You couldn’t be more excited about being on your first financial statement audit as you launch into your new professional accounting career. Having recently graduated with a Master of Accountancy degree, you are thrilled to be employing all the skills acquired in your rigorous accounting program. The client engagement you’re now working on is Longeta Corporation, which is a California-based developer and marketer of software used to manage data storage functions for complex computer networks. Longeta particularly markets its products to other companies who serve as intermediaries for government purchasers.These intermediaries purchase Longeta’s products and then “resell” them to government purchasers and other organizations. The company’s stock is quoted on the NASDAQ National Market System. The audit manager in charge of the engagement assigned you responsibility for auditing revenues for Longeta. You are excited to be in charge of this highly significant account and are enjoying the work you’ve done so far in the audit of some of the significant revenue transactions recorded during the year. The financial statements under audit are for the fiscal period ended September 30, 2019. ASSESSING EVIDENCE OBTAINED You have gathered quite a bit of information about several of the revenue transactions for the year. One of the transactions particularly caught your attention given its size. So, you’re in the process of assessing the evidence obtained to determine if the revenues from this transaction are fairly stated.You obtained this information from reviewing documentation related to the transaction and from inquiries you made of the vice president of sales and the controller.You made the following notes about what you’ve learned and are now preparing for a meeting with the audit manager to discuss issues related to the transaction. Here’s what you’ve noted so far: During July 2019, Longeta’s vice president of sales sent a proposal to Magicon Inc, to sell $7 million worth of Longeta software and services to the U.S. Air Force. Longeta approached Magicon because Magicon has a relationship with the U.S. Air Force while Longeta does not. Magicon is a necessary intermediary under the government’s procurement regulations. Under terms of the proposal, Magicon would place a $7 million order for Longeta software and services by September 30, 2019, which is the last day of Longeta’s fiscal year. In exchange, Magicon would receive a sizeable commission and become an exclusive reseller of Longeta products for the Air Force. Longeta normally must enter into “reseller agreements” with intermediaries such as Magicon in order to complete transactions. However, given the short timetable, Magicon was unable to obtain necessary corporate approvals from its legal department to sign a reseller agreement with Longeta before year end on September 30. As a substitute for the reseller agreement, Magicon’s buyers agreed to place its order through an “order letter” that would later be followed by a purchase order and the reseller agreement. Before the order letter was submitted, Magicon’s legal department requested that Longeta grant Magicon the right to cancel its obligation to pay Longeta the $7 million if Longeta and Magicon were unable to negotiate a mutually acceptable reseller agreement within 30 days. In late September, Longeta’s vice president of sales emailed and faxed a letter on Longeta letterhead to Magicon legal specialists. Here is an excerpt from the letter: “Per our discussion, the following is a clarification of the intent of the order letter dated September 30, 2019 between Longeta Corporation and Magicon Inc.The order letter meets GAAP requirement for revenue recognition.The order letter allows Longeta to recognize revenue for our year ended September 30, 2019…The order letter gives us 30 days to reach mutually agreeable terms and conditions. In the unlikely event that we do not reach “mutually agreeable terms and conditions,” Magicon will have the right to terminate the order letter and all obligations.This contingency may not be expressly stated in the order letter. However, you have my assurance that in the event that we cannot reach terms we will not hold you to the commitment to pay referenced in the order letter.” On September 30, 2019, the Magicon legal department approved the deal and Magicon’s purchasers signed and transmitted an order letter from Magicon to Longeta to buy $7 million worth of software and support services. The separate letter from the vice president of sales to Magicon, however, was not attached to the order letter and it was not referenced in the order letter. The order letter was submitted to Longeta’s finance department.At that point, Longeta’s made an accounting entry to record $5.8 million as current revenue for the product Longeta had shipped. The remaining $1.2 million was to be separately invoiced for updates and technical support services and was therefore recorded as deferred revenue. REQUIRED You want to be thoroughly prepared for the meeting with the audit manager. Perform the following procedures to be certain you have all necessary information about the transaction’s treatment. [1] The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently completed a joint project to develop a common revenue standard for U.S. GAAP and IFRS to improve revenue recognition practices and to remove inconsistencies and weaknesses in revenue requirements. The updated guidance is contained in the Accounting Standards Codification as Topic 606, "Revenue from Contracts with Customers." Review that guidance to summarize the core principle for recognizing revenue and briefly describe