ACCOUNTING 5330

 

SEMINAR IN AUDITING

 

Summer 1996

 

Dr. C. William (Bill) Thomas Office Hours: 1-2:30 M-R

Blume Center Room 128 and by appointment

710-4924

Bill_Thomas@baylor.edu

Textbooks:

(1) Michael C. Knapp, Contemporary Auditing (Issues and Cases), 2nd Edition, West, 1996.

(2) Thomas R. Weirich, Alan Reinstein, Accounting & Auditing Research: A Practical Guide,

Southwestern Publishing Co., 4th Edition, 1996.

(3) Cooking the Books, video tape series and selected other materials, National Association of

Certified Fraud Examiners, 1991.

(4) *Fraud Survey Results, KPMG Peat Marwick, 1994

(5) Supplemental reading per bibliography

(6) (Reference) Claire May and Gordon S. May, Effective Writing: A Handbook for Accountants (4th ed.), 1996. On reserve in Moody Library

(7) *Professional Standards Vols. 1 and 2, CCH, 1995. (On reserve in Moody Library)

(8) (Reference) Your auditing textbook from ACC 4330 (or first auditing course, if not a BU undergraduate). Any recent text will do. You should reference the chapters that deal with the topical area you are studying that particular day, and review pertinent sections.

 

Course Objectives:

(1) To build on the theoretical framework of auditing learned in the first course, and to enhance

practical skills in performing auditing techniques.

(2) To expose students to real life situations involving fraudulent financial reporting, to heighten

sensitivities to the possibility of fraud, and to build skills in fraud detection.

(3) To refine students’ abilities to recognize issues in accounting and auditing from relatively

unstructured situations.

(4) To continue to develop students’ abilities to work cooperatively in a team setting.

(5) To refine students’ oral and written communications skills.

(6) To expose students to primary sources (generally accepted auditing standards), other technical

standards and selected other literature of auditing, and methods to utilize those resources to find

answers to everyday problems.

 

Course Policies

This class is a SEMINAR!!! Accordingly, although I might lecture at times, the quality of class will depend primarily on your performance and participation. As you can see from the syllabus, much of the class time will be spent in case studies as well as discussion of the readings. I expect you to take an active role in leading these discussions. A significant of your grade will include class participation, so come to class prepared to take an active role.

 

Grades in this course will be determined as follows:

Activity

Content

Writing

Oral

Team

Total

Points

Mid-term examination

100

20

 

 

120

Term project

80

20

20

 

120

Research case (written and oral)

10

10

10

 

30

Written cases and problem material

80

40

 

 

120

Oral presentation

40

 

20

 

60

Class participation on daily basis

 

 

40

 

40

Performance as a team member

 

 

 

60

60

Total

310

90

90

60

550

 

Explanation of requirements and ground rules for the course

 

Examinations:

 

The mid-term examination is the only examination in the course. It will consist of essay type questions that cover technical and conceptual issues of accounting and auditing research, as well as fraudulent financial reporting. Twenty points of your grade on the examination will be applied to proper writing techniques: grammar, sentence structure, punctuation. You should go to Moody Library and study the May and May book (reference #6 on list above) for good writing techniques. Other references to written work are in the "Case Studies" section below.

 

Term Project:

 

Instead of a final exam, you will complete a term project worth 120 points. Your assignment is (1) to locate a real company in Waco or the surrounding area; (2) have one or more meetings with appropriate company personnel; (3) evaluate overall inherent risk (industry, business, company); (3) evaluate the control environment of the company; (4) evaluate detailed controls over any one of its systems; and (5) develop an audit strategy for detection risk procedures for that system. Your strategy should include:

 

(1) Client acceptance issues.

(2) Engagement letter

(3) Complete analysis of the most recent yearly financial statements on a comparative basis with the previous year. Include all key ratios (liquidity, profitability, leverage). Also include industry comparative statistics. Identify the account balances of highest risk of misstatement.

(4) Assessment of inherent audit risk for the industry and the company. For this you must do some research on the company and the industry in which it operates. You should therefore try to choose a company that operates in an industry that can be researched. It is not necessary that the company be a public company.

(5) Assessment of financial statement materiality as well as the threshold for the material accounts you are analyzing

(6) Analysis of the control environment.

(7) Detailed analysis and documentation of internal controls (for one cycle only).

(8) Assessment of internal control risk for the cycle that you select (assertion by assertion basis).

(9) Documentation of (4) through (8) in engagement strategy memorandum.

