Required information

Serial Problem Business Solutions LO P1, P2, P3, P4

[The following information applies to the questions displayed below.]

Santana Rey created Business Solutions on October 1, 2017. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2017. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts.

In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1/10, n/30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company’s new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2018. Its transactions for January through March follow:

The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation:

1. The March 31 amount of computer supplies still available totals $2,005.
2. Three more months have expired since the company purchased its annual insurance policy at a $2,220 cost for 12 months of coverage.
3. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.
4. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is $825.
5. Depreciation on the computer equipment for January 1 through March 31 is $1,250.
6. Depreciation on the office equipment for January 1 through March 31 is $400.
7. The March 31 amount of merchandise inventory still available totals $704.

Part 2

2. Post the journal entries in part 1 to the accounts in the company’s general ledger. (Note: Begin with the ledger’s post-closing adjusted balances as of December 31, 2017.)

Serial Problem Business Solutions LO P1, P2, P3, P4 [The following information applies to the questions displayed below.] Santana Rey created Business Solutions on October 1, 2015. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2015. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts. No. Account Title Debit Credit 101 Cash $ 48,372 106.1 Alex’s Engineering Co. 0 106.2 Wildcat Services 0 106.3 Easy Leasing 0 106.4 IFM Co. 3,000 106.5 Liu Corp. 0 106.6 Gomez Co. 2,668 106.7 Delta Co. 0 106.8 KC, Inc. 0 106.9 Dream, Inc. 0 119 Merchandise inventory 0 126 Computer supplies 580 128 Prepaid insurance 1,665 131 Prepaid rent 825 163 Office equipment 8,000 164 Accumulated depreciation—Office equipment $ 400 167 Computer equipment 20,000 168 Accumulated depreciation—Computer equipment 1,250 201 Accounts payable 1,100 210 Wages payable 500 236 Unearned computer services revenue 1,500 307 Common stock 73,000 318 Retained earnings 7,360 319 Dividends 0 403 Computer services revenue 0 413 Sales 0 414 Sales returns and allowances 0 415 Sales discounts 0 502 Cost of goods sold 0 612 Depreciation expense—Office equipment 0 613 Depreciation expense—Computer equipment 0 623 Wages expense 0 637 Insurance expense 0 640 Rent expense 0 652 Computer supplies expense 0 655 Advertising expense 0 676 Mileage expense 0 677 Miscellaneous expenses 0 684 Repairs expense—Computer 0 In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1/10, n/30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company’s new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2016. Its transactions for January through March follow: Jan. 4 The company paid cash to Lyn Addie for five days’ work at the rate of $125 per day. Four of the five days relate to wages payable that were accrued in the prior year. 5 Santana Rey invested an additional $25,000 cash in the company in exchange for more common stock. 7 The company purchased $5,800 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB shipping point, invoice dated January 7. 9 The company received $2,668 cash from Gomez Co. as full payment on its account. 11 The company completed a five-day project for Alex’s Engineering Co. and billed it $5,500, which is the total price of $7,000 less the advance payment of $1,500. 13 The company sold merchandise with a retail value of $5,200 and a cost of $3,560 to Liu Corp., invoice dated January 13. 15 The company paid $600 cash for freight charges on the merchandise purchased on January 7. 16 The company received $4,000 cash from Delta Co. for computer services provided. 17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount. 20 Liu Corp. returned $500 of defective merchandise from its invoice dated January 13. The returned merchandise, which had a $320 cost, is discarded. (The policy of Business Solutions is to leave the cost of defective products in cost of goods sold.) 22 The company received the balance due from Liu Corp., net of both the discount and the credit for the returned merchandise. 24 The company returned defective merchandise to Kansas Corp. and accepted a credit against future purchases. The defective merchandise invoice cost, net of the discount, was $496. 26 The company purchased $9,000 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB destination, invoice dated January 26. 26 The company sold merchandise with a $4,640 cost for $5,800 on credit to KC, Inc., invoice dated January 26. 31 The company paid cash to Lyn Addie for 10 days’ work at $125 per day. Feb. 1 The company paid $2,475 cash to Hillside Mall for another three months’ rent in advance. 3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the $496 amount in the credit memorandum. 5 The company paid $600 cash to the local newspaper for an advertising insert in today’s paper. 11 The company received the balance due from Alex’s Engineering Co. for fees billed on January 11. 15 The company paid $4,800 cash for dividends. 23 The company sold merchandise with a $2,660 cost for $3,220 on credit to Delta Co., invoice dated February 23. 26 The company paid cash to Lyn Addie for eight days’ work at $125 per day. 27 The company reimbursed Santana Rey for business automobile mileage (600 miles at $0.32 per mile). Mar. 8 The company purchased $2,730 of computer supplies from Harris Office Products on credit, invoice dated March 8. 9 The company received the balance due from Delta Co. for merchandise sold on February 23. 11 The company paid $960 cash for minor repairs to the company’s computer. 16 The company received $5,260 cash from Dream, Inc., for computing services provided. 19 The company paid the full amount due to Harris Office Products, consisting of amounts created on December 15 (of $1,100) and March 8. 24 The company billed Easy Leasing for $9,047 of computing services provided. 25 The company sold merchandise with a $2,002 cost for $2,800 on credit to Wildcat Services, invoice dated March 25. 30 The company sold merchandise with a $1,048 cost for $2,220 on credit to IFM Company, invoice dated March 30. 31 The company reimbursed Santana Rey for business automobile mileage (400 miles at $0.32 per mile). The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation: a. The March 31 amount of computer supplies still available totals $2,005. b. Three more months have expired since the company purchased its annual insurance policy at a $2,220 cost for 12 months of coverage. c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day. d. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is $825. e. Depreciation on the computer equipment for January 1 through March 31 is $1,250. f. Depreciation on the office equipment for January 1 through March 31 is $400. g. The March 31 amount of merchandise inventory still available totals $704.

