VE
Auditing
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IF
IE
Cases
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BR
AI
N
BO
O
ST
ER
Instructor Resource Manual
SEVENT H EDIT ION
Mark S. Beasley Frank A. Buckless
Steven M. Glover Douglas F. Prawitt
DO NOT COPY OR REDISTRIBUTE
New York, NY
VERIFIEDBRAINBOOSTER
, VE
Vice President, Business, Economics, and UK Courseware: Donna Battista Manager, Learning Tools: Brian Surette
Director of Portfolio Management: Adrienne D’Ambrosio Content Developer, Learning Tools: Sarah Peterson
R
Director, Courseware Portfolio Management: Ashley Dodge Managing Producer, Digital Studio and GLP, Media Production and Development:
Senior Sponsoring Editor: Neeraj Bhalla Ashley Santora
IF
Editorial Assistant: Elisa Marks Managing Producer, Digital Studio: Diane Lombardo
Vice President, Product Marketing: Roxanne McCarley Digital Studio Producer: Regina DaSilva
IE
Senior Product Marketer: Tricia Murphy Digital Studio Producer: Alana Coles
Product Marketing Assistant: Marianela Silvestri Digital Content Team Lead: Noel Lotz
Manager of Field Marketing, Business Publishing: Adam Goldstein Digital Content Project Lead: Martha LaChance
D
Field Marketing Manager: Nayke Popovich Project Manager: Liza Marie Borja, SPi Global
Vice President, Production and Digital Studio, Arts and Business: Etain O'Dea Interior Design: Jonathan Liljegren
BR
Director of Production, Business: Jeff Holcomb Interior Cover Art: Petrovic Igor/Shutterstock
Managing Producer, Business: Melissa Feimer
Content Producer: Sugandh Juneja
AI
Operations Specialist: Carol Melville
Design Lead: Kathryn Foot
N
BO
Copyright © 2019, 2015, 2012 by Pearson Education, Inc. or its affiliates. All Rights Reserved. This publication
is protected by copyright, and permission should be obtained from the publisher prior to any prohibited
reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical,
O
photocopying, recording, or otherwise. For information regarding permissions, request forms, and the
appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit
ST
www.pearsoned.com/permissions/
Acknowledgments of third-party content appear on the appropriate page within the text.
ER
PEARSON and ALWAYS LEARNING are exclusive trademarks owned by Pearson Education, Inc. or its affiliates in
the U.S. and/or other countries.
Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the
property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress
are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship,
endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship
between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.
ISBN 10: 0-13-442270-8
ISBN 13: 978-0-13-442270-1
VERIFIEDBRAINBOOSTER
, VE
PR E FAC E
R
Auditing Cases: An Interactive Learning Approach provides exposure to real-world audit techniques
IF
and hands-on learning for students in both undergraduate and graduate auditing courses. This Seventh
Edition continues our tradition of providing a rich learning experience for students that challenges them
IE
to apply knowledge learned in the classroom and from traditional auditing textbooks so they can develop
skills to complete tasks they will be asked to do once they enter the accounting and auditing profession.
D
NEW CASES TO THE SEVENTH EDITION
BR
The Seventh Edition continues to feature a variety of cases that address different aspects of the audit. Some are
AI
based on real companies, while others are disguised as “hypothetical companies” in order to provide a “surprise
element” once they are completed. Additional cases include examples of client system documentation and audit
N
workpapers that students prepare and evaluate as if they are on a current audit team.
BO
C A S E 3.6 Wells Fargo
O
Assessing the Impact of Ethical Culture
ST
This case features the alleged inappropriate sales culture at Wells Fargo Bank that
ultimately led to the CEO’s 2016 testimony in front of the U.S. Senate Banking
Committee and his subsequent resignation. The bank’s audit firm was challenged to
ER
defend its work by four U.S. Senators, one of whom included Bernie Sanders, a recent
candidate for U.S. President.
C A S E 4.8 Koss, Inc.
