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You are the Chief Financial Officer (CFO) of a firm that is being sued for damages it caused. It is the end of your fiscal year, and you are trying to determine the appropriate treatment of this matter. Your boss, the Chief Executive Officer (CEO) acknowledges (privately) that your firm is responsible for the damages and that the judgment will be made against your firm. Your legal counsel estimates that the penalty levied by the court will be in the range of $2 million to $6 million, with a most likely amount of $4 million.
The CEO's position on the matter is that because of the wide variance in the range of possible outcomes (i.e. penalties levied) that the best thing to do is to simply wait until the case is settled (next year), and record at that time the actual damages assessed by the court.
What are some possible reasons that the CEO may hold his viewpoint? What should be your response to the CEO? Do you think it is necessary to make an accrual for an estimated amount of the assessment or settlement? If so, what amount do you think is appropriate? Explain.
Classify the main account or group of accounts affected by this risk in the audit plan.
What are the advantages and disadvantages of the primary types of auditor? There are several types of auditors, the most common types of auditors are:
Audit of general motors revenue. Each car and truck has an invoice on the window and is in GM's computer system, and that 8 million cars and trucks were sold.
In brief describe the responsibilities each of the following groups of people has regarding internal control: Management, the board of directors, internal auditors, others in the organization.
Determine whether SOX has been effective in regulating ethical behavior of for-profit health care organizations. Defend your position.
In light of audit failures over the last decade, are current audit standards sufficient to ensure the integrity of audit opinions? Why or why not?
Adjusting Entries: Interest receivable at 1/1/06 was $5,000. During 2006 cash received from debtors for interest on outstanding notes receivable amounted to $6,000.
The importance of internal controls ... a little side trip due to current events: This is an article that highlights the importance of internal controls in managing financial functions (and by extension to managing all business functions). Can you..
What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? Using the allowance method?
How are reviews performed by external auditors different than those performed by internal auditors? How are the reviews alike? Do you think an organization benefits more from an internal audit or an external audit?
Why is it important to place emphasis on the existence and rights (ownership) assertions when auditing accounts receivable?Which audit procedures are usually the most useful for auditing the existence and rights assertions?
Determine if a qualified opinion, adverse opinion, or a disclaimer of opinion would be issued for each of the above occurrences. Identify the contents of each part.
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