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CASE 5-7 MARCUS YAMABUTO

Summary Marcus Yamabuto graduated from State University in June 2007 and he began working for Huang & Garcia in September 2007, a large regional firm. Yamabutos first major audit was assigned was Dunco, a secondary manufacturer of plasma monitors that sells its to major manufacturers. Yamabuto was assigned to review sale documents and freight, the terms of the sale, and the proper cutoff treatment. Yamabuto discovered $2.4 million of revenue that had been prematurely recognized for the year ended December 31, 2007. He determined the problem by matching the invoices with corresponding freight bills, and then he noticed that the shipping date of one transaction was January 2, 2008 Question 1 What advice would you give to Yamabuto ? Include in your answer the reasons for providing that advice from both accounting and ethical perspectives. I will advise that as an auditor should give qualified opinion when the financial statements is a differences of opinion with management on the application of GAAP that is material in amount or material because of the nature of the difference in Dunco invoices with corresponding freight bills. Besides, Yamabuto also must give reasonable statements to Dunco, he was checks all transactions financial statement 2007 to 2008. Furthermore, Yamabuto a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statement are free of material misstatement, whether caused by error or fraud. Ignoring your answer to Question 1, assume that Yamabuto approaches his supervisor on the audit, Eileen Moldey, and tells her about his findings. Moldey contacts the partner in charge of the audit, Dusty Mite, and they meet the next morning. Mite: Ive discussed the matter with the CFO, Goal Tendz, and he provided an explanation for the discrepancy. According to Tendz, the goods were loaded on the freight forwarders trucks at Duncos warehouse on December 31 and left there because the company did not start the trip to Dontuchis headquarters to deliver the product until January, after the New Years holiday. Therefore, the revenue as recorded for 2007 will remain on the books. Moldey: That sounds fine to me. How about you, Marcus. Are you on board? The independent auditorss, responsibility is to audit and report on the financial statements prepare by management. For the issues Danco, discrepancy,according to were loaded on the freight forwarders trucks at duncos warehouse on December 31 and left there because the company did not start the trip to duntuchis headquarters to deliver the product until January , after the new years holiday. Therefore ,the revenue as recorded for 2007 will remain on the books. Then, in adverse opinion There is no doubt in the latter case that the stock market reaction would be negative . when a qualified opinion is given ,it is possible based on the reasons for the qualification the fact that the statements. In conclusion, Marcus Yamabuto graduated from state university in June 2007. He began working for a large regional firm, Huang & Garcia, in September 2007. The first major audit

to which Yamabuto was assigned was Dunco ,a secondary manufacturer of plasma monitors. Dunco sells its monitors to major manufacturers including Jujitsu and Dontuchi. Yamabuto auditors for Dunco, he was assigned to review sale documents and freight bills to determine the amount of freight, the terms of the sale ,and the proper cutoff treatment. He determined the problem by matching the invoices with corresponding freight bills. Yamabuto the auditor qualifies the report when there is a difference of opinion management or problem by matching the invoices. Yamabuto aware of discrepancies exist in the invoice. Yamabuto opinion fraud in the financial statements. Yamabuto responsible to express an independent opinion on the statement.

Question 2 As Marcuss best friend, assume you are able to give Marcus advice after finding out about this new information and before he has to respond to Moldey. What would you advise and why? According to this case Tenzs as the CFO explain about the discrepancy that on 31 December the goods were loaded on the freights forwarders trucks at Duncos warehouse and left the goods there. It is because the trip to Dontuchis hearquarters did not start by that company. The delivery of product will be done after the New Years holiday on January. Then the revenue will be recorded for 2007 on the books. As Marcuss best friend, assume that Im able to give an advice to Marcus after finding out about the new informations, I also will advise that the revenue should be record for the year of 2007. It is because there have an intention to ship the goods when there loaded the goods on the freight forwarders trucks at Duncos warehouse and left there. Besides that, Dunco company do not start their trip to deliver the product during loaded the goods on the trucks at Duncos warehouse. The revenue recognized when intentions to ship have and the goods were loaded on the freight forwarders trucks at the warehouse of Dunco.

Question 3 If Huang & Garcia were to issue an unqualified opinion on the audit of Dunco, will the firm have violated its professional and ethical standards? Explain which ones would be violated or why you think no standards would have been violated. In my opinion, Huang & Garcia violated its professional and ethical standards because give an unqualified opinion on audit of Dunco. In audit opinion, auditors only can express an unqualified opinion which is clean opinion, with an explanatory paragraph, a qualified opinion, an adverse opinion, or a disclaimer. In this case, the revenue that had been prematurely recognized for the year ended December 31, 2007. He found the problem by matching the invoices with corresponding freight bills. Than, the shipping notice transaction was January 2, 2008 and there was a note singed by the freight forwarder. So, he cannot easily give unqualified opinion about that case because he not sure about that.

Question 4 Do you think Dunco has committed fraud? Why or why not? Yes, I think that Dunco has committed fraud especially in the action of recognizing the revenue prematurely for the year ended December 31, 2007. Yamabuto, the auditor for Dunco, a secondary manufacturer of plasma monitors, has discovered that revenue of $2.4 million had been prematurely recognized for the year ended December 31 2007. He determined the problem by matching the invoices with corresponding freight bills. He also took notice that one transaction was recorded with shipping date on January 2, 2008 and found a note signed by the freight forwarder saying that they had picked up for shipment at Dunco warehouse on January 3, 2008. Marcus was assumed that he did get on board in which he accepted the explanation given by Tendz. According to GAAP standard, the transaction for the invoice dated January 2 and 3, 2008 must be recorded as deferred revenue to match with the sales over the next 12 months. It is not a usual thing for the revenue to be recorded and recognized on December 31, 2007 because the goods were not shipped to the customers in that particular year. Although Marcus did get on board and accepted the explanation given by Tendz, yet it is still wrong as there is no evidence to support the explanation by Tendz. Based on the fraudulent financial reporting by SAS 99, Dunco has committed fraud by misstating the revenue for year 2007. Duncos financial results were manipulated through the false recording of revenue which was supposed to be recognized in 2008. So, to prevent the fraud from happening is to record the transaction as deferred revenue. Dunco must establish an environment within the company that does not tolerate the deviation from ethical standards and also the companys strategic planning which incorporates a commitment to ethical behaviour.

Question 5 Professor Maximilan B. Torres said the following in a commentary published by the Acton Institute (www.acton.org): Fraud, that in every conscience leaves a sting, May be by man employd on one, whose trust He wins, or on another, who withholds Strict confidence. Comment on Torress statement in general and with respect to the facts of this case. Torress statement generally was talked about the effects of fraud and by whom the fraud was made. In this case, Yamabuto discovered about the confusing transaction of revenue. The problem is commit to fraud which there is has a pressure to commit fraud. This is because the company wants to achieve the goal which decrease charges and increase earnings. In this case, Dunco was manipulate the revenue that suppose to be in 2008 was backdate to 2007. This manipulated will effect to earnings and liquidity beside the company to be appears extraordinarily successful. All these effect like a sting that leaves by fraud by trusted person. Trusted person here is Dunco, a secondary manufacturer that sells its products to major manufacturer.

References : Steven M. Mintz, Roselyn E. Morris, Ethical Obligations and Decision Making in Accounting, McGraw Hill, International Edition 2008. Josephson Institute, n.d., http://josephsoninstitute.org/MED/MED-2sixpillars.html ,retrieved on 25 November 2011

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