The Sounds of a High-Fidelity Fraud
This case gives students a “bird's-eye” view of the 9th-largest embezzlement fraud in
U.S. history, which took place at the Koss Corporation, headquartered in Wisconsin. The
case vividly illustrates what can happen when internal control over financial reporting
(ICFR) is lax at a public company. The case will be particularly interesting for students
because much of the story of this massive defalcation fraud is introduced through the
words of the company’s CEO and the individual who stole $34 million from the company,
adapted from deposition statements. The case brings to life the importance of effective
ICFR, with an emphasis on the Control Environment, and introduces students to the
role that accountants can play as expert witnesses in court cases.
C A S E 5.8 Oilfields-R-Us, Inc.
Evaluation of Management Review Controls
This case introduces students to management review controls (MRCs), an increasingly
important topic in practice for both management and auditors. In a MRC, members
of management review key information and evaluate reasonableness by comparing it
to expected value, such as budget-to-actual comparisons and review of accounting
estimates. This case helps students appreciate the importance of the effective design
and execution of MRCs, and it highlights some of the challenges of evaluating their
effectiveness in audits of internal control over financial reporting.
INSTRUCTOR RESOURCE | DO NOT COPY OR REDISTRIBUTE iii
Copyright © 2019 Pearson Education, Inc. VERIFIEDBRAINBOOSTER
, VE
Town and Country Hardware
Evaluation of Tests of Controls with Automated 6.1 C A S E
R
Component for the Expenditure Cycle (Purchases)
IF
IE
This case introduces students to internal controls with an automated component that
are an increasingly important topic in the practice for both management and auditors.
This case helps students appreciate the challenges of evaluating the effectiveness of
D
internal controls over financial reporting with an automated component.
BR
ADDITIONAL NEW FEATURES OF THE SEVENTH EDITION
AI
Reflects Recent Auditing Standards
N
This edition includes updates that reflect new auditing standards issued by the AICPA’s Auditing Standards
BO
Board (up through SAS No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern)
and the PCAOB’s Auditing Standards (up through AS 3101, The Auditor’s Report on an Audit of Financial Statements
When the Auditor Expresses an Unqualified Opinion). When relevant, questions expose students to new guidance
O
contained in recently issued auditing standards.
ST
Updated and Re-ordered Materials and Questions
Many of the case questions have been restructured to change the nature of the topics addressed and to expose
ER
students to different issues from those examined in prior editions. Many cases also have reordered questions.
Dates in hypothetical cases have been set in calendar year 2018 with audit procedures performed on the 2017
fiscal year information and/or interim procedures performed on the 2018 fiscal year information. When
appropriate, we have changed underlying data in some of the hypothetical cases so that the cases differ from
prior editions. All of these changes reduce the potential benefit of students seeking our solutions from prior
editions of the casebook. Further, students who inappropriately access and use solutions to prior editions are
more likely to be detected by the instructor.
SOLVING TEACHING AND LEARNING CHALLENGES
Auditing educators continue to look for opportunities to increase their emphasis on the development of students’
professional judgment, critical thinking, communication, and interpersonal relationships skills. Development of
these skills requires a shift from passive instruction to active involvement of students in the learning process.
Unfortunately, current course materials provided by many publishers are not readily adaptable to this kind of
active learning environment, or they do not provide materials that address each major part of the audit process.
The purpose of this casebook is to give students hands-on exposure to realistic auditing situations focusing
specifically on each aspect of the audit process.
Over 50 Cases Spanning the Audit Processes
This casebook contains a collection of 50 auditing cases plus a separate learning module about professional
judgment that allows the instructor to focus and deepen students’ understanding in each of the major activities
performed during the conduct of an audit. These cases expose students to aspects of the audit spanning from
client acceptance to issuance of an audit report, with a particular focus on how professional judgment is applied
throughout the audit. Each case is primarily assigned to one of 12 identified aspects of an audit; however, a
number of cases address more than one topic. As a result, cases are cross-referenced in the Table of Contents so
that instructors can easily pinpoint how a particular case might be useful to address different audit topics. The
following Table of Contents Overview provides the number of cases for each of the 12 topics.
