Question

Audit Sampling and Accounts Receivable

Question 1 KPMG was the auditor for Xerox Corporation between 1997 and 2000. During this time, approximately $6 billion of revenue was improperly classified and earnings were overstated by approximately $2 billion. When the fraudulent conduct was exposed, Xerox restated its financial statements and replaced KPMG as its auditor. KPMG paid $22.5 million to settle a lawsuit against the firm by regulators.

Research this accounting fraud on the Internet for further details on what occurred.

Required: Suppose that you are part of Xerox Corporation’s audit team hired to complete 1997 to 2000 financial statement audits.

Do the following:

b) Discuss one procedure that the auditors (that is, you) could have performed that would have identified the fraud. Provide a valid procedure that the auditors could have performed that would have identified the fraud. Explain the procedure and it must be clear about the following:

• what to test
• how to do the test
• why to do the test
• what relevant documents will be included in the test
• why the procedure makes sense in terms of identifying the fraud in the case

Answer 1

solution:

The Xerox Corporation was under intense pressure from the shareholders to maintain and elevate its performance. The underlying business model of the company was under threat and needed a fix, so as to continue to be a sustainable and profitable business. Instead blanket of some accounting tricks was put on poor performance. During the time, KPMG was the statutory auditor of the corporation, tasked with ensuring and reporting to the shareholders that the accounts drawn up were free from any material misstatement and fraud. Instead the firm turned a blind eye to all the creative accounting.

Fraud To keep up with the expectations of the Wall Street, Xerox Corp. was to enhance its performance by one way or the other. It did this by a number of ways:

a. Cookie Jar Accounting: Cookie Jar Accounting is a method in which reserves are treated as a jar and these reserves are used whenever the operating performance of the company falls short of its expectations. Extraordinary one time expenses were written of against these reserves, avoiding a hit on the Profit & Loss.

b. Speeding up of Lease Income: according to Generally Accepted Accounting Principles, pay from leases was to be perceived over the rent term, with the exception of rent identifying with hardware which could be perceived promptly. The organization offered a packaged rent wherein alongside the gear, different administrations and financing was likewise done. The organization did not bifurcate between the leases and perceived all of such rent rentals as pay promptly.

c. Upgrading Residual Value of Leased Assets: according to Generally Accepted Accounting Principles (GAAP), the leftover estimation of the benefit rented can't be reconsidered upwards after commencement of the rent. The organization routinely utilized the act of expanding the remaining estimation of the rented resources.

d. Late acknowledgment of pay: The other salary picked up by the organization in an expense debate in years preceding 1997 was perceived just in 1997. This is against GAAP. This was done as such as to try and out the crumbling execution of the organization amid 1997 to 2001, when this bookkeeping extortion was in movement

e. Revelation of Factoring Transactions: The organization had pitiful money balance versus its benefit base. To cover this up, the organization sold its receivable and acknowledged money against it. Anyway this was not unveiled as a piece of the give an account of fiscal reports. The wellspring of money is of crucial significance.

Assessing Audit Evidence

Treat Jar Accounting: A proof around there could have been assembled by checking the record of stores whereby the firm could have made sense of what were holds comprised of and why the stores have diminished amid the year. On the off chance that there were costs which were discounted against the equivalent the purpose behind the equivalent and whether the equivalent ought to have been charge to Profit and Loss. A barrier could be contended from the organization's side that just unprecedented and sporadic costs were discounted against the stores. Anyway the equivalent isn't supportable alluding to GAAP.

Increasing speed of Lease Income: The firm could have investigated the arrangement of the leases and for what reason were the leases sold in package. In addition, can the rent rentals be separated in to hardware deals and rentals for different administrations and financing. The firm would have alluded to the treatment given in the GAAP for leases and arrive at the resolution that the organization was plainly endeavoring to perceive the salary very ahead of time.

Improving Residual Value of Leased Assets: The firm could have asked about the successive corrections in the lingering estimations of the rented resources. In addition, just upward revaluations would effectively answer the questions. The way that the equivalent isn't reasonable by GAAP, the organization's plausible safeguard that it revalue the resources for reflect reasonable esteem bears no criticalness.

Late acknowledgment of salary: There was no pragmatic explanation behind perceiving salaries of prior years amid 1997-98. A salary is perceived when it is quantifiable and there is a sensible conviction of getting it. The main barrier organization has for this is powerlessness to indicate sureness. Just on this ground would the inspector not qualify the review report. The firm of reviewers would have gotten a duplicate of the procedures of the assessment question to build up conviction over getting the equivalent and act as needs be.

Revelation of Factoring Transactions: The most vital component of a business is the money streams of the element. The business result in benefits which eventually bears money to the firm. The acknowledgment of offers in to money is the absolute most essential thing in a business. The absence of change of benefit to money reflects poor accumulation arrangement of the business, expanded deals figures, and so forth. The equivalent was the situation with Xerox Corp. Since deals were swelled, it were not going to result in real money at last. By and by a satisfactory dimension of money was to be kept up. Hence calculating of receivables was finished. The firm of evaluators would have broke down the accounting report that one current resource has been changed over in to another present resource i.e., receivables were changed over in to money. A bogus impression was passed on that receivables have been gathered routinely since no exposure was given.

thank you.