Auditing and Assurance Services Articles
Article/Chapter Correlation Grid
Auditing and Assurance Services Part 1 Part 2 Part 3
Article Title 1 2 3 4 5 6 7 8 9 10 11 12 A B C D E F G H
1. The Walt Disney Company’s X X
2003 Proxy Statement
2. More businesses are outsourcing X
services including accounting and
3. New ethics group formed by local X
4. Students can view disciplinary X
actions taken against CPAs
5. Other countries are struggling X
with ethics standards too!
6. IFAC proposes new standard on X
engagement partner rotation
7. IFAC proposes new standard on X
8. Corporate scandals still in the X
9. Small accounting firms finding X
that Sarbanes-Oxley is providing
10. The United Kingdom debates X
auditor liability issues
11. Is Sarbanes-Oxley increasing the X
12. Internal auditors find problems at X
13. Government audit finds wasted X
spending in Washington D.C.
public school system
14. Internal auditors given new X
advisories concerning private
15. “Grant Thornton is Accused by X
SEC of Assisting Fraud,”
16. “New Issues are Raised Over X
Independence of Auditor for
17. “SEC Begins Probe Into Ernst’s X
18. “Many Companies Report X
Transactions with Top Officers
19. “Adeco Delays 2003 Results Over X
20. “More Firms Part Ways with X
21. “Lancer Stands by Audit Findings X
in Face of KPMG Allegations,”
22. Global Crossing’s 2003 Annual X
23. “Tyco’s Auditor Undercuts Bonus X
24. Lancer Corporation Form 8-K X
dated February 3, 2004
25. “Probe of Coke’s Sales Leads to X
26. “Kodak’s Fuzzy Numbers X
1. The Walt Disney Company’s 2003 Proxy Statement
In its 2003 proxy statement, The Walt Disney Company (Disney) reported the following:
A reduction in the consulting services provided by its independent auditor (PricewaterhouseCoopers) from $40.8 million to $0.
In January 2002, Disney announced it would not enter into any consulting contracts with its independent auditors.
On October 1, 2002, PricewaterhouseCoopers sold its consulting business to IBM.
1. What types of consulting services are permitted to be provided by auditors to their audit client? What types are prohibited?
2. Did Disney’s January 2002 announcement go “beyond” the requirements for consulting services?
3. Did IBM’s purchase of PricewaterhouseCoopers’ consulting unit affect the types of services this unit could offer to Disney?
2. More businesses are outsourcing of services including accounting and tax services
Auditors are required to consider service organizations in performing their audit work. This issue is growing in importance as more
and more work, including accounting work, is being outsourced overseas.
"Questions Loom as Accountants Outsource Work Abroad"; Chicago Lawyer; February 2004; Available on LexisNexis
"Your Taxes; Outsourcing Abroad Applies to Tax Returns, Too"; New York Times; February 15, 2004; Available on LexisNexis
1. How might the growing trend of outsourcing effect the way that auditors plan and conduct an audit?
2. Do you see an increase in the demand by clients of third-party providers for internal control reports?
3. New ethics group formed by local business community
Many business communities are getting the message about ethics. In Tulsa, Oklahoma a Tulsa Business Ethics Consortium has been
organized. Twenty companies have formed this group to discuss ethical problems and situations.
"New Tulsa Group Seeks to Emphasize Ethics in Business"; The Tulsa World; February 22, 2004; Available on LexisNexis
1. What value might a group like the Tulsa Business Ethics Consortium have for the businesses involved?
4. Students can view disciplinary actions taken against CPAs
The AICPA discloses disciplinary actions on its website www.aicpa.org click on disciplinary actions. February 2004 disclosures
Rule 501 Acts Discreditable – Violation of SEC insider trading rules
Rule 102 Integrity and Objectivity – signing of an affidavit that misrepresented the facts and subordinated judgment
Rule 501 Acts Discreditable – Negligence in preparing financial statements
5. Other countries are struggling with ethics standards too!
The Enron and WorldCom scandals have far-reaching global effects. For example, Germany is struggling with new rules for its
Germany’s New Draft Laws on Auditor Independence Too 'Imprecise'; International Accounting; January 23, 2004; Available on
1. Why might another country, like Germany, be influenced by events and legislation that occurs in the United States?
6. IFAC proposes new standard on engagement partner rotation
IFAC has an exposure draft pending approval entitled Proposed Revision to Code of Ethics for Professional Accountants. The
standard reinforces Sarbanes-Oxley in requiring a change in lead engagement partners for an audit client after a predefined period of
time, normally not to exceed seven years.
