prison sentence for fraudulently misrepresenting Leslie Fay’s financial
xi