Santana Rey created Business Solutions on October 1, 2017. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2017. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts. No. Account Title Debit Credit 101 Cash $ 48,522 106.1 Alex’s Engineering Co. 0 106.2 Wildcat Services 0 106.3 Easy Leasing 0 106.4 IFM Co. 3,070 106.5 Liu Corp. 0 106.6 Gomez Co. 2,808 106.7 Delta Co. 0 106.8 KC, Inc. 0 106.9 Dream, Inc. 0 119 Merchandise inventory 0 126 Computer supplies 730 128 Prepaid insurance 1,989 131 Prepaid rent 905 163 Office equipment 8,180 164 Accumulated depreciation—Office equipment $ 220 167 Computer equipment 20,600 168 Accumulated depreciation—Computer equipment 1,100 201 Accounts payable 1,110 210 Wages payable 700 236 Unearned computer services revenue 1,330 301 S. Rey, Capital 82,344 302 S. Rey, Withdrawals 0 403 Computer services revenue 0 413 Sales 0 414 Sales returns and allowances 0 415 Sales discounts 0 502 Cost of goods sold 0 612 Depreciation expense—Office equipment 0 613 Depreciation expense—Computer equipment 0 623 Wages expense 0 637 Insurance expense 0 640 Rent expense 0 652 Computer supplies expense 0 655 Advertising expense 0 676 Mileage expense 0 677 Miscellaneous expenses 0 684 Repairs expense—Computer 0 In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1/10, n/30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company’s new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2018. Its transactions for January through March follow: Jan. 4 The company paid cash to Lyn Addie for five days’ work at the rate of $175 per day. Four of the five days relate to wages payable that were accrued in the prior year. 5 Santana Rey invested an additional $23,300 cash in the company. 7 The company purchased $7,200 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB shipping point, invoice dated January 7. 9 The company received $2,808 cash from Gomez Co. as full payment on its account. 11 The company completed a five-day project for Alex’s Engineering Co. and billed it $5,450, which is the total price of $6,780 less the advance payment of $1,330. 13 The company sold merchandise with a retail value of $4,000 and a cost of $3,470 to Liu Corp., invoice dated January 13. 15 The company paid $740 cash for freight charges on the merchandise purchased on January 7. 16 The company received $4,050 cash from Delta Co. for computer services provided. 17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount. 20 Liu Corp. returned $600 of defective merchandise from its invoice dated January 13. The returned merchandise, which had a $290 cost, is discarded. (The policy of Business Solutions is to leave the cost of defective products in cost of goods sold.) 22 The company received the balance due from Liu Corp., net of both the discount and the credit for the returned merchandise. 24 The company returned defective merchandise to Kansas Corp. and accepted a credit against future purchases. The defective merchandise invoice cost, net of the discount, was $486. 26 The company purchased $9,500 of merchandise from Kansas Corp. with terms of 1/10, n/30, FOB destination, invoice dated January 26. 26 The company sold merchandise with a $4,620 cost for $5,880 on credit to KC, Inc., invoice dated January 26. 31 The company paid cash to Lyn Addie for 10 days’ work at $175 per day. Feb. 1 The company paid $2,715 cash to Hillside Mall for another three months’ rent in advance. 3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the $486 amount in the credit memorandum. 5 The company paid $430 cash to the local newspaper for an advertising insert in today’s paper. 11 The company received the balance due from Alex’s Engineering Co. for fees billed on January 11. 15 Santana Rey withdrew $4,700 cash from the company for personal use. 23 The company sold merchandise with a $2,460 cost for $3,410 on credit to Delta Co., invoice dated February 23. 26 The company paid cash to Lyn Addie for eight days’ work at $175 per day. 27 The company reimbursed Santana Rey for business automobile mileage (700 miles at $0.32 per mile). Mar. 8 The company purchased $2,850 of computer supplies from Harris Office Products on credit, invoice dated March 8. 9 The company received the balance due from Delta Co. for merchandise sold on February 23. 11 The company paid $860 cash for minor repairs to the company’s computer. 16 The company received $5,260 cash from Dream, Inc., for computing services provided. 19 The company paid the full amount due to Harris Office Products, consisting of amounts created on December 15 (of $1,110) and March 8. 24 The company billed Easy Leasing for $9,177 of computing services provided. 25 The company sold merchandise with a $2,082 cost for $2,820 on credit to Wildcat Services, invoice dated March 25. 30 The company sold merchandise with a $1,168 cost for $2,400 on credit to IFM Company, invoice dated March 30. 31 The company reimbursed Santana Rey for business automobile mileage (1,000 miles at $0.32 per mile). The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation: The March 31 amount of computer supplies still available totals $2,095. Three more months have expired since the company purchased its annual insurance policy at a $2,652 cost for 12 months of coverage. Lyn Addie has not been paid for seven days of work at the rate of $175 per day. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is $905. Depreciation on the computer equipment for January 1 through March 31 is $1,100. Depreciation on the office equipment for January 1 through March 31 is $220. The March 31 amount of merchandise inventory still available totals $674.

The joint pmf of ? and ? is given by ??,? (?, ?) = (? + ?)/ 27 ??? ? = 0, 1,2; ? = 1, 2, 3, and ??,? (?, ?) = 0 otherwise. a. Find ?(?|? = ?) for all ? = 0,1, 2. b. Find ?(3 + 0.2?|? = 2).

SP 4 Adria Lopez created Success Systems on October 1, 2013. The company has been successful, and
its list of customers has grown. To accommodate the growth, the accounting system is modified to set up
separate accounts for each customer. The following chart of accounts includes the account number used
for each account and any balance as of December 31, 2013. Adria Lopez decided to add a fourth digit with
a decimal point to the 106 account number that had been used for the single Accounts Receivable account.
This change allows the company to continue using the existing chart of accounts.