iv DO NOT COPY OR REDISTRIBUTE | INSTRUCTOR RESOURCE
Copyright ©VERIFIEDBRAINBOOSTER
2019 Pearson Education, Inc.
Auditing
R
IF
IE
Cases
D
BR
AI
N
BO
O
ST
ER
Instructor Resource Manual
SEVENT H EDIT ION
Mark S. Beasley Frank A. Buckless
Steven M. Glover Douglas F. Prawitt
DO NOT COPY OR REDISTRIBUTE
New York, NY
VERIFIEDBRAINBOOSTER
, VE
Vice President, Business, Economics, and UK Courseware: Donna Battista Manager, Learning Tools: Brian Surette
Director of Portfolio Management: Adrienne D’Ambrosio Content Developer, Learning Tools: Sarah Peterson
R
Director, Courseware Portfolio Management: Ashley Dodge Managing Producer, Digital Studio and GLP, Media Production and Development:
Senior Sponsoring Editor: Neeraj Bhalla Ashley Santora
IF
Editorial Assistant: Elisa Marks Managing Producer, Digital Studio: Diane Lombardo
Vice President, Product Marketing: Roxanne McCarley Digital Studio Producer: Regina DaSilva
IE
Senior Product Marketer: Tricia Murphy Digital Studio Producer: Alana Coles
Product Marketing Assistant: Marianela Silvestri Digital Content Team Lead: Noel Lotz
Manager of Field Marketing, Business Publishing: Adam Goldstein Digital Content Project Lead: Martha LaChance
D
Field Marketing Manager: Nayke Popovich Project Manager: Liza Marie Borja, SPi Global
Vice President, Production and Digital Studio, Arts and Business: Etain O'Dea Interior Design: Jonathan Liljegren
BR
Director of Production, Business: Jeff Holcomb Interior Cover Art: Petrovic Igor/Shutterstock
Managing Producer, Business: Melissa Feimer
Content Producer: Sugandh Juneja
AI
Operations Specialist: Carol Melville
Design Lead: Kathryn Foot
N
BO
Copyright © 2019, 2015, 2012 by Pearson Education, Inc. or its affiliates. All Rights Reserved. This publication
is protected by copyright, and permission should be obtained from the publisher prior to any prohibited
reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical,
O
photocopying, recording, or otherwise. For information regarding permissions, request forms, and the
appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit
ST
www.pearsoned.com/permissions/
Acknowledgments of third-party content appear on the appropriate page within the text.
ER
PEARSON and ALWAYS LEARNING are exclusive trademarks owned by Pearson Education, Inc. or its affiliates in
the U.S. and/or other countries.
Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the
property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress
are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship,
endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship
between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.
ISBN 10: 0-13-442270-8
ISBN 13: 978-0-13-442270-1
VERIFIEDBRAINBOOSTER
, VE
PR E FAC E
R
Auditing Cases: An Interactive Learning Approach provides exposure to real-world audit techniques
IF
and hands-on learning for students in both undergraduate and graduate auditing courses. This Seventh
Edition continues our tradition of providing a rich learning experience for students that challenges them
IE
to apply knowledge learned in the classroom and from traditional auditing textbooks so they can develop
skills to complete tasks they will be asked to do once they enter the accounting and auditing profession.
D
NEW CASES TO THE SEVENTH EDITION
BR
The Seventh Edition continues to feature a variety of cases that address different aspects of the audit. Some are
AI
based on real companies, while others are disguised as “hypothetical companies” in order to provide a “surprise
element” once they are completed. Additional cases include examples of client system documentation and audit
N
workpapers that students prepare and evaluate as if they are on a current audit team.
BO
C A S E 3.6 Wells Fargo
O
Assessing the Impact of Ethical Culture
ST
This case features the alleged inappropriate sales culture at Wells Fargo Bank that
ultimately led to the CEO’s 2016 testimony in front of the U.S. Senate Banking
Committee and his subsequent resignation. The bank’s audit firm was challenged to
ER
defend its work by four U.S. Senators, one of whom included Bernie Sanders, a recent
candidate for U.S. President.
C A S E 4.8 Koss, Inc.