The full-text is available on the IFAC website at www.ifac.org/guidance
7. Corporate scandals still in the news
Several prominent cases are moving forward and should be of interest to students in any assurance class. Jeff Skilling was indicted in
February and the Adelphia Fraud Trials are slated begin soon.
"Enron’s Skilling Finally Takes His Walk"; Chicago Sun-Times; February 22, 2004; www.suntimes.com
"Adelphia is Next in Parade of Fraud Trails"; New York Times; February 23, 2004; www.nytimes.com; Also available on LexisNexis
1. How might the events shape the future of business? How might these events shape the future of Auditing?
8. IFAC proposes new standard on continuing education
IFAC has an exposure draft pending approval entitled Continuing Professional Development: A program of Lifelong Learning
and Continuing Development of Professional Competence. While the standard does not introduce any new ideas above the
continuing education standards of the AICPA, IIA, CMA, other professional certification organizations, and State Boards of
Accountancy, it does reinforce the professions global commitment to continuing education.
The full-text is available on the IFAC website at www.ifac.org/guidance
9. Small accounting firms finding that Sarbanes-Oxley is providing new opportunities
Some Accounting Firms are capitalizing on the scandals that have led to the development of Sarbanes-Oxley
"For Small Accounting Firms, Scandals Have an Upside"; New York Times; February 24, 2004; www.nytimes.com; Also available on
1. Why do you think large companies are looking to non-big four CPA firms for audit and consulting work?
10. The United Kingdom debates auditor liability issues
Auditor Liability is an international issue. Presently, auditors in the United Kingdom are lobbying for proportionate liability and
liability caps. The issues being raised can lead to a great classroom discussion on auditor liability. Articles available include:
"Audit; Auditors Resist DTI Moves on Liability", Accountancy Age, January 8, 2004; available on LexisNexis
"Liability Cap ’Could Combat Calamity’", FT.com, February 23, 2004
"Liability Cap Would Improve UK Reporting, Says ICAEW", Accountancy Age, February 27, 2004; available on LexisNexis
1. What are the issues concerning auditor liability?
2. How does the debate in England compare to the current auditor liability situation in the U.S.?
11. Is Sarbanes-Oxley increasing the auditor’s liability?
While the goal of Sarbanes-Oxley has been to improve financial reporting and reduce the likelihood of future Enrons and WorldComs
some see problems with the implementation of the Act. A recent article in Business Crimes describes some of the pitfalls in the Act
that could lead to increased auditor liability.
"Sarbanes-Oxley Litigation Trap?" Business Crimes, January 14, 2004; Available on LexisNexis.
1. Does Sarbanes-Oxley increase the risk of lawsuit for the auditor?
12. Internal auditor’s find problems at Wal-Mart
The KPMG Fraud Survey of 2003 is available through the AICPA website at www.aicpa.org/antifraud/homepage.htm. Also on that
same web page is a link to fraud and ethics case studies that you may find useful in class.
The Internal Auditors at Wal-Mart have found over 1300 violations of child labor laws; 15,000 instances of employees working
through meals; and 60,000 instances of workers missing breaks.
"Wal-Mart Woes: Audit Finds Thousands of labor Law Violations"; CNN Daybreak; January 13, 2004; Available on LexisNexis.
1. Wal-Mart management has made statements that the internal auditors were incorrect in their findings. What does this say for
internal controls at Wal-Mart?
2. What do you think about management’s relationship with internal audit?
3. What do you think about the future of internal audit at Wal-mart?
13. Government audit finds wasted spending in Washington D.C. public school system
A government audit, of the public school system in Washington D.C., performed by KPMG, revealed that the public school system
failed to submit annual cost report’s to the city’s Medicaid Assistance Administration for 1999 trough 2002. The result is that the city
has spent money that would have been funded by federal programs.