No. Account Title Dr. Cr.
101 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $58,160
106.1 Alex’s Engineering Co. . . . . . . . . . . . . 0
106.2 Wildcat Services . . . . . . . . . . . . . . . . 0
106.3 Easy Leasing . . . . . . . . . . . . . . . . . . . . 0
106.4 IFM Co. . . . . . . . . . . . . . . . . . . . . . . . . 3,000
106.5 Liu Corp. . . . . . . . . . . . . . . . . . . . . . . 0
106.6 Gomez Co. . . . . . . . . . . . . . . . . . . . . . 2,668
106.7 Delta Co. . . . . . . . . . . . . . . . . . . . . . . 0
106.8 KC, Inc. . . . . . . . . . . . . . . . . . . . . . . . . 0
106.9 Dream, Inc. . . . . . . . . . . . . . . . . . . . . . 0
119 Merchandise inventory . . . . . . . . . . . 0
126 Computer supplies . . . . . . . . . . . . . . . 580
128 Prepaid insurance . . . . . . . . . . . . . . . . 1,665
131 Prepaid rent . . . . . . . . . . . . . . . . . . . . 825
163 Office equipment . . . . . . . . . . . . . . . . 8,000
164 Accumulated depreciation—
Office equipment . . . . . . . . . . . . . . $ 400
167 Computer equipment . . . . . . . . . . . . 20,000
168 Accumulated depreciation—
Computer equipment . . . . . . . . . . 1,250
201 Accounts payable . . . . . . . . . . . . . . . . 1,100

210 Wages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500
236 Unearned computer services revenue . . . . . . . . . . . 1,500
307 Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,000
318 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,148
319 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
403 Computer services revenue . . . . . . . . . . . . . . . . . . . 0
413 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
414 Sales returns and allowances . . . . . . . . . . . . . . . . . . 0
415 Sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
502 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 0
612 Depreciation expense—Office equipment . . . . . . . . 0
613 Depreciation expense—
Computer equipment . . . . . . . . . . . . . . . . . . . . . 0
623 Wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
637 Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
640 Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
652 Computer supplies expense . . . . . . . . . . . . . . . . . . . 0
655 Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . 0
676 Mileage expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
677 Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . 0
684 Repairs expense—Computer . . . . . . . . . . . . . . . . . . 0

In response to requests from customers, A. Lopez will begin selling computer software. The company will
extend credit terms of 1y10, ny30, FOB shipping point, to all customers who purchase this merchandise.
However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415,
and 502) are added to its general ledger to accommodate the company’s new merchandising activities.
Also, Success Systems does not use reversing entries and, therefore, all revenue and expense accounts
have zero beginning balances as of January 1, 2014. Its transactions for January through March follow:
Jan. 4 The company paid cash to Lyn Addie for five days’ work at the rate of $125 per day. Four of the
five days relate to wages payable that were accrued in the prior year.
5 Adria Lopez invested an additional $25,000 cash in the company in exchange for more common
stock.
7 The company purchased $5,800 of merchandise from Kansas Corp. with terms of 1y10, ny30,
FOB shipping point, invoice dated January 7.
9 The company received $2,668 cash from Gomez Co. as full payment on its account.
11 The company completed a five-day project for Alex’s Engineering Co. and billed it $5,500,
which is the total price of $7,000 less the advance payment of $1,500.
13 The company sold merchandise with a retail value of $5,200 and a cost of $3,560 to Liu Corp.,
invoice dated January 13.
15 The company paid $600 cash for freight charges on the merchandise purchased on January 7.
16 The company received $4,000 cash from Delta Co. for computer services provided.
17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount.
20 Liu Corp. returned $500 of defective merchandise from its invoice dated January 13. The
returned merchandise, which had a $320 cost, is discarded. (The policy of Success Systems is to leave the cost of defective products in cost of goods sold.)

22 The company received the balance due from Liu Corp., net of both the discount and the credit
for the returned merchandise.
24 The company returned defective merchandise to Kansas Corp. and accepted a credit against
future purchases. The defective merchandise invoice cost, net of the discount, was $496.
26 The company purchased $9,000 of merchandise from Kansas Corp. with terms of 1y10, ny30,
FOB destination, invoice dated January 26.
26 The company sold merchandise with a $4,640 cost for $5,800 on credit to KC, Inc., invoice
dated January 26.
31 The company paid cash to Lyn Addie for 10 days’ work at $125 per day.
Feb. 1 The company paid $2,475 cash to Hillside Mall for another three months’ rent in advance.
3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the $496
amount in the credit memorandum.
5 The company paid $600 cash to the local newspaper for an advertising insert in today’s paper.
11 The company received the balance due from Alex’s Engineering Co. for fees billed on January 11.
15 The company paid $4,800 cash for dividends.
23 The company sold merchandise with a $2,660 cost for $3,220 on credit to Delta Co., invoice
dated February 23.
26 The company paid cash to Lyn Addie for eight days’ work at $125 per day.
27 The company reimbursed Adria Lopez for business automobile mileage (600 miles at $0.32
per mile).
Mar. 8 The company purchased $2,730 of computer supplies from Harris Office Products on credit,
invoice dated March 8.
9 The company received the balance due from Delta Co. for merchandise sold on February 23.
11 The company paid $960 cash for minor repairs to the company’s computer.
16 The company received $5,260 cash from Dream, Inc., for computing services provided.
19 The company paid the full amount due to Harris Office Products, consisting of amounts created
on December 15 (of $1,100) and March 8.
24 The company billed Easy Leasing for $8,900 of computing services provided.
25 The company sold merchandise with a $2,002 cost for $2,800 on credit to Wildcat Services,
invoice dated March 25.
30 The company sold merchandise with a $1,100 cost for $2,220 on credit to IFM Company, invoice
dated March 30.
31 The company reimbursed Adria Lopez for business automobile mileage (400 miles at $0.32 per
mile).