the five steps needed to achieve the core principle. Also, describe how the core principle was not achieved in this situation. [2] In your own words, explain the company’s reasoning for recording $5.8 million as current revenue while recording the remaining $1.2 million as deferred revenue. Also, document where on the financial statements the deferred revenue account would be presented. [3] Assess the content of the separate letter issued by Longeta’s vice president of sales to Magicon. Document your conclusion about how the content of the letter affects or does not affect revenue recognition for Longeta for the year ended September 30, 2019. [4] Given that the letter from the vice president of sales was not attached to or documented in the order letter submitted by Magicon to Longeta, document your conclusion as to the impact, if any, the vice president’s letter has on the accounting treatment for the transaction since it was not part of the order letter. [5] Research PCAOB Auditing Standards on the PCAOB's website (www.pcaobus.org) to summarize the guidance for auditors in regards to their assessment of the risk of material misstatement related to revenue recognition. What do those standards require of auditors in regards to their assessment of risk related to revenue recognition? [6] Auditing standards describe three conditions that are usually found to be present when fraud exists. What are those three conditions and what red flags, if any, might be present at Longeta? [7] The separate letter from the vice president of sales was emailed and faxed to Magicon representatives. What would be the impact if Longeta’s vice president had only provided that information orally to Magicon representatives and not forwarded the information in written form? [8] As of September 30, 2019, Magicon had only submitted the order letter. Document your conclusion about the impact on the accounting for the transaction if Longeta and Magicon (a) sign the reseller agreement within 30 days or (b) do not sign the reseller agreement within 30 days. [9] Document your final conclusion about the accounting treatment of this transaction between Longeta and Magicon. Be sure to provide a basis for your conclusion. PROFESSIONAL JUDGMENT QUESTION It is recommended that you read the Professional Judgment Introduction found at the beginning of the book prior to responding to the following question. [10] One of the environmental factors affecting judgment is the "rush to solve" judgment trap. Briefly describe the trap and how it applies to the situation affecting the recording of the sales transaction.
> If the value of r is small, can we conclude that there is not a strong relationship between the two variables?
> A new study is widely reported to show that dog owners benefit by being more agreeable and extroverted than cat owners. Comment in light of facts that, on average, dogs cost more to maintain and that dog owners have larger incomes than cat owners.
> In each of the following instances, would you expect a positive, negative, or zero correlation? (a) Number of salespersons and total dollar sales for real estate firms. (b) Total payroll and percent of wins of national league baseball teams. (c) The amou
> What is wrong with this statement of purpose? PURPOSE: Determine whether or not, over the course of the semester, the campus bus reaches your stop at the scheduled time. Give an improved statement of purpose.
> Would you expect a positive, negative, or nearly zero correlation for each of the following7 Give reasons for your answers. (a) The physical fitness of a dog and the physical fitness of the owner. (b) For each person, the number of songs downloaded fro
> With reference to the quit-smoking experiment: (a) Suppose the placebo trials were ignored and you were only told that 120 of 216 were abstinent after using the medicated patches. Would this now appear to be stronger evidence in favor of the patches? (
> With reference to the quit-smoking experiment, suppose two new subjects are available. Explain how you would assign one subject to receive the placebo and one to receive the medicated patch.
> Nausea from air sickness affects some travelers. A drug company, wanting to establish the effectiveness of its motion sickness pill, randomly gives either its pill or a look-alike sugar pill (placebo) to 200 passengers. (a) Complete the marginal totals.
> A sample of persons will each be asked to give the number of their close friends. The responses are to be grouped into the following classes: 0, 1-3, 3-5, 6 or more. Left endpoint is included. Explain where difficulties might arise.
> The number of goals your favorite ice hockey team scores are to be collected for each game. These game totals are to be grouped into the classes 0- 1, 2- 3, 4- 5, 7 or more. Both endpoints are included. Explain where a difficulty might arise.
> Data from one campus dorm on the number of burglaries are collected each week of the semester. These data are to be grouped into the classes 0-1, 2-3, 3-5, 6 or more. Both endpoints included. Explain where a difficulty might arise.
> Of the $207 million raised by a major university's fund drive, $11 7 million came from individuals and bequests, $24 million from industry and business, and $66 million from foundations and associations. Present this information in the form of a pie char
> At the last minute, 6 tickets have become available for a big football game. Use Table 1, Appendix B, to select the recipients from among 89 interested students.
> Eighty customers at a bakery named their favorite pie. The responses are as follows: (a) Calculate the frequency for each pie. (b) Construct a pie chart.
