Darvish Company is a European subsidiary of Cubbie Corporation, a U.S. company. Darvish had the following balance sheet at December 31, 20X1:

There are no differences between local GAAP and U.S. GAAP for Darvish. Cubbie translates Darvish’s financial statements into U.S. dollars using the current rate method.

Required:

1. What is the amount of Darvish’s translation exposure at December 31, 20X1?
2. Ignoring any changes in Darvish’s translation exposure that might arise during 20X2, what amount of translation gain or loss arises in 20X2 if the euro’s value falls from $1.20 at December 31, 20X1, to $1.15 at December 31, 20X2?
3. Is the translation gain or loss referred to in Requirement 2 included in net income or in other comprehensive income?

Background

ABC Retailers Inc. (ABC or the “Company”) is a U.S. public company that files quarterly and annual reports with the Securities and Exchange Commission (SEC). ABC is a leading retail

chain operating more than 100 department stores across the continental United States. ABC department stores offer customers a variety of nationally advertised products, including clothing, shoes, jewelry, and other accessories. The Company’s supply chain of products is managed through a single warehouse and distribution facility located in Kansas City, Missouri. ABC has a centralized accounting and finance structure at its corporate headquarters, where all processes and controls related to all substantive account balances occur, including controls related to accounts payable and the Vendor Master File. ABC recognizes revenues from retail sales at the point of sale to its customers. Discounts provided to customers by the Company at the point of sale, including discounts provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Cost of goods sold for the Company primarily consist of inbound freight and costs relating to purchasing and receiving, inspection, depreciation, warehousing, internal transfer, and other costs of distribution.

Facts

Audit Issue

On June 1,2016, the Accounts Payable (AP) Manager received an e-mail inquiry about the process required for a vendor to change its bank account information. The e-mail was sent from

John Smith at a domain address listed as “Watch-Makers.” Watch Makers is a manufacturer thatsupplies ABC-branded watches to ABC’s west region department stores. In addition, John Smith is the primary contact at Watch Makers with whom the Company typically interacts.The AP Manager responded to the e-mail request on June 15,2016, with the procedures required of the vendor, which include completing a vendor bank account request form. On June 20, 2016, the AP Manager received a reply e-mail from John Smith at “Watch-Makers” with a completed vendor bank account request form, which included John Smith’s signature, new bank account information, and other related information. Upon receiving the vendor bank account request form, the AP Manager completed a separately required Vendor Change Form for internal processing. The Vendor Change Form is completed for new vendors or changes to existing vendors’ information, including bank account information. The AP Manager sent the completed Vendor Change Form to ABC’s Assistant Controller, who reviewed and approved the request on June 24, 2016. The bank account information was updated within the Vendor Master File on June 26, 2016. Throughout the month of July, valid Watch Makers invoices were processed through the Company’s accounts payable process, and the valid invoices were paid in accordance with the Company’s processes for cash disbursements and wire transfers. However, because the bank account information for Watch Makers was changed (as a result of the June 1, 2016, e-mail request) approximately $2 million in payments was wired to an incorrect bank account. On August 2, 2016, the Company received an inquiry from Watch Makers about the expected timing of the $2 million in outstanding invoices. As a result of the direct interaction with Watch Makers’ employee John Smith, the Company determined that the previous vendor bank account change form was received from a fraudulent domain name with the intent to defraud the Company. The e-mail domain for Watch Makers is “Watch Makers,” with no hyphen, rather than “Watch-Makers,” with a hyphen. Both e-mails received from “Watch-Makers” were determined to be from a fraudulent source (that also fraudulently used John Smith’s name in the e-mail). As noted above, there are two employees within the Company that were involved in processing and approving the Vendor Change Form. The Company’s policy on bank account change requests was communicated by ABC’s Assistant Controller in an August 2015 e-mail that indicated that for each Vendor Change Form requesting a vendor bank account change, the accounts payable department was required to (1) obtain a previously processed and paid invoice from the vendor requesting the bank account change, (2) call the vendor using the contact information obtained from the prior invoice, (3) verify the authenticity of the requested bank account change request by directly contacting the vendor, and (4) include all relevant information obtained in steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s control description relating to the review of a Vendor Change Form by the Assistant Controller is not explicit regarding the specific attributes of the review. However, because the policy was distributed by the Assistant Controller and the Assistant Controller is also the control owner (e.g., performs the review), there is a presumption that the Assistant Controller would understand that as part of her review, she should evaluate whether the AP Manager obtained sufficient information to confirm the authenticity of the bank account change request.