The following additional facts are available for preparing adjustments on March 31 prior to financial statement
preparation:
a. The March 31 amount of computer supplies still available totals $2,005.
b. Three more months have expired since the company purchased its annual insurance policy at a $2,220
cost for 12 months of coverage.
c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.
d. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent
expense is $825.
e. Depreciation on the computer equipment for January 1 through March 31 is $1,250.
f. Depreciation on the office equipment for January 1 through March 31 is $400.
g. The March 31 amount of merchandise inventory still available totals $704.
Required
1. Prepare journal entries to record each of the January through March transactions.
2. Post the journal entries in part 1 to the accounts in the company’s general ledger. (Note: Begin with the
ledger’s post-closing adjusted balances as of December 31, 2013.)
3. Prepare a partial work sheet consisting of the first six columns (similar to the one shown in Exhibit 4B.1)
that includes the unadjusted trial balance, the March 31 adjustments (a) through (g), and the adjusted trial
balance. Do not prepare closing entries and do not journalize the adjustments or post them to the ledger.
4. Prepare an income statement (from the adjusted trial balance in part 3) for the three months ended
March 31, 2014. Use a single-step format. List all expenses without differentiating between selling
expenses and general and administrative expenses.
5. Prepare a statement of retained earnings (from the adjusted trial balance in part 3) for the three months
ended March 31, 2014.
6. Prepare a classified balance sheet (from the adjusted trial balance) as of March 31, 2014

(c) Government intervention is always required to deal with the problem of asymmetric information in insurance. True or false? Explain your answer.

(d) Outline the rationale for and benefits of a publicly funded health service.

U.S. Foodservice: A Case Study in Fraud and Forensic Accounting

Maria H. Sanchez

Christopher P. Agoglia^[1]

Ahold’s audit committee ordered investigations at the parent company and at 17 Ahold operating and real estate companies to look for accounting errors, irregularities, and other issues as well as assess internal controls and management integrity (Ahold, 2003a).   After a forensic audit, Ahold eventually reported that the overstatement of U.S. Foodservice’s earnings was more than $850 million (Ball, 2003). A large component of the overstatement resulted from improper recognition of promotional allowances. Several U.S. Foodservice employees and vendors either admitted to or were convicted of playing a role in the fraud. In this case, students will gain insights into the proper accounting for and disclosure of promotional allowances and also the risk of over-reliance on third party confirmation as an audit procedure. Students will also distinguish between a financial statement audit and a forensic audit.

Accounting for cash consideration from vendor rebates, also known as “promotional allowances,” was at the center of the U.S. Foodservice’s earnings restatement. Rebates of this type are common in the grocery and foodservice industries and are frequently material in amount, sometimes exceeding 5% of sales. Vendors can offer rebates to customers in exchange for favorable display space in stores, or they may give volume rebates to provide an incentive to a retailer to increase sales of the vendor’s products, with the rebate percentage increasing as the retailer’s sales volume increases. However, these rebates are problematic in several respects. At the time of U.S. Foodservice’s accounting irregularities, there was no standardized accounting treatment of these rebates. Companies have accounted for them differently, and there have been differing levels of disclosure regarding their amounts. The investigation at U.S. Foodservice revealed that determination of rebates receivable can be problematic.

WHAT HAPPENED AT U.S. FOODSERVICE

            U.S. Foodservice was acquired by Ahold in 2000. Prior to this, U.S. Foodservice used KPMG as their auditor. After the acquisition, U.S. Foodservice was audited by Deloitte &

Touche, Ahold’s auditor. During their 2002 audit of Ahold’s financial statements, as part of their confirmation process at U.S. Foodservice, Deloitte discovered that certain accrued vendor allowance receivable balances were overstated. Deloitte uncovered a series of accounting irregularities at U.S. Foodservice and other Ahold subsidiaries and also improper accounting for certain of Ahold’s joint ventures (Parker, 2003). Deloitte immediately withdrew their audit opinions for 2000 and 2001 and suspended work on the 2002 audit.  

            There appeared to be a confluence of economic conditions, managerial “inventiveness,” and failures of internal controls that led to the accounting irregularities at U.S. Foodservice.

Company sales for the year 2002 had been decreasing. In last quarter of 2002, upper management held a conference call with its divisional managers advising them that their annual bonuses were at risk if sales were not boosted. According to testimony provided by those inside the company, in that conference call, the company’s chief operating officer described an

“initiative” that would increase the likelihood of managers receiving their bonuses and help the company achieve its sales target for the year. Quite simply, the strategy was to order large amounts of inventory and immediately recognize the vendor rebates that accompanied them. The rebates were in many cases substantial and, according to some sources, ranged from 8.5% to 46% of the purchase price. Divisional managers stated that they were told by upper management that if they did not place orders for additional inventory, then it would be done for them. These managers reported that it was made clear that if they did not go along with the “initiative,” not only were their bonuses in jeopardy, but perhaps their jobs were as well (Stecklow, Raghavan, & Ball, 2003).

Soon the warehouses at U.S. Foodservice were overflowing with inventory of foodrelated items and paper products. The amount of inventory the company purchased was so large that it had to rent additional space and refrigerator trucks to store it. As purchases increased, the vendor rebates to which U.S. Foodservice were entitled also increased. Supplier rebates increased from approximately $125 million in 2000 to about $700 million in 2003 (Bray, 2006). These rebates were recognized immediately as products were purchased in an attempt to boost earnings. The excess inventory was so immense, however, that even after the announcement of the earnings restatement, it was questionable whether the company would be able to sell it. In an effort to unload the massive amount of product in its warehouses, the company had to reduce its selling price below its original cost in some cases (Stecklow, Raghavan, & Ball, 2003).