> The number of automobile accidents reported per month helps to identify intersections that require improvement. The number of crashes per month reported at an intersection near a university campus in Madison, Wisconsin, are Present these data in a freque
> A student at the University of Wisconsin surveyed 40 students in her dorm concerning their participation in extracurricular activities during the past week. The data on number of activities are Present these data in a frequency table and in a relative fr
> Recorded here are the blood types of 40 persons who have volunteered to donate blood at a plasma center. Summarize the data in a frequency table. Include calculations of the relative frequencies.
> The city of Madison regularly checks the water quality at swimming beaches located on area lakes. The concentration of fecal coliforms, in number of colony forming units (CFU) per 100 ml of water, was measured on fifteen days during the summer at one bea
> A campus area merchant recorded the number of bad checks received per month, for five months 4 5 4 7 6 Display the data in a dot diagram.
> Before microwave ovens are sold, the manufacturer must check to ensure that the radiation coming through the door is below a specified safe limit. The amounts of radiation leakage (mW/cm2) with the door closed from 25 ovens are as follows (courtesy of Jo
> A person with asthma took measurements by blowing into a peak-flow meter on seven consecutive days. 429 425 471 422 432 444 454 Display the data in a dot diagram.
> A sample of 50 departing airline passengers at the main check-in counter produced the following number of bags checked through to final destinations. (a) Make a relative frequency line diagram. (b) Comment on the pattern. (c) What proportion of passenger
> A major West Coast power company surveyed 50 customers who were asked to respond to the statement, "People should rely mainly on themselves to solve problems caused by power outages" with one of the following responses. 1. Definitely agree. 2. Somewhat
> Twelve bicycles are available for use at the student union. Use Table 1, to select 4 of them for you and three of your friends to ride today.
> A survey of 451 men revealed that 144 men, or 3 1.9%, wait until Valentine's day or the day before to purchase flowers. Identify a statistical population and the sample.
> It was 9:30 A.M. on a Monday morning when the call came through. “Hi Dr. Mitchell, do you have a minute?” “Sure,” the professor replied. “I am one of your former students, but if you don’t mind, I would prefer to remain anonymous. I think it is best for
> Nathan recently interviewed with one of the accounting firms in the city where he wants to live. The firm agreed to cover the expense of a rental car that he used to travel from his university to the firm’s office. The rental car agency required that Nat
> Brent Dorsey graduated six months ago with a master’s degree in accounting. Immediately after graduation, Brent began working with a large accounting firm in Portland, Oregon. He is now on his second audit engagement—a company called Northwest Steel Prod
> Banking regulators announced in early 2015 a greater focus on evaluating ethical culture as part of their regulatory examination of a bank’s health. In a February 2015 speech, Thomas Baxter, Executive Vice President and General Counsel
> On November 15, 2004, the Securities and Exchange Commission (SEC) filed an enforcement action in the Northern Illinois U.S. District Court against Hollinger Inc., a Toronto-based company, and its former Chairman and CEO, Conrad Black, and the company’s
> Murchison Technologies, Inc. recently developed a patient-billing software system that it markets to physicians and dentists. Jim Archer and Janice Johnson founded the company in Austin, Texas five years ago after working at IBM for more than 15 years. J
> Scott glanced up at the clock on his office wall. It read 2:30 P.M. He had scheduled a 3:00 P.M. meeting with George “Hang-ten” Baldwin, chief executive officer of Surfer Dude Duds, Inc. Surfer Dude specialized in selling clothing and accessories popular
> Spencer and Loveland, LLP is a medium-sized, regional accounting firm based in the western part of the United States. A new client of the firm, K&K, Inc., which manufactures a variety of picture frames, recently contracted with Spencer and Loveland t
> Auto Parts, Inc. (“the Company”) manufactures automobile subassemblies marketed primarily to the large U.S. automakers. The publicly held Company’s unaudited financial statements for the year ended December 31, 2018, reflect total assets of $56 million,
> The information below relates to the audit of EyeMax Corporation, a client with a calendar year-end. EyeMax has debt agreements associated with publicly traded bonds that require audited financial statements. The company is currently, and historically ha
> The Runners Shop (TRS) was a family-owned business founded 17 years ago by Robert and Andrea Johnson. In July of 2018, TRS found itself experiencing a severe cash shortage that forced it to file for bankruptcy protection. Prior to shutting down its opera
> Southeast Shoe Distributor (SSD) is a closely-owned business that was founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and resells men’s, women’s, and childrenâ€&#
> Southeast Shoe Distributor (SSD) is a closely owned business founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and resells men’s, women’s, and children’s sho