(10) Development of hypothetical audit program for detection risk procedures.

(11) Report to management regarding internal control reportable conditions.

 

On August 7, you will give both an oral and a written report to the class (and to your client, if possible) regarding your findings on the control environment, the information system, your suggestions for improving the system, and the hypothetical audit plan for the cycle you have chosen.

 

 

Research:

The purpose of the research component is to teach you how to find the answer to technical accounting and auditing questions you may have never encountered before. We stress both manual and computer methods. When possible, use the WWW, NAARS, or other electronic media to obtain your responses. These media are discussed in Chapters 6 and 7 of the Weirich and Reinstein text. If you find a WWW site that is particularly interesting, please share it with the class. I will regard it positively when I assign your oral and team participation grades. Two of the three research exercises (questions from Chapters 5, 6, and 8 and the NAARS exercise) are to be done on your own. The long case should be done as a group and presented orally to the class on July 11. I expect both an oral and written presentation of your group’s research case. All written responses are to be typewritten and neat. You are expected to use proper research techniques that you learn in the first part of the course in your work on the subsequent cases.

 

Case studies (written work and daily discussion):

120 points of the grade will be from case studies from the Knapp text (1) as well as other sources. Maximum grade on each written case will be 15 points. Each group has a total of 9 possible cases and exercises to prepare. You may drop your lowest grade, for a total of 8 cases that count for credit. On days when it is your responsibility to prepare an oral presentation, you do not have to turn in a written case. On days when two cases are presented in class, groups 1-3 will prepare case 1, and groups 4-5 will prepare case 2. This means that you will never have to prepare more than one case per day, so make it good! (Example: group 1 has written cases to prepare on July 8, 9, 17, 22, 24, 25, 29, 31 and August 1. They prepare oral presentations on July 15, 25 and 30). These presentations dates are in addition to your research presentations on July 11 and your company presentations on July 22 and August 7. Cases from the Knapp text are from real life. They are not hypothetical. They cover many practical issues of accounting and auditing practice, and many phases of a typical audit. Some of the other cases are hypothetical, but are derived from real life issues faced in auditing. Each person in the class whose group is not presenting that day must prepare a written analysis of their assigned case in advance. You are expected to work with your group (discussion of issues, research, etc.) in order to obtain what you feel is the best response to each case. However, each person should prepare his/her own written response, typewritten, in good form. Bring those analyses to class with you and use them as the guide for your class participation. After participating in the class discussion, you may have until the start of the next class session to refine your solution and turn in your final analysis for a grade.

 

Case studies (oral presentations)

Groups that are presenting on a given day do not need to turn in a written analysis of either case for that day. Your grade for that particular day will be strictly an oral presentation grade. Whenever it is your group's time to present a case, designate two spokespersons to present the case on behalf of the group and to lead a class discussion of the issues. Divide the presentation time approximately equally between each presenter. The group should prepare the case and should coach the persons making the presentation to maximize its effectiveness. Presenters will be expected to follow the rules of effective oral presentation techniques that are covered in the video on the first day of class. After viewing the video in class, your group may desire to check it out and watch it again as a group, to assure that you absorb all of the right techniques. Presentation of each case should take about 30 minutes total class time. Include (1) clarification of the background facts; (2) discussion of the issues (let the questions at the back of the case guide you here); (3) consideration of alternatives; (4) citation of authorities; (5) your conclusions; (6) class discussion. Remember that, when you lead the discussion, every other person in the class has prepared a written analysis. Be sure to include a time in your discussion to elicit the input of others. There are a sufficient number of cases so that each person in the class can be in front of the class at least once. Once a particular person in your group has made a presentation, he/she is "off the hook" until every other person in the group has presented at least once. The object is to improve oral communications skills for each person in the class. You should plan to use visual aids (preferably Power Point). If you do not know how to use Power Point, have someone else in your group show you. Let your creative juices flow on this part. Make it interesting. I have included an oral presentation evaluation form (oraleval) on the J drive that you should read and become familiar with. Each time your group makes an oral presentation, the person in charge of the presentation for that day will receive the grade. From time to time I may pass out oral evaluation forms and let the class give an assessment of the quality of the presentation.