During the audit of U.S. Foodservice, third party confirmations of rebates receivable had been provided by the vendors’ salespeople, not their accounting departments. According to complaints filed by the SEC, employees at U.S. Foodservice urged their vendors to complete and return to the auditors false confirmation letters with dollar amounts intentionally overstated, sometimes by as much as millions of dollars. Some vendors were pressured, some were provided with secret “side letters” assuring the vendors that they did not owe the amounts listed on the confirmations (Securities and Exchange Commission, 2006b).

In a span of several months, the “initiative” proposed by the company’s COO unraveled. Rather than helping the company out of its economic doldrums, the scheme instead resulted in earnings restatements, plunging stock price, several high-level managers losing their jobs, regulatory investigation of the company’s accounting practices, and allegations that officials in both the U.S. and Dutch offices had criminal intent to deceive and defraud the investing public

(Stecklow, Raghavan, & Ball, 2003). In July 2003, Dutch officials raided Ahold’s headquarters and began a criminal probe (Sterling, 2003). One year later, in July 2004, U.S. officials announced that two former U.S. Foodservice executives were being formally charged with conspiracy, securities fraud, and making false filings. Prosecutors also announced at the same time that two other U.S. Foodservice managers had admitted to their roles in the same alleged scheme of overstating earnings (McClam, 2004).

THE FORENSIC AUDIT

After the irregularities were uncovered by the external auditors, a criminal investigation was launched by the U.S. Department of Justice. In addition, Ahold appointed a team of forensic accountants from PricewaterhouseCoopers to work alongside the SEC. The forensic accountants had to sort through tens of thousands of documents (Datson, 2003). A U.S. federal grand jury issued subpoenas for Ahold documents for as far back as January 1, 1999 (Buckley and Chaffin, 2003).  

The forensic audit revealed fraud at U.S. Foodservice totaling over $850 million, with over $100 relating to 2000, over $200 million relating to 2001 and the rest relating to 2002. The fraud related to fictitious and/or overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold (Ahold, 2003a). Numerous U.S. Foodservice employees were involved in the fraud, and it was discovered that the fraud went back as far as 2000. U.S. Foodservice employees were found to have been using inflated recognition rates for vendor allowances and intentionally misapplying both Dutch and U.S. GAAP. Deloitte’s audit testing using third party confirmations failed to detect management’s misrepresentation of the reduction in cost of sales resulting from these manufacturer rebates (Bryan-Low, 2003).

The probe of U.S. Foodservice expanded to investigate several of the company’s suppliers, including Sara Lee and ConAgra Foods, to determine if they might have been complicit in U.S. Foodservice’s intent to misrepresent certain financial statement assertions. The investigation revealed that U.S. Foodservice employees asked salespeople at their vendors to sign false documentation for Deloitte and that some vendors cooperated with this fraudulent scheme. Three salespeople at Sara Lee admitted that they had signed off on, and forwarded to

U.S. Foodservice’s external auditors, erroneous documents that reflected inflated amounts owed to the company by Sara Lee (Callahan, 2003b). Similarly, at ConAgra Foods two salespeople also admitted to signing off on inflated amounts for manufacturer rebates due to U.S. Foodservice. ConAgra Foods claimed, however, that the erroneous confirmation amounts were discovered and that U.S. Foodservice’s external auditor was notified before news of the accounting scandal broke (Callahan, 2003a). The forensic examination at U.S. Foodservice also revealed numerous weaknesses in internal controls, including failure to properly record and track vendor allowances, inadequate accounting and financial reporting systems for vendor allowances, and failure to follow GAAP (Ahold, 2003a).

The investigation revealed fraud at not only U.S. Foodservice, but also at several other Ahold subsidiaries and the parent company. It was discovered at one subsidiary that fictitious invoices were used to conceal payments, and in some cases, payments were improperly capitalized rather than expensed. It was also discovered that the consolidation of certain joint ventures into Ahold’s financial statements was in error and that secret side letters had been concealed from Ahold’s audit committee and external auditors. Further, accounting irregularities and earnings management were uncovered at other subsidiaries and at the parent company.

Overall, more than 750 separate items related to internal control weaknesses and accounting issues were identified at Ahold and its subsidiaries (Ahold, 2003a). This extensive forensic examination led to a lengthy delay in the announcement of 2002 audited earnings numbers. Ahold’s 2002 annual report was released October of 2003, which included restatements for the years 2000 and 2001.

The total fraud at Ahold was revealed to be over $1 billion. Of this, approximately $856 million related to U.S. Foodservice. Upon conclusion of the forensic investigation, Ahold announced the creation of a task force reporting to the audit committee to address the internal control weaknesses and improper accounting practices uncovered during the investigation. (Ahold, 2003b). Ahold announced in their 2002 annual report that the internal audit department would now report directly to the CEO and the audit committee, rather than solely to the CEO, as was the case previously (Ahold, 2002a).

According to press releases from Ahold, after the accounting scandal, U.S. Foodservice made “substantial improvements in the company’s financial systems and controls, as well as its financial organization, to strengthen financial monitoring and reporting” (Ahold, 2004). They also established a new office of governance, ethics and compliance.

LESSONS LEARNED: AUDIT CONFIRMATIONS

            In designing the tests to be performed during an audit, an auditor must obtain adequate assurance to address audit risk. The greater the risk of a particular financial statement assertion (e.g., the existence and amount of vendor rebates), the more evidence an auditor should gather to support the assertion. Statement on Auditing Standards (SAS) No. 67 states that, “confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” (AICPA, 1992, SAS 67.06, AU 330). According to SAS No. 67, confirmation from an independent source is generally viewed as having greater reliability than evidence obtained solely from client personnel. Confirmation with a third party helps the auditor assess the financial statement assertions with respect to all five of management’s assertions: existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. The auditor may design a third party confirmation to address any one or more of these assertions (AICPA, 1992). However, existence is usually the primary assertion addressed by confirmation of receivables.