> Southeast Shoe Distributor (SSD) is a closely owned business that was founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and sells men’s, women’s, and childrenâ€
> After being in business for only two years, Your 1040 Return.com has quickly become a leading provider of online income tax preparation and filing services for individual taxpayers. Steven Chicago founded the company after a business idea came to him whi
> Southeast Shoe Distributor (SSD) is a closely owned business that was founded 10 years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and sells men’s, women’s, and childrenâ€
> Southeast Shoe Distributor (SSD) is a closely owned business that was founded ten years ago by Stewart Green and Paul Williams. SSD is a distributor that purchases and sells men’s, women’s, and childrenâ€
> RedPack Beer Company is a privately-held micro brewery located in Raleigh, North Carolina. Bank loan covenants require that RedPack submit audited financial statements annually to the bank. Specifically, the bank covenants contain revenue and liquidity m
> Your audit firm, Garrett and Schulzke LLP, is engaged to perform the annual audit of Hooplah, Inc., for the year ending December 31, 2017. Hooplah is a privately-held company that sells electronics components to companies that manufacture various applian
> The Financial Accounting Standard Board’s Accounting Standards Codification Topic 820, Fair Value Measurement, (ASC 820) provides a framework for measuring or estimating the fair value of certain assets and liabilities. It provides a hierarchy with three
> Confirmations of accounts receivable play an important role in the accumulation of sufficient, appropriate audit evidence. One of the principal strengths of confirmations is that they provide evidence obtained directly from third-parties. Auditing Standa
> Henrico Retail, Inc. is a first year audit client. The audit partner obtained the following description of the sales system after recently meeting with client personnel at the corporate office. DESCRIPTION OF THE SALES SYSTEM Henrico’s sales system is IT
> Wally’s Billboard & Sign Supply, Inc. was founded four years ago by Walter Johnson. The company specializes in providing locations for sign and billboard advertising and has recently begun to enter the sign design market. After working several years in t
> Burlingham Bees, an independent, minor league baseball team, competes in the Northwest Coast League. The team finished in second place in 2018 with a record of 94-50. The Bees’ 2018 cumulative season attendance of 534,784 spectators set
> Asher Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.Asher Farms sells ice pack, chill pack and frozen chicken, in whole, cut-up and bone
> Northwest Bank (NWB) has banking operations in 35 communities in the states of Washington, Oregon, and Idaho. Headquarters for the bank are in Walla Walla, Washington. NWB’s loan portfolio consists primarily of agricultural loans, comme
> Analytical procedures can be powerful tools in conducting an audit. They help the auditor understand a client’s business and are useful in identifying potential risks and problem areas requiring greater substantive audit attention. If f
> Anne Aylor, Inc. (Anne Aylor) is a leading national specialty retailer of high-quality women’s apparel, shoes, and accessories sold primarily under the “Anne Aylor” brand name. Anne Aylor is a highly
> Town and Country Hardware (T&CH) is a closely owned business founded six years ago by Caleb and Jasmine Wright. T&CH has retail hardware stores located at three lake communities along the Virginia and North Carolina border. T&CH sells products for home i
> In a management review control (MRC), members of management review key information and evaluate its reasonableness by comparing it to expected values. Some examples include comparing budget to actual, reviewing impairment analyses, and reviewing estimate
> On January 24, 2008, Société Générale, France’s second largest bank announced the largest trading loss in history, a staggering 4.9 billion Euro ($7.2 billion U.S.), which it blamed on a single rogue trader. The trader, Jérôme Kerviel, worked at what Soc
> Large public companies in the U.S. are required by law to engage an auditor to perform an “integrated audit” involving both a traditional financial statement audit and an audit of internal control over financial reporting. PCAOB Audit Standard No. 2201,
> You are the new information technology (IT) audit specialist at the accounting firm of Townsend and Townsend, LLP. One of the audit partners, Harold Mobley, asked you to evaluate the effectiveness of general and application IT-related controls for a pote
> St. James Clothiers is a high-end clothing store located in a small Tennessee town. St. James has only one store, which is located in the shopping district by the town square. St. James enjoys the reputation of being the place to buy nice clothing in the
> An entrepreneur by the name of Francisco Fernandez recently entered into a new venture involving ownership and operation of a small, 26-room motel and café. The motel is located in a remote area of southern Utah. The area is popular for tourists, who com
> Apple Inc. (Apple) is a worldwide provider of innovative technology products and services. Apple’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, ma