"Schools Tardy on Cost Reports; Auditors also Cite Bonuses"; The Washington Times; February 20, 2004; Available on LexisNexis
1. Why was KPMG doing a governmental audit?
2. What do you think will be the result of the audit report?
14. Internal auditors given new advisories concerning private information
Privacy of information and the use of private information is a major issue in business. The Institute of Internal Auditors ahs issued
two new practice advisories:
Practice Advisory 2100-8: "The Internal Auditor’s Role in Evaluating an Organization’s Privacy Framework."
Practice Advisory 2300-1: "The Internal Auditor’s Use of Personal Information in Conducting Audits. "
1. What are the issues regarding private information?
2. Why is the IIA issuing these advisories?
15. “Grant Thornton is Accused by SEC of Assisting Fraud,” Wall Street Journal (January 21, 2004), C1.
The SEC accused Grant Thornton of aiding and abetting securities-fraud violations by former audit client MCA Financial
Grant Thornton responded that it was not at fault and that MCA Financial Corporation concealed the fraud from its auditors.
1. What is the auditor’s responsibility with respect to financial statement fraud?
2. Can shareholders’ hold Grant Thornton liable for “aiding and abetting”?
16. “New Issues are Raised Over Independence of Auditor for MCI,” Wall Street Journal (January 28, 2004), C1, C4.
KPMG’s independence from MCI (formally WorldCom) has been questioned because of aggressive tax-avoidance strategies
that were recommended to WorldCom.
Independence has been raised because of the possibility that MCI may bring suit against KPMG for past fees and damages
1. From an independence standpoint, what are the issues involved with a client bringing suit against a CPA firm?
2. If you were a shareholder of MCI, how would you view a decision by MCI not to bring suit against KPMG?
3. How would MCI’s decision not to bring suit against KPMG possibly affect your perceptions of KPMG’s future independence?
17. “SEC Begins Probe Into Ernst’s Pacts,” Wall Street Journal (December 8, 2003), C13.
The SEC is inquiring into Ernst & Young’s relationship with three audit clients over travel services: American Express, AMR
(American Airlines), and Continental Airlines.
The issues raised by the SEC related to commissions and rebates received from these companies for Ernst & Young-related
1. If American Express served as Ernst & Young’s exclusive travel agent and split commissions with Ernst, what issues does this
raise with respect to Ernst’s audit of American Express?
2. If Ernst & Young charged its clients for the full cost of airline tickets and retained the rebates on these tickets (which were not
received until later), is this an ethical practice?
3. What issues are raised when an accounting firm purchases services from audit clients and is entitled to receive volume-related
18. “Many Companies Report Transactions with Top Officers,” Wall Street Journal (December 29, 2003), A3, A10
Filings of 400 major companies revealed an extraordinary number of related party transactions.
Major types of related party transactions included business deals, lawyers, loans, and family members.
1. What are the major accounting issues with respect to related-party transactions??
2. What is the auditor’s responsibility for related-party transactions?
19. “Adeco Delays 2003 Results Over Accounting,” Wall Street Journal (January 13, 2004), A3, A4.
Adeco, the world’s largest temporary employment company, indicated that it wouldn’t be able to issue its 2003 financial
statements because of material weaknesses in its internal control.
1. How has the auditor’s responsibility for internal control changed as a result of the Sarbanes-Oxley Act?
2. What type of reports on internal control are required under the Sarbanes-Oxley Act?
3. Why would internal control deficiencies affect Adeco’s ability to issue its financial results on a timely basis?
20. “More Firms Part Ways with Auditors,” USA Today (February 9, 2004), B1.
1,460 companies changed auditors in 2003 (almost one-third of the Russell 3000 companies).
Reasons cited for auditor changes include internal control issues, disputes over accounting rules, and opinion shopping.
