SU Economic Restatement of The Financial Statements on Investors Paper

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Description

Assume you are the partner in an accounting firm hired to perform the audit on a fortune 1000 company. Assume also that the initial public offering (IPO) of the company was approximately five (5) years ago and the company is concerned that, in less than five (5) years after the IPO, a restatement may be necessary. During your initial evaluation of the client, you discover the following information:

  • The client is currently undergoing a three (3) year income tax examination by the Internal Revenue Service (IRS). A significant issue involved in the IRS audit encompasses inventory write-downs on the tax returns that are not included in the financial statements. Because of the concealment of the transaction, the IRS is labeling the treatment of the write-down as fraud.
  • The company has a share-based compensation plan for top-level executives consisting of stock options. The value of the options exercised during the year was not expensed or disclosed in the financial statements.
  • The company has several operating and capital leases in place, and the CFO is considering leasing a substantial portion of the assets for future use. The current leases in place are arranged using special purpose entities (SPEs) and operating leases.
  • The company seeks to acquire a global partner, which will require IFRS reporting.
  • The company received correspondence from the Securities and Exchange Commission (SEC) requesting additional supplemental information regarding the financial statements submitted with the IPO.

Write an eight to ten (8-10) page paper in which you:

  1. Evaluate any damaging financial and ethical repercussions of failure to include the inventory write-downs in the financial statements. Prepare a recommendation to the CFO, evaluating the negative impact of a civil fraud penalty on the corporation as a result of the IRS audit. In the recommendation, include essential internal control procedures to prevent fraudulent financial reporting from occurring, as well as the major obligation of the CEO and CFO to ensure compliance.
  2. Examine the negative results on stakeholders and the financial statements of an IRS audit which generates additional tax and penalties or subsequent audits. Assume that the subsequent audit and / or additional tax and penalties result from the taxpayer’s use of an inventory reserve account, applying a 10 percent reduction to inventory over three (3) years.
  3. Discuss the applicable federal tax laws, regulations, rulings, and court cases related to the inventory write-downs, and explain the specific relevance of each to the write-down.
  4. Research the current generally accepted accounting principles (GAAP) regarding stock option accounting. Evaluate the current treatment of the company’s share-based compensation plan based on GAAP reporting. Contrast the financial benefits and risks of the share-based compensation stock option plan with the financial benefits and risks of a share-based stock-appreciation rights plan (SARS). Recommend to the CFO which plan the company should use and provide the correct accounting treatment for each.
  5. Research the reporting requirements for lease reporting under GAAP and International Financial Reporting Standards (IFRS). Based on your research, create a proposal for future lease transactions to the CFO. Within the proposal, discuss the use of off-the-balance sheet financing arrangements, capital leases, and operating leases, and indicate the related business and financial risks of each.
  6. Create an argument for or against a single set of international accounting standards related to lease accounting based on the global market and cross border leases of assets. Examine the benefits and risks of your chosen position.
  7. Examine the major implications of SAS 99 based on the factors you discovered during the initial evaluation of the company. Provide support for your rationale.
  8. Analyze the potential for a material misstatement in the financial statements based on the issues identified in your initial evaluation. Make a recommendation to the CFO for the issuance of restated financial statement restatement. Identify at least three (3) significant issues that can result from the failure to issue restated financial statements.
  9. Examine the economic effect of restatement of the financial statements on investors, employees, customers, and creditors.
  10. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia and similar websites do not qualify as academic resources. You have access to Strayer University’s Online Library at https://research.strayer.edu or iCampus University Library Research page at https://icampus.strayer.edu/library/research.

Your assignment must follow these formatting requirements:

  • This course requires use of new Strayer Writing Standards (SWS). The format is different than other Strayer University courses. Please take a moment to review the SWS documentation for details.
  • Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow SWS or school-specific format. Check with your professor for any additional instructions.
  • Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

  • Apply the proper accounting rules and make recommendations to ensure compliance with generally accepted accounting principles.
  • Determine the appropriateness of decision making in terms of professional standards and ethics
  • Apply advanced federal taxation concepts to business situations.

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Explanation & Answer

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Running head: AUDITING

1

Auditing
Name
Course
Tutor
Date

AUDITING

2
Auditing

Introduction
Auditing is an essential procedure that makes sure that the financial statements reflect an
accurate and fair view of the financial status of a company. There is the need for an auditor to
use both substantive and analytical procedures in assessing any company. The Initial Public
Offering is likely to generate a large amount of capital for any business both in the short term
and the long run. An evaluation of the financial statements points out areas that need to be
examined.
The write-downs of inventory imply that the management has been reporting lower
amounts of stock. It is vital to consider that the stock is part of the cost of goods sold
(COGS). They are underreporting the inventory results in increased COGS hence lower gross
profits. This move also results in the reduction of the net profits reported in any fiscal year. It
is vital to note that taxation is based on the net income reported in any financial year. As a
result, the business reports less taxes in the fiscal year. Such a move translates to tax evasion
by a company by paying less corporate taxes. A company may be sued for tax evasion and
required to pay hefty fines due to this criminal act. The tax authority will need the company
to present the correct and accurate financial statements. It becomes mandatory for the
company to submit audited financial statements in the years under review.
Internal Controls
The inventory write-downs hurt the reputation of the business. It not only portrays the
company management as dishonest but also people keen on achieving their selfish interest
(Tassadaq & Malik, 2015). The impact of the civil fraud penalty has a detrimental effect on
other stakeholders. It will be hard to convince other people that the financial statements are
reliable. There is the need to put in place strong internal controls that safeguard against fraud

AUDITING

3

activities. Some of the mechanisms include the segregation of duties. This move makes sure
that there are people involved in bookkeeping, reporting the transactions, depositing cash and
auditing activities in the business. There is the need to make sure that there is an individual
making orders, another receiving the orders and someone else dispatching the goods from the
store. It is also vital to consider the use of a single inventory method such as weighted
average or First in, First out (FIFO). The business should also allow the physical audit of the
inventory and the records to establish their actual value in any financial year. There is also
the need to evaluate the use of authorization by the use of passwords and lockouts. The CEO
is tasked with putting in place robust internal control systems (ICS).
IRS audit
The write-downs of the inventory have been done consistently for three subsequent
years. The management used the inventory reserve...


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