Even though evidence obtained by a third party confirmation is generally viewed as being more reliable than evidence provided by the entity being audited, SAS No. 67 cautions that an auditor should maintain a healthy level of professional skepticism. The auditor should consider information from prior years’ audits and audits of similar entities. Further, an auditor has an obligation to understand the arrangements and transactions between the audit client and the third party so that the appropriate confirmation request can be designed. SAS No. 67 states that “[i]f information about the respondent’s competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such

information on designing the confirmation request and evaluating the results, including determining whether other procedures are necessary” (AICPA, 2002, SAS 67.27). The statement allows for the possibility that the party responding to the confirmation may not be completely objective or free from bias and requires the auditor to use other evidence to confirm financial statement assertions in such cases (AICPA, 1992).

Confirming accounts receivable is a generally accepted auditing procedure and is required unless the amount involved is immaterial, a confirmation would be ineffective, or if the auditor can substantially reduce the level of audit risk of the financial statement assertion through the use of other substantive and analytical tests. Accounts receivable, for the purpose of SAS No. 67 (AU 330), represent claims against customers that have arisen in the normal course of business and loans held by financial institutions (AICPA, 1992). The Statement does not specifically address confirming a receivable that arises when a vendor owes a rebate to a reseller, a situation that differs substantially from the typical trade accounts receivable from a customer. Confirming vendor rebate receivables give rise to different risks that likely were not envisioned when the Statement was adopted in 1992.

In adopting SAS No. 67, two (of the seventeen) Board members, while assenting to the Statement, expressed a reservation that the language used in the Statement usurped the freedom of the auditor in exercising professional judgment in how best to confirm accounts receivable and that the language might also lead auditors to place undue reliance on third party confirmation when circumstances might suggest that the auditor choose a more effective test (AICPA, 1992). With the benefit of hindsight it is clear that the auditors of U.S. Foodservice could have, and should have, designed a more “effective test,” one that would have helped overcome the inherent weakness that existed in this situation where parties providing the confirmation may have either been uninformed about the existence and/or amount owed to the retailer or may have had a vested interest to overstate the amount that was owed to U.S. Foodservice. While some practitioner literature has made reference to biases of confirmation respondents (e.g., Simunic 1996), scant attention has been given to this particular concern regarding responses to auditor confirmations by vendors’ sales personnel.

THE AFTERMATH

In 2004, Timothy J. Lee and William F. Carter, both former purchasing executives for U.S. Foodservice, pleaded guilty to participating in the scheme and to conspiring with suppliers to mislead the company’s auditors. They later agreed to pay approximately $300,000 in civil penalties (Reuters, 2005).

More than a dozen U.S. Foodservice vendors pleaded guilty from 2003 to 2006 to criminal charges related to the fraud, admitting that they submitted false confirmations to the auditors (Bloomberg, 2006). Many other U.S. Foodservice employees and vendors have faced civil charges from the SEC, and most have agreed to pay fines without admitting guilt (Sterling, 2007).

In 2009, the SEC dropped the charges against the two former KPMG auditors charged with having engaged in improper conduct during the 1999 audit of U.S. Foodservice (SEC, 2009).

The auditors had been charged by the SEC in 2006 (SEC, 2006b).

PLEASE WRITE A CONCLUTION FOR THIS CASE STUDY RELATED TO THE AUDIT FAILURE.

U.S. Foodservice: A Case Study in Fraud and Forensic Accounting

Maria H. Sanchez

Christopher P. Agoglia^[1]

Ahold’s audit committee ordered investigations at the parent company and at 17 Ahold operating and real estate companies to look for accounting errors, irregularities, and other issues as well as assess internal controls and management integrity (Ahold, 2003a).   After a forensic audit, Ahold eventually reported that the overstatement of U.S. Foodservice’s earnings was more than $850 million (Ball, 2003). A large component of the overstatement resulted from improper recognition of promotional allowances. Several U.S. Foodservice employees and vendors either admitted to or were convicted of playing a role in the fraud. In this case, students will gain insights into the proper accounting for and disclosure of promotional allowances and also the risk of over-reliance on third party confirmation as an audit procedure. Students will also distinguish between a financial statement audit and a forensic audit.

Accounting for cash consideration from vendor rebates, also known as “promotional allowances,” was at the center of the U.S. Foodservice’s earnings restatement. Rebates of this type are common in the grocery and foodservice industries and are frequently material in amount, sometimes exceeding 5% of sales. Vendors can offer rebates to customers in exchange for favorable display space in stores, or they may give volume rebates to provide an incentive to a retailer to increase sales of the vendor’s products, with the rebate percentage increasing as the retailer’s sales volume increases. However, these rebates are problematic in several respects. At the time of U.S. Foodservice’s accounting irregularities, there was no standardized accounting treatment of these rebates. Companies have accounted for them differently, and there have been differing levels of disclosure regarding their amounts. The investigation at U.S. Foodservice revealed that determination of rebates receivable can be problematic.

WHAT HAPPENED AT U.S. FOODSERVICE

            U.S. Foodservice was acquired by Ahold in 2000. Prior to this, U.S. Foodservice used KPMG as their auditor. After the acquisition, U.S. Foodservice was audited by Deloitte &

Touche, Ahold’s auditor. During their 2002 audit of Ahold’s financial statements, as part of their confirmation process at U.S. Foodservice, Deloitte discovered that certain accrued vendor allowance receivable balances were overstated. Deloitte uncovered a series of accounting irregularities at U.S. Foodservice and other Ahold subsidiaries and also improper accounting for certain of Ahold’s joint ventures (Parker, 2003). Deloitte immediately withdrew their audit opinions for 2000 and 2001 and suspended work on the 2002 audit.  

