Week 10 Assignment 3 Submission
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Assignment 3: Capstone Research Project
Due Week 10 and worth 440 points
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 sharebased 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 five (5) quality academic resources in this assignment. Note:
Wikipedia and other Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
• Be typed, double spaced, using Times New Roman font (size 12), with
one-inch margins on all sides; citations and references must follow
APA 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:
• Analyze accounting situations to apply the proper accounting rules and
make recommendations to ensure compliance with generally
accepted accounting principles.
• Analyze business situations to determine the appropriateness of decision
making in terms of professional standards and ethics
• Analyze business situations and apply advanced federal taxation
concepts.
• Use technology and information resources to research issues in
accounting.
• Write clearly and concisely about accounting using proper writing
mechanics.
Grading for this assignment will be based on answer quality, logic /
organization of the paper, and language and writing skills, using the
following rubric.
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