1. What notification is made when a change in auditors occurs?
2. Refer to Kmart’s Form 8-K filed with the Securities and Exchange Commission on October 9, 2003. Why did Kmart dismiss its
auditor (PricewaterhouseCoopers)? What issues does this raise in your mind?
3. This article notes that Deloitte & Touche resigned from the audit of Shugard Storage in November 2003 because it could not
trust Shugard’s explanation of overpaying its CEO by $1.4 million. Is this a legitimate reason for resigning from an audit? Why
or why not?
21. “Lancer Stands by Audit Findings in Face of KPMG Allegations,” Wall Street Journal (February 5, 2003), A2.
KPMG informed Lancer that it was resigning from the audit because Lancer failed to take appropriate action with respect to
illegal acts with respect to transactions between it and Coca-Cola Company.
Lancer’s audit committee did not find sufficient evidence of “intentional misconduct” or “accounting irregularities”.
1. What is the auditor’s responsibility with respect to illegal acts?
2 When an illegal act is detected, what is the auditor’s appropriate response?
22. Global Crossing’s 2003 Annual Report
In Global Crossing’s 2003 Annual Report, Grant Thornton identified internal control deficiencies in the various areas.
1. Refer to Global Crossing’s Form 10-K dated December 8, 2003. What are some of the areas in which deficiencies in internal
control were identified?
2 Global Crossing’s 10-K indicated that Grant Thornton identified these deficiencies as “material weaknesses”. What is a material
weakness? What is the auditor’s responsibility for identifying material weaknesses?
3. From Global Crossing’s Form 10-K, what was Global Crossing’s management’s response to these deficiencies?
23. “Tyco’s Auditor Undercuts Bonus Defense,” Wall Street Journal (January 20, 2004), C1.
In the trial of Tyco’s executives on charges of unauthorized bonuses and loans, defense attorneys have alleged that the
transactions were reviewed by PricewaterouseCoopers.
PricewaterhouseCoopers partner Richard Scalzo indicated that he reviewed the accounting for the bonuses and loans but did not
verify that they were authorized by Tyco’s board of directors or audit committee.
Many of these disputed bonuses were identified in management representation letters sent from Tyco to PricewaterhouseCoopers.
1. What responsibility does PricewaterhouseCoopers have to verify that bonuses were authorized by Tyco’s board of directors if
these bonuses were accounted for properly?
2 How could greater levels of communication between PricewaterouseCoopers and Tyco’s board of directors have mitigated this
24. Lancer Corporation Form 8-K dated February 3, 2004
Lancer’s 8-K announced a change in its auditor from KPMG LLP.
KPMG indicated that it was no longer able to rely on Lancer’s management’s representations and was no longer willing to be
associated with its financial statements.
In addition, KPMG indicated that it had some questions with the method of accounting for Lancer’s recognition of revenue from
sales of equipment to Coca-Cola North America Fountain.
1. In addition to resigning, what other options might be available to KPMG in this situation?
2 If you were another CPA firm, what reservations would you have about taking this engagement?
3. Assuming you were considering accepting this engagement, what type of questions would you consider asking Lancer and
25. “Probe of Coke’s Sales Leads to Japan,” Wall Street Journal (January 30, 2004), A3, A6.
Coca-Cola finance officials indicated that Coca-Coca attempted to overstate revenues by shipping excess concentrate to bottlers in
In 2000, Coca-Cola announced that bottlers in Japan had planned to reduce their inventories of concentrate.
Coca-Cola officials responded that bottlers in Japan were not forced to accept any shipments of concentrate against their will.
1. What risk factors may have alerted Coca-Cola’s auditors as to the potential for overstating revenues?
2 What type of audit procedures may have allowed Coca-Cola’s auditors to identify this potential misstatement?
26. “Kodak’s Fuzzy Numbers,” Business Week (February 9, 2004), 77.
Kodak has taken “one-time” restructuring charges for each of the last 12 years.
These restructuring charges amounted to half of its total operating earnings since 1992.
1. Since net income is affected by the classification of these items as restructuring charges, why is this a major consideration for
Kodak and its shareholders?
2 Does Kodak’s practice of taking frequent restructuring charges raise any issues for their auditors?