> Tina is an audit manager with a national public accounting firm and one of her clients is Simply Steam, Co. Simply Steam provides industrial and domestic carpet steam-cleaning services. This is the first time Simply Steam has been audited. Thus, Tina doe
> John C. Koss started his first company, J.C. Koss Hospital Television Rental Company, in 1953, based in Milwaukee, Wisconsin, but John had greater ambitions. Eventually he partnered with Martin Lange, an engineer, and by 1958 the two had founded Koss Ele
> In December 1995, the flamboyant entrepreneur, Michael “Mickey” Monus, formerly president and chief operating officer (COO) of the deep-discount retail chain Phar-Mor, Inc., was sentenced to 19 years and seven months in prison. Monus was convicted for th
> Xerox Corporation (Xerox), once a star in the technology sector of the economy, found itself engulfed in an accounting scandal alleging that it was too aggressive in recognizing equipment revenue.1 The complaint filed by the Securities and Exchange Commi
> Waste Management, Inc.’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 28, 1997 described the company at that time as a leading international provider of waste management services. According to disclosures i
> One can only imagine the high expectations of investors when the boards of directors of CUC International, Inc. (CUC) and HFS, Inc. (HFS) agreed to merge in May 1997 to form Cendant Corporation. The $14 billion stock merger of HFS and CUC, considered a m
> Enron Corporation entered 2001 as the seventh largest public company in the United States, only to later exit the year as the largest company to ever declare bankruptcy to that point in U.S. history. Investors who lost millions and lawmakers seeking to p
> Don’t ever tell yourself, “that won’t happen to me.” Just ask Cynthia Cooper, former Vice President of Internal Audit at WorldCom. Cynthia Cooper was a typical accounting student as an undergrad at Mississippi State University. Raised in Clinton, Mississ
> The accounting firm of Barnes and Fischer, LLP, is a medium-sized, national CPA firm. The partnership, formed in 1954, now has over 4,000 professionals on the payroll. The firm mainly provides auditing and tax services, but it has recently had success bu
> In what ways can leaders create ethical organizations?
> How do the contemporary theories of leadership relate to earlier foundational theories?
> What are the contingency theories of leadership?
> What are the causes and consequences of abuse of power?
> What power or influence tactics and their contingencies are identified most often?
> How is leadership different from power?
> The authors who suggested that membership in a team makes us smarter found that teams were more rational and quicker at finding solutions to difficult probability problems and reasoning tasks than were individuals. After participation in the study, team
> On the highly functioning teams in which you’ve been a member, what other characteristics might have contributed to success?
> From your experiences in teams, do you agree with the researchers’ findings on the characteristics of smart teams? Why or why not?
> Imagine you are a manager at a national corporation. You have been asked to select employees for a virtual problem-solving team. What types of employees would you include and why?
> Can you think of strategies that can help build trust among virtual team members?
> Recall a time when you felt like you could not trust members on your team. Why did you feel that way? How did that affect the team’s performance?
> What are the relevant points of intellectual and physical abilities to organizational behavior?
> In the cases discussed above, where do you think you would perform better, and why? Justify your answer by taking into account efficiency factors, reward systems, the context, and your individual perceptions.
> What type of group or team are cyclists working for a supervisor for Deliveroo? Justify your answer.
> How should the criterion of “legitimacy” be determined? Explain.
> Is there ever a case in which illegitimate tasks should be tolerated or “rightfully” given? Explain your answer.
> When is work performed by individuals preferred over work performed by teams?
> What are the major job attitudes?
> How do you think employees should respond when given illegitimate tasks? How can an organization monitor the tasks it assigns to employees and ensure that the tasks are legitimate? Explain your answer.
> Do you think it is possible for a reward program to start out rewarding the appropriate behavior at its inception but then begin to reward the wrong thing over time? Why or why not?
> Assuming you could become better at detecting the real emotions of others from facial expressions, do you think it would help your career? Why or why not?
> What are the ethical implications of reading faces for emotional content in the workplace?
> How do you overcome the potential problems of cross-cultural communication?
> What do you think are the best workplace applications for emotion reading technology?
> What type of decision-making framework would you advise the warehouse manager to adopt in order to help him reach an optimal decision? How will your suggestion help?
> Identify the stakeholders who will be influenced by the decision to accept or refuse the frozen meat shipment.
> Does the decision to accept or refuse the frozen meat shipment call for ethical or legal considerations? Why?
> How would you have acted had you been in a similar situation?
> How can organizations create team players?