Other Relevant Facts

• Materiality—$8 million.

• The Company processed approximately 105 vendor requested bank account changes during 2016 before the realization that the request from “Watch-Makers” was fraudulent (from September 25, 2015, to August 2, 2016). After the identification of the misappropriation of assets, the Company’s internal audit department obtained and reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting that only five Vendor Change Forms contained the information required by the policy. In addition, internal audit determined that the primary review procedure performed by the Assistant Controller related to the verification that the bank account number was appropriately included on the Vendor Change Form. This procedure was performed in all cases before the bank account information was input into the accounts payable system.

• The total wire transfer payments made to the 105 vendors that requested bank account changes in FY16 totaled approximately $56.2 million (based on an analysis prepared by Internal Audit of the invoices processed and paid by the Company after the processing of a Vendor Change Form for the 105 vendors). There are more than 30 vendors with annual purchase activity of over $20 million (12 of which have purchase activity of over $40 million); thus, the amount of payments made to any single vendor in a payables cycle could approximate $2 million, assuming a cycle of 30 days.

• The Company’s Chief Security Officer completed an internal investigation and concluded that there was no indication that the AP Manager and Assistant Controller were involved in the scheme that resulted in the $2 million misappropriation.

• After the determination on August 2, 2016, that the Vendor Change Form was from a fraudulent source, the Company ceased processing additional Vendor Change Forms until it could understand the root cause of the deficiency. On September 10, 2016, the Assistant Controller sent a reminder regarding the importance of following the vendor bank account request change policy. The e-mail also highlighted an enhancement to the process, which primarily included an enhancement to the Vendor Change Form. The form was revised to include the following three new, explicit sections that are required to be completed: (1) contact phone number pulled from previously processed and paid vendor invoice, (2) name of individual at the vendor (from a previous invoice) that was contacted, and (3) date discussed/contacted. The policy e-mail reiterated the requirement to include a copy of the previously processed vendorinvoice with the Vendor Change Form.

• Internal Audit performed a thorough evaluation of the competency of the Assistant Controller and concluded that notwithstanding the Assistant Controller’s lack of historical performance, the Assistant Controller was suitably competent to perform the control.

Engagement Team Note

In planning the 2016 audit, the engagement team obtained an understanding of the internal controls related to cash disbursements. This understanding was developed through the

engagement team’s walkthrough of the cash disbursements process. As part of its walkthrough procedures, the engagement team made inquiries of appropriate personnel, inspected relevant documentation, and in certain cases, observed the control performers carrying out required control procedures. As a result, the engagement team concluded that there were no significant changes to the cash disbursements process in the current year. The engagement team identified four risks of material misstatement relating to the cash disbursements process. For each risk identified, the team documented the control activity that addresses the risk of material misstatement in the excerpted worksheet (see Appendix

1). As a result of the 'Audit Issue’ described above, the engagement team identified a control deficiency in the following control:

CD5C—The accounts payable department is required to complete the following for each Vendor Change Form requesting a bank account change:

1. Obtain a previously processed and paid invoice from the vendor requesting the bank account change.

2. Call the vendor using the contact information from the obtained invoice.

3. Verify the authenticity of the requested bank account change request.

4. Attach all relevant information obtained in steps (1) through (3) to the Vendor Change Form for review and approval.

The Company’s control description regarding the Assistant Controller’s review of the Vendor Change Form is not prescriptive regarding the specific attributes of the review. However, there is a presumption that the Assistant Controller would understand the primary objective of the control, which is to evaluate whether sufficient information was obtained by the AP Manager to confirm that the bank account change request was authentic.