The Sounds of a High-Fidelity Fraud
This case gives students a “bird's-eye” view of the 9th-largest embezzlement fraud in
U.S. history, which took place at the Koss Corporation, headquartered in Wisconsin. The
case vividly illustrates what can happen when internal control over financial reporting
(ICFR) is lax at a public company. The case will be particularly interesting for students
because much of the story of this massive defalcation fraud is introduced through the
words of the company’s CEO and the individual who stole $34 million from the company,
adapted from deposition statements. The case brings to life the importance of effective
ICFR, with an emphasis on the Control Environment, and introduces students to the
role that accountants can play as expert witnesses in court cases.
C A S E 5.8 Oilfields-R-Us, Inc.
Evaluation of Management Review Controls
This case introduces students to management review controls (MRCs), an increasingly
important topic in practice for both management and auditors. In a MRC, members
of management review key information and evaluate reasonableness by comparing it
to expected value, such as budget-to-actual comparisons and review of accounting
estimates. This case helps students appreciate the importance of the effective design
and execution of MRCs, and it highlights some of the challenges of evaluating their
effectiveness in audits of internal control over financial reporting.
INSTRUCTOR RESOURCE | DO NOT COPY OR REDISTRIBUTE iii
Copyright © 2019 Pearson Education, Inc. VERIFIEDBRAINBOOSTER
, VE
Town and Country Hardware
Evaluation of Tests of Controls with Automated 6.1 C A S E
R
Component for the Expenditure Cycle (Purchases)
IF
IE
This case introduces students to internal controls with an automated component that
are an increasingly important topic in the practice for both management and auditors.
This case helps students appreciate the challenges of evaluating the effectiveness of
D
internal controls over financial reporting with an automated component.
BR
ADDITIONAL NEW FEATURES OF THE SEVENTH EDITION
AI
Reflects Recent Auditing Standards
N
This edition includes updates that reflect new auditing standards issued by the AICPA’s Auditing Standards
BO
Board (up through SAS No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern)
and the PCAOB’s Auditing Standards (up through AS 3101, The Auditor’s Report on an Audit of Financial Statements
When the Auditor Expresses an Unqualified Opinion). When relevant, questions expose students to new guidance
O
contained in recently issued auditing standards.
ST
Updated and Re-ordered Materials and Questions
Many of the case questions have been restructured to change the nature of the topics addressed and to expose
ER
students to different issues from those examined in prior editions. Many cases also have reordered questions.
Dates in hypothetical cases have been set in calendar year 2018 with audit procedures performed on the 2017
fiscal year information and/or interim procedures performed on the 2018 fiscal year information. When
appropriate, we have changed underlying data in some of the hypothetical cases so that the cases differ from
prior editions. All of these changes reduce the potential benefit of students seeking our solutions from prior
editions of the casebook. Further, students who inappropriately access and use solutions to prior editions are
more likely to be detected by the instructor.
SOLVING TEACHING AND LEARNING CHALLENGES
Auditing educators continue to look for opportunities to increase their emphasis on the development of students’
professional judgment, critical thinking, communication, and interpersonal relationships skills. Development of
these skills requires a shift from passive instruction to active involvement of students in the learning process.
Unfortunately, current course materials provided by many publishers are not readily adaptable to this kind of
active learning environment, or they do not provide materials that address each major part of the audit process.
The purpose of this casebook is to give students hands-on exposure to realistic auditing situations focusing
specifically on each aspect of the audit process.
Over 50 Cases Spanning the Audit Processes
This casebook contains a collection of 50 auditing cases plus a separate learning module about professional
judgment that allows the instructor to focus and deepen students’ understanding in each of the major activities
performed during the conduct of an audit. These cases expose students to aspects of the audit spanning from
client acceptance to issuance of an audit report, with a particular focus on how professional judgment is applied
throughout the audit. Each case is primarily assigned to one of 12 identified aspects of an audit; however, a
number of cases address more than one topic. As a result, cases are cross-referenced in the Table of Contents so
that instructors can easily pinpoint how a particular case might be useful to address different audit topics. The
following Table of Contents Overview provides the number of cases for each of the 12 topics.
iv DO NOT COPY OR REDISTRIBUTE | INSTRUCTOR RESOURCE
Copyright ©VERIFIEDBRAINBOOSTER
2019 Pearson Education, Inc.
