Question

The financial statement fraud case I decided to select was the Tesco accounting scandal, which took place in 2014. After analyzing the case and reading the chapter I realized that this cases involves 3 of the 5 earnings management techniques: revenue recognition, big-bath charges, and creative accounting.

            The primary technique used to report misleading results was the acceleration of future revenues into the current period in order to meet the earning expectations. This is an example of the “revenue recognition” type of earnings management because they “accelerate the recording of revenues to help meet analysts’ earnings projections” (Mintz & Morris, 2017). They overstated the profits/revenue “for the past six months by £250m” (Ruddick, 2014). The secondary technique used by Tesco was big bath. For years they had not written off or written down assets that lost value and so when they finally came clean on the revenue recognition abuses, they also adjusted assets to proper valuations and anticipated future expenses in one big bath write off called “restructuring.” The “playing with the timing of events” to accelerate revenues and expenses in order to make prior periods more attractive and concentrate all the bad news into one quarter that can pass and be forgotten is a form of creative accounting. Firms prefer to have all the bad news at once, say their apologies and then set up for better performance later. So, they “came clean” (due to whistleblower) and then decided to adjust assets and set up liabilities for the upcoming periods so that all the bad news would occur all at once and future periods would look good (and investors could settle back down and be happy again).

Question:

Based on the earnings management technique that you have identified, if you were an investigator conducting an audit of the company and if that was your hypothesis of what is occurring, what kinds of audit tests do you think you'd want to incorporate into your audit plan and what would you be looking for as confirmation that you are correct in your thinking?

Answer 1

1. REVENUE RECOGNITION:-

as a audit of a company i would conduct the sampling of a sales invoices to examine date of delivery, payment information, date of sales of goods and services, i shall ensure that revenue information in the general ledger reconciles with the sales invoices.

2. i would have conducted the analytical review procedures by making comparisons with the previous year sales figures and finding out any significant deviations/ differences with the current year.

2. BIG BATH TECHNIQUES

2.1 as an auditor of a company it is the duty of the auditor of a company to examine the financial statements by applying the necessary audit procedures and expressing an opinion on the true and fair view of the financial statements.

2. therefore all the assertions that is being reported in the financial statements is need to checked thoroughly thus it is the duty if an auditor to find out the whether the assets are accurately stated in the books of accounts, proper valuation of the assets is need to be checked after applying the necessary accounting principles and a auditor can also obtain the management representation letter stating that fixed assets are accurately stated in the books of accounts .