Internal Controls -> Control DeficiencyEvaluation

Question:

In light of the identified deficiency, auditors should consider what impact, if any, the deficiency may have on other controls. What implications does the failure to adequately review the Vendor Change Form have on other controls?

Codger Corp. — Internal Controls

Codger Corp. (CC or the “Company”) is a U.S. public company that files quarterly andannual reports with the Securities and Exchange Commission (SEC). CC is a leading retail chain operating more than 100 department stores across the continental United States. CC department stores offer customers a variety of nationally advertised products, including clothing, shoes, jewelry, and other accessories. The Company’s supply chain ofproducts is managed through a single warehouse and distribution facility located in Kansas City, Missouri.

CC has a centralized accounting and finance structure at its corporate headquarters, whereall processes and controls related to all substantive account balances occur, includingcontrols related to accounts payable and the Vendor Master File. CC recognizes revenues from retail sales at the point of sale to its customers. Discounts provided to customers bythe Company at the point of sale, including discounts provided in connection with loyaltycards, are recognized as a reduction in sales as the products are sold. Cost of goods sold for the Company primarily consist of inbound freight and costs relating to purchasing and receiving, inspection, depreciation, warehousing, internal transfer, and other costs ofdistribution.

Case Facts

Audit Issue

On June 1, 20X2, the Accounts Payable (AP) Manager received an e-mail inquiry about the process required for a vendor to change its bank account information. The e-mail was sent from John Smith at a domain address listed as “Time-Peace.” Time Peace is a manufacturer that supplies CC-branded watches to CC’s west region department stores.In addition, John Smith is the primary contact at Time Peace with whom the Companytypically interacts.

The AP Manager responded to the e-mail request on June 15, 20X2, with the procedures required of the vendor, which include completing a vendor bank account request form. On June 20, 20X2, the AP Manager received a reply e-mail from John Smith at “Time-Peace” with a completed vendor bank account request form, which included John Smith’s signature, new bank account information, and other related information.

Upon receiving the vendor bank account request form, the AP Manager completed a separately required Vendor Change Form for internal processing. The Vendor Change Form is completed for new vendors or changes to existing vendors’ information,

including bank account information. The AP Manager sent the completed Vendor Change

Form to CC’s Assistant Controller, who reviewed and approved the request on June 24,

20X2. The bank account information was updated within the Vendor Master File on June

26, 20X2.

Throughout the month of July, valid Time Peace invoices were processed through the

Company’s accounts payable process, and the valid invoices were paid in accordance

5

with the Company’s processes for cash disbursements and wire transfers. However, because the bank account information for Time Peace was changed (as a result of the June 1, 20X2, e-mail request) approximately $2 million in payments was wired to an incorrect bank account. On August 2, 20X2, the Company received an inquiry from Time Peace about the expected timing of the $2 million in outstanding invoices. As a result of the direct interaction with Time Peace’s employee John Smith, the Company determined that the previous vendor bank account change form was received from a fraudulent domain name with the intent to defraud the Company. The e-mail domain for Time Peace is “Time Peace,” with no hyphen, rather than “Time-Peace,” with a hyphen.Both e-mails received from “Time-Peace” were determined to be from a fraudulent source (that also fraudulently used John Smith’s name in the e-mail).

As noted above, there are two employees within the Company that were involved in processing and approving the Vendor Change Form. The Company’s policy on bank account change requests was communicated by CC’s Assistant Controller in an August

20X1 e-mail that indicated that for each Vendor Change Form requesting a vendor bank account change, the accounts payable department was required to (1) obtain a previously processed and paid invoice from the vendor requesting the bank account change, (2) call the vendor using the contact information obtained from the prior invoice, (3) verify the authenticity of the requested bank account change request by directly contacting the vendor, and (4) include all relevant information obtained in steps (1) through (3) as an attachment to the Vendor Change Form. The Company’s control description relating to the review of a Vendor Change Form by the Assistant Controller is not explicit regarding the specific attributes of the review. However, because the policy was distributed by the Assistant Controller and the Assistant Controller is also the control owner (e.g., performs the review), there is a presumption that the Assistant Controller would understand that as part of her review, she should evaluate whether the AP Manager obtained sufficient information to confirm the authenticity of the bank account change request.