 

Performance as a team member

There will be two group evaluations during the semester. The intent is to foster team interaction within the class. All evaluations are to be turned in to me in sealed envelopes. No one is to see your evaluation of your team members except you and me. Due to the strict confidentiality of group evaluations, I expect you to be honest in your assessment of other group members. If you fail to turn in a group evaluation, or if I have reason to suspect that you are not being candid in your evaluation of other team members, I will call you in for a conference. If, after conferring with you, I conclude that you are not being candid, YOU will be given a zero for that particular evaluation. A copy of the group evaluation form (grpeval) is on the J drive under ACC 5330. Please familiarize yourself with the form and the way to access it.

 

Oral participation

I will expect you to come prepared to give oral responses to the persons who are leading the case discussion. Since this class is a seminar, much of the discussion will be done by members of the class. As time permits each day, we will discuss the reading assignments that you will have from the assigned texts or attached bibliography. On some class days, I may lead a discussion of the theoretical issues facing us, based upon the background reading for the day. I will ask questions unannounced to each of you. Part of your grade will be based on your in-class responses and your overall oral participation. You are expected to have read the assigned material whether or not we have time to discuss it in class.

 

Approximate format of each class session when cases are being presented (starting July 11):

 

(10-15 minutes) Introduction of material by professor (if needed)

(60 minutes) Presentation of cases: 30 minutes each by students

(10-15 minutes) Summary/wrap up and brief discussion of tomorrow’s topic by professor

 

Detailed class schedule begins on the next page.

 

Date Topic In Class Discussion Advance Reading

Part I. Research in Accounting and Auditing

 

July 3 Winning Presentations Introductions (2) Chs. 1,2

Critical Thinking Video GT Handout

Effective Writing

July 4 No class Independence Day Holiday

July 5 Research Environment (2) Chs. 3, 4 (2) Chs. 3, 4

 

July 8 Research Sources/Methods All questions from (2) Chs. 5, 6, 8

Chs. 5, 6, 8

July 9 Research Sources/ (cont.) NAARS exercise (2) Chapter 7

July 10 No class Lab day to prepare research case presentations

July 11 A/A Research Case presentations

Part II. Fraudulent financial reporting: awareness, causes and preventative measures

(5) A

July 12 Introduction and Elements of Video: "Cooking the Books" (4) *Survey on Fraud Fraud (3) CFE Materials

 

July 15 ZZZZ Best Case 1.4: Group 1 (1) Case 1.4

ESM Securities Case 1.2: Group 2 (1) Case 1.2

July 16 Management/ Auditor Video: "How to Steal

Responsibilities $500 Million" *SAS 53, SAS 54

(Phar-Mor Drug) *Proposed SAS on fraud

July 17 Lincoln Savings & Loan Case 1.5: Group 3 (1) Case 1.5

July 18 Mid-term examination

 

Part IV. Audit Issues in the Real World

July 19 No class. Field trip to clients (5) B

 

July 22 Client Acceptance All teams present *(7) AU315, QC90.23-.24

Engagement Letters (1) Case 5.3, q. 1

July 23 Planning the engagement Case 5.3 q.1: Group 4 *(7) AU311

July 24 Analytical Procedures Case 1.3: Group 5 Case 1.3, q's 1-3: Gps 1,2

q's 3,5,6: Gps 3,4

*(7) AU329 (5) C

July 25 Audit Risk and materiality Case 1.1: Group 1 Case 1.1, q's 1-4: Gps.2,3

(Gps.2,3:q's 1-4; q's 5-7: Gps. 4,5

*SAS 47 (AU 312)(5) D

July 26 Internal Control Case 2.3: Group 2 Case 2.3

*(5) E

July 29: Evidence and Reporting: A/R Case A: Group 3 (5) F; Gps. 1-2 turn in Inventory Case 2.1: Group 4 Gp. 5 turn in

July 30 Evidence and Reporting: Cash Case 2.8: Group 5 Gps. 1-4 turn in q's.1,3,5

July 31 Completing the Audit: Re- Case B: Group 1 (5) G; *AU508, 711

issuance of report Gps. 3 turn in

Subsequent events Case C: Group 2 *AU508, 530, 560

Gps. 4 and 5 turn in

 

Date Topic In Class Discussion Advance Reading

Aug. 1 Going Concern Considerations Case D: Group 3 (5) H; *AU 341, 508

Gps. 1-4 turn in

Aug. 2 Other types of reports *(7) Vol. 1, AU 600-700

Aug. 5 Compilation, review and Case 5.3 q.'s 2-4 *(7) Vol. 2, AR and AT

attest services

Aug. 6 The future of the Video (5) I

assurance function

Aug. 7 Company Presentations

 

*Search for this on WWW or LEXIS/NEXIS

 

 

(5) Outside Readings List

 

A. Fraud:

Doppelt, Andrew B., "The Telltale Signs of Money Laundering", Journal of Accountancy,

March, 1990, pp. 31-33.