            There appeared to be a confluence of economic conditions, managerial “inventiveness,” and failures of internal controls that led to the accounting irregularities at U.S. Foodservice.

Company sales for the year 2002 had been decreasing. In last quarter of 2002, upper management held a conference call with its divisional managers advising them that their annual bonuses were at risk if sales were not boosted. According to testimony provided by those inside the company, in that conference call, the company’s chief operating officer described an

“initiative” that would increase the likelihood of managers receiving their bonuses and help the company achieve its sales target for the year. Quite simply, the strategy was to order large amounts of inventory and immediately recognize the vendor rebates that accompanied them. The rebates were in many cases substantial and, according to some sources, ranged from 8.5% to 46% of the purchase price. Divisional managers stated that they were told by upper management that if they did not place orders for additional inventory, then it would be done for them. These managers reported that it was made clear that if they did not go along with the “initiative,” not only were their bonuses in jeopardy, but perhaps their jobs were as well (Stecklow, Raghavan, & Ball, 2003).

Soon the warehouses at U.S. Foodservice were overflowing with inventory of foodrelated items and paper products. The amount of inventory the company purchased was so large that it had to rent additional space and refrigerator trucks to store it. As purchases increased, the vendor rebates to which U.S. Foodservice were entitled also increased. Supplier rebates increased from approximately $125 million in 2000 to about $700 million in 2003 (Bray, 2006). These rebates were recognized immediately as products were purchased in an attempt to boost earnings. The excess inventory was so immense, however, that even after the announcement of the earnings restatement, it was questionable whether the company would be able to sell it. In an effort to unload the massive amount of product in its warehouses, the company had to reduce its selling price below its original cost in some cases (Stecklow, Raghavan, & Ball, 2003).

During the audit of U.S. Foodservice, third party confirmations of rebates receivable had been provided by the vendors’ salespeople, not their accounting departments. According to complaints filed by the SEC, employees at U.S. Foodservice urged their vendors to complete and return to the auditors false confirmation letters with dollar amounts intentionally overstated, sometimes by as much as millions of dollars. Some vendors were pressured, some were provided with secret “side letters” assuring the vendors that they did not owe the amounts listed on the confirmations (Securities and Exchange Commission, 2006b).

In a span of several months, the “initiative” proposed by the company’s COO unraveled. Rather than helping the company out of its economic doldrums, the scheme instead resulted in earnings restatements, plunging stock price, several high-level managers losing their jobs, regulatory investigation of the company’s accounting practices, and allegations that officials in both the U.S. and Dutch offices had criminal intent to deceive and defraud the investing public

(Stecklow, Raghavan, & Ball, 2003). In July 2003, Dutch officials raided Ahold’s headquarters and began a criminal probe (Sterling, 2003). One year later, in July 2004, U.S. officials announced that two former U.S. Foodservice executives were being formally charged with conspiracy, securities fraud, and making false filings. Prosecutors also announced at the same time that two other U.S. Foodservice managers had admitted to their roles in the same alleged scheme of overstating earnings (McClam, 2004).

THE FORENSIC AUDIT

After the irregularities were uncovered by the external auditors, a criminal investigation was launched by the U.S. Department of Justice. In addition, Ahold appointed a team of forensic accountants from PricewaterhouseCoopers to work alongside the SEC. The forensic accountants had to sort through tens of thousands of documents (Datson, 2003). A U.S. federal grand jury issued subpoenas for Ahold documents for as far back as January 1, 1999 (Buckley and Chaffin, 2003).  

The forensic audit revealed fraud at U.S. Foodservice totaling over $850 million, with over $100 relating to 2000, over $200 million relating to 2001 and the rest relating to 2002. The fraud related to fictitious and/or overstated vendor allowance receivables and improper or premature recognition of vendor allowances and an understatement of cost of goods sold (Ahold, 2003a). Numerous U.S. Foodservice employees were involved in the fraud, and it was discovered that the fraud went back as far as 2000. U.S. Foodservice employees were found to have been using inflated recognition rates for vendor allowances and intentionally misapplying both Dutch and U.S. GAAP. Deloitte’s audit testing using third party confirmations failed to detect management’s misrepresentation of the reduction in cost of sales resulting from these manufacturer rebates (Bryan-Low, 2003).

The probe of U.S. Foodservice expanded to investigate several of the company’s suppliers, including Sara Lee and ConAgra Foods, to determine if they might have been complicit in U.S. Foodservice’s intent to misrepresent certain financial statement assertions. The investigation revealed that U.S. Foodservice employees asked salespeople at their vendors to sign false documentation for Deloitte and that some vendors cooperated with this fraudulent scheme. Three salespeople at Sara Lee admitted that they had signed off on, and forwarded to

U.S. Foodservice’s external auditors, erroneous documents that reflected inflated amounts owed to the company by Sara Lee (Callahan, 2003b). Similarly, at ConAgra Foods two salespeople also admitted to signing off on inflated amounts for manufacturer rebates due to U.S. Foodservice. ConAgra Foods claimed, however, that the erroneous confirmation amounts were discovered and that U.S. Foodservice’s external auditor was notified before news of the accounting scandal broke (Callahan, 2003a). The forensic examination at U.S. Foodservice also revealed numerous weaknesses in internal controls, including failure to properly record and track vendor allowances, inadequate accounting and financial reporting systems for vendor allowances, and failure to follow GAAP (Ahold, 2003a).

The investigation revealed fraud at not only U.S. Foodservice, but also at several other Ahold subsidiaries and the parent company. It was discovered at one subsidiary that fictitious invoices were used to conceal payments, and in some cases, payments were improperly capitalized rather than expensed. It was also discovered that the consolidation of certain joint ventures into Ahold’s financial statements was in error and that secret side letters had been concealed from Ahold’s audit committee and external auditors. Further, accounting irregularities and earnings management were uncovered at other subsidiaries and at the parent company.