Other Relevant Facts

•?Materiality — $8 million.

•?The Company processed approximately 105 vendor requested bank accountchanges during FYX2 before the realization that the request from “Time-Peace” was fraudulent (from September 25, 20X1, to August 2, 20X2). After the identification of the misappropriation of assets, the Company’s internal audit department obtained and reviewed all 105 Vendor Change Forms reviewed by the Assistant Controller, noting that only five Vendor Change Forms contained the information required by the

policy. In addition, internal audit determined that the primary review procedure performed by the Assistant Controller related to the verification that the bank account number was appropriately included on the Vendor Change Form. This procedure was performed in all cases before the bank account information was input into the accounts payable system.

•?The total wire transfer payments made to the 105 vendors that requested bank account changes in FYX2 totaled approximately $56.2 million (based on an analysis prepared by Internal Audit of the invoices processed and paid by the Company afterthe processing of a Vendor Change Form for the 105 vendors).

•?There are more than 30 vendors with annual purchase activity of over $20 million (12 of which have purchase activity of over $40 million); thus, the amount ofpayments made to any single vendor in a payables cycle could approximate $2 million, assuming a cycle of 30 days.

•?The Company’s Chief Security Officer completed an internal investigation and concluded that there was no indication that the AP Manager and Assistant Controller were involved in the scheme that resulted in the $2 million misappropriation.

•?After the determination on August 2, 20X2, that the Vendor Change Form was from a fraudulent source, the Company ceased processing additional Vendor ChangeForms until it could understand the root cause of the deficiency. On September 10, 20X2, the Assistant Controller sent a reminder regarding the importance of following the vendor bank account request change policy. The e-mail also highlighted an enhancement to the process, which primarily included an enhancement to the VendorChange Form. The form was revised to include the following three new, explicit sections that are required to be completed: (1) contact phone number pulled from previously processed and paid vendor invoice, (2) name of individual at the vendor(from a previous invoice) that was contacted, and (3) date discussed/contacted. Thepolicy e-mail reiterated the requirement to include a copy of the previously processed vendor

invoice with the Vendor Change Form.

•?Internal Audit performed a thorough evaluation of the competency of theAssistant Controller and concluded that notwithstanding the Assistant Controller’s lack of historical performance, the Assistant Controller was suitably competent to perform the control.

Engagement Team Note

In planning the 20X2 audit, the engagement team obtained an understanding of the internal controls related to cash disbursements. This understanding was developed through the engagement team’s walkthrough of the cash disbursements process. As part of its walkthrough procedures, the engagement team made inquiries of appropriate personnel, inspected relevant documentation, and in certain cases, observed the control performers carrying out required control procedures. As a result, the engagement team concluded that there were no significant changes to the cash disbursements process in the current year.

The engagement team identified four risks of material misstatement relating to the cash disbursements process. For each risk identified, the team documented the control activity that addresses the risk of material misstatement in the excerpted worksheet (see

Handout 1). As a result of the Audit Issue described above, the engagement team identified a control deficiency in the following control:

CD5C — The accounts payable department is required to complete the following for each Vendor Change Form requesting a bank account change:

1. Obtain a previously processed and paid invoice from the vendor requesting the bank account change.

2.   Call the vendor using the contact information from the obtained invoice.

3. Verify the authenticity of the requested bank account change request.

4. Attach all relevant information obtained in steps (1) through (3) to the Vendor

Change Form for review and approval.

The Company’s control description regarding the Assistant Controller’s review of the Vendor Change Form is not prescriptive regarding the specific attributes of the review. However, there is a presumption that the Assistant Controller would understand the primary objective of the control, which is to evaluate whether sufficient information was obtained by the AP Manager to confirm that the bank account change request was authentic.

Internal Controls -> Control DeficiencyEvaluation

Question: As CC's auditor, what implications does this control deficiency have for other controls related to the cash disbursement process, and for the controls related to the cash disbursement process, and for the control environment in general?