Groveman, Howard, "How Auditors Can Detect Financial Statement Misstatement," Journal of Accountancy Vol. 180, No. 4 (October 1995) 83-86.

Sauls, Walter S., "Developing a Kite-Detection System", The Internal Auditor, December, 1984,

pp. 39-42.

 

B. Client Acceptance:

Hull, Rita P. and Mchem, Cheryl, "Practitioners’ View on Communications Between Predecessor

and Successor Auditors and Accountants", Accounting Horizons, June, 1987, pp. 61-69.

Murray, Mark F. "When a Client is a Liability," Journal of Accountancy 174 No. 3, (9/92) 54-58

 

C. Analytical Procedures:

Blocher, Edward and George F. Patterson, Jr. "The Use of Analytical Procedures," Journal of Accountancy 181 No. 2 (2/96) 53-55.

Blocker, Edward J. and Cooper, Jean C., "A Study of Auditors’ Analytical Review Performance",

Auditing: A Journal of Practice and Theory, Spring, 1988, pp. 1-28.

Harper, Robert M., Strewser, Jerry R., and Twang, Kwei, "Establishing Investigation Thresholds

for Preliminary Analytical Procedures", Auditing: A Journal of Practice and Theory,

Fall, 1990, pp. 115-133.

 

D. Materiality:

Jennings, Marianne, Kneer, Dan C., and Reckers, Philip M. J., "A Reexamination of the Concept of

Materiality: Views of Auditors, Users, and Officers of the Court", Auditing: A Journal of

Practice and Theory, Spring, 1987, pp. 104-115.

Pany, Kurt, and Wheeler, Stephen, "A Comparison of Various Materiality Rules of Thumb",

The CPA Journal, June, 1989, pp. 62-63

"Using Materiality in Audit Planning," Journal of Accountancy (3/83)

 

E. Internal Control:

Libby, Robert, Artman, James T., and Willingham, John J., "Process Susceptibility, Control Risk,

and Audit Planning’, The Accounting Review, April, 1985, pp. 212-228

Reimers, Jane, Wheeler, Stephen, and Dusenbury, Richard, "The Effect of Response Mode on

Auditors’ Control Risk Assessments", Auditing: A Journal of Practice and Theory,

Fall, 1993, pp. 62-78.

Sadgwanni, A., Kim, I., and Helmerci, J., "EDI’s Effects on Internal Controls", EDPACS,

July, 1989, pp. 1-11.

Srinidhi, B. N., and Vasarhelyi, M. A., "Auditor Judgment Concerning Establishment of Substantive

Tests Based on Internal Control Reliability", Auditing: A Journal of Practice and Theory,

Spring, 1986, pp. 64-76.

Statement on Auditing Standards No. 78--Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS No. 55. Journal of Accountancy 181 No. 2 (Feburary 1996) 85- 91.

Willingham, John J., and Wright, William F., "Financial Statement Errors and Internal Control

Judgments", Auditing: A Journal of Practice and Theory, Fall, 1985, pp. 57-70.

 

 

 

 

F. Evidence:

Caster, Paul, "The Role of Confirmations as Audit Evidence," Journal of Accoutancy,

February, 1992, pp. 73-76

Schwersenz, Jack, "Accounts Payable Confirmations: Why and How Used", The CPA Journal,

May, 1987, pp. 101-193

Windsor, Sean, "The Use of Audit Sampling Techniques to Test Inventory", Journal of

Accountancy, January, 1991, pp. 107-111.

 

G. Completing the audit:

Hall, Thomas W., and Butler, A. A., "Assuring Adequate Attorneys’ Replies to Audit Inquiries",

Journal of Accountancy, March, 1988, pp. 56-63.

Saunders, George D., and Munter, Paul, "The Search for Unrecorded Liabilities--The Implications of

Maislin", The CPA Journal, February, 1991, pp. 48-51.

 

H. Going Concern:

Ellingsen, John E., Pany, Kurt, and Fagan, Peg, "SAS No. 59: How to Evaluate Going Concern",

Journal of Accountancy, January, 1989, 24-31.

 

I. Future of Assurance Function

Elliott, Robert K. "The Future of Assurance Services: Implications for Academia," Accounting Horizons, Vol. 9 No. 4 (December 1995), 118-127