The Williams Company, a U.S.-based company, owns 100% of a European Subsidiary (ES). The investment in ES totals $10 million (euros 13.5 million) as of the end of Year 1. This represents an initial investment of $6 million and retained earnings of $4 million. The Currency Translation Adjustment (CTA) account included in Other Comprehensive Income (OCI) totals $1 million (loss) at the end of Year 1.

During Year 2, Williams decided to sell 25% of ES to the Tremont Company, an unrelated U.S.-based Company for $15 million in cash. The closing date of the transaction is June 30 of Year 2. Earnings of ES for the six months of Year 2 are $1 million and there was an additional increase of $200,000 in the CTA during the first six months of Year 2. No dividends have been paid by ES to Williams.

Instructions:

1. Calculate the gain or the loss on the partial disposal by Williams of ES as of June 30, Year 2, under both the US GAAP and IFRS. Make sure you show the details of both calculations and provide authoritative references supporting the basis and the reasoning for each of your calculations.
2. Assume that during January Year 2, ES paid a dividend to Williams of euro 6.75 million ($5 million). How would that dividend be treated by Williams under both the US GAAP and IFRS? What impact, if any, would this dividend have on the CTA account of Williams under both the US GAAP and IFRS? Make sure you show the details of any calculations and provide authoritative references supporting the basis and the reasoning for each of your calculations, if any.
3. Assume that Williams’s investment in ES totals $6 million, the amount of the original investment. ES had not made any money since being formed by Williams as of December 31, Year 1, management has decided to sell ES, and to evaluate ES for any impairment charge in its Year 1 financial statements. The CTA totals $1 million at the end of Year 1. How would the evaluation of ES differ under the US GAAP and IFRS? Make sure you show the details of any calculations supported by authoritative references when answering this question.

• Your submission should be a minimum of 3 pages in length, not including the required cover and reference pages. Longer submissions are permissible.

On May 8, 2015, Jett Company (a U.S. company) made a credit sale to Lopez (a Mexican company). The terms of the sale required Lopez to pay 1,340,000 pesos on February 10, 2016. Jett prepares quarterly financial statements on March 31, June 30, September 30, and December 31. The exchange rates for pesos during the time the receivable is outstanding follow.

Compute the foreign exchange gain or loss that Jett should report on each of its quarterly statements for the last three quarters of 2015 and the first quarter of 2016

Compute the amount reported on Jett's balance sheets at the end of its last three quarters

Three different companies each purchased trucks on January 1, 2018, for $74,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 80,000 miles in 2018, 60,000 miles in 2019, 45,000 miles in 2020, and 70,000 miles in 2021. Each of the three companies earned $63,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation. Answer each of the following questions. Ignore the effects of income taxes. c-1. Calculate the book value on the December 31, 2020, balance sheet?

Suppose that the current market price of the stock of Company X is $ 872. Suppose that you expect that the news release by Company X will cause at least ca 10% movement in the market price of its stock by Dec. 4th, 2020. However, you are not sure whether there will be a downward adjustment or an upward adjustment of the market price. Describe briefly a trading strategy involving call and (or) put options that accounts for this expectation. Use graph to demonstrate the payoffs and identify clearly your pay-offs from each option position as well as from the overall position at the date of expiry (please consider the price range of $600 to $1200 on the graph) and mark clearly the numerical values of break-even stock prices related to your strategy. Suppose that the call and put options, which are available on the market and can be used for the construction of trading strategy, are following:

• Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary this year. Your chief executive officer (CEO) has requested a presentation to the board of directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year. Please assess the value of each method identified in your presentation to the board and support your recommendation with examples. Respond to at least one other student.

• Imagine you are the chief financial officer (CFO) of a corporation with plans to complete the acquisition of a key subsidiary this year. Your chief executive officer (CEO) has requested a presentation to the board of directors describing the methods available to account for the acquisition internally and the best method for the company during the acquisition year. Please assess the value of each method identified in your presentation to the board and support your recommendation with examples. Respond to at least one other student.