Overall, more than 750 separate items related to internal control weaknesses and accounting issues were identified at Ahold and its subsidiaries (Ahold, 2003a). This extensive forensic examination led to a lengthy delay in the announcement of 2002 audited earnings numbers. Ahold’s 2002 annual report was released October of 2003, which included restatements for the years 2000 and 2001.

The total fraud at Ahold was revealed to be over $1 billion. Of this, approximately $856 million related to U.S. Foodservice. Upon conclusion of the forensic investigation, Ahold announced the creation of a task force reporting to the audit committee to address the internal control weaknesses and improper accounting practices uncovered during the investigation. (Ahold, 2003b). Ahold announced in their 2002 annual report that the internal audit department would now report directly to the CEO and the audit committee, rather than solely to the CEO, as was the case previously (Ahold, 2002a).

According to press releases from Ahold, after the accounting scandal, U.S. Foodservice made “substantial improvements in the company’s financial systems and controls, as well as its financial organization, to strengthen financial monitoring and reporting” (Ahold, 2004). They also established a new office of governance, ethics and compliance.

LESSONS LEARNED: AUDIT CONFIRMATIONS

            In designing the tests to be performed during an audit, an auditor must obtain adequate assurance to address audit risk. The greater the risk of a particular financial statement assertion (e.g., the existence and amount of vendor rebates), the more evidence an auditor should gather to support the assertion. Statement on Auditing Standards (SAS) No. 67 states that, “confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” (AICPA, 1992, SAS 67.06, AU 330). According to SAS No. 67, confirmation from an independent source is generally viewed as having greater reliability than evidence obtained solely from client personnel. Confirmation with a third party helps the auditor assess the financial statement assertions with respect to all five of management’s assertions: existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. The auditor may design a third party confirmation to address any one or more of these assertions (AICPA, 1992). However, existence is usually the primary assertion addressed by confirmation of receivables.

Even though evidence obtained by a third party confirmation is generally viewed as being more reliable than evidence provided by the entity being audited, SAS No. 67 cautions that an auditor should maintain a healthy level of professional skepticism. The auditor should consider information from prior years’ audits and audits of similar entities. Further, an auditor has an obligation to understand the arrangements and transactions between the audit client and the third party so that the appropriate confirmation request can be designed. SAS No. 67 states that “[i]f information about the respondent’s competence, knowledge, motivation, ability, or willingness to respond, or about the respondent’s objectivity and freedom from bias with respect to the audited entity comes to the auditor’s attention, the auditor should consider the effects of such

information on designing the confirmation request and evaluating the results, including determining whether other procedures are necessary” (AICPA, 2002, SAS 67.27). The statement allows for the possibility that the party responding to the confirmation may not be completely objective or free from bias and requires the auditor to use other evidence to confirm financial statement assertions in such cases (AICPA, 1992).

Confirming accounts receivable is a generally accepted auditing procedure and is required unless the amount involved is immaterial, a confirmation would be ineffective, or if the auditor can substantially reduce the level of audit risk of the financial statement assertion through the use of other substantive and analytical tests. Accounts receivable, for the purpose of SAS No. 67 (AU 330), represent claims against customers that have arisen in the normal course of business and loans held by financial institutions (AICPA, 1992). The Statement does not specifically address confirming a receivable that arises when a vendor owes a rebate to a reseller, a situation that differs substantially from the typical trade accounts receivable from a customer. Confirming vendor rebate receivables give rise to different risks that likely were not envisioned when the Statement was adopted in 1992.

In adopting SAS No. 67, two (of the seventeen) Board members, while assenting to the Statement, expressed a reservation that the language used in the Statement usurped the freedom of the auditor in exercising professional judgment in how best to confirm accounts receivable and that the language might also lead auditors to place undue reliance on third party confirmation when circumstances might suggest that the auditor choose a more effective test (AICPA, 1992). With the benefit of hindsight it is clear that the auditors of U.S. Foodservice could have, and should have, designed a more “effective test,” one that would have helped overcome the inherent weakness that existed in this situation where parties providing the confirmation may have either been uninformed about the existence and/or amount owed to the retailer or may have had a vested interest to overstate the amount that was owed to U.S. Foodservice. While some practitioner literature has made reference to biases of confirmation respondents (e.g., Simunic 1996), scant attention has been given to this particular concern regarding responses to auditor confirmations by vendors’ sales personnel.

THE AFTERMATH

In 2004, Timothy J. Lee and William F. Carter, both former purchasing executives for U.S. Foodservice, pleaded guilty to participating in the scheme and to conspiring with suppliers to mislead the company’s auditors. They later agreed to pay approximately $300,000 in civil penalties (Reuters, 2005).

More than a dozen U.S. Foodservice vendors pleaded guilty from 2003 to 2006 to criminal charges related to the fraud, admitting that they submitted false confirmations to the auditors (Bloomberg, 2006). Many other U.S. Foodservice employees and vendors have faced civil charges from the SEC, and most have agreed to pay fines without admitting guilt (Sterling, 2007).

In 2009, the SEC dropped the charges against the two former KPMG auditors charged with having engaged in improper conduct during the 1999 audit of U.S. Foodservice (SEC, 2009).

The auditors had been charged by the SEC in 2006 (SEC, 2006b).

read the above REAL WORLD AUDITING case study and provide an overview of the facts of the case (in your own words);  discuss the theoretical principles applicable to the case.

Exercise 1-21A (Static) Preparing financial statements—retained earnings emphasis LO 1-5, 1-6, 1-7, 1-8

On January 1, Year 3, the following information was drawn from the accounting records of Carter Company: cash of $800; land of $3,500; notes payable of $600; and common stock of $1,000.

Required
a. Determine the amount of retained earnings as of January 1, Year 3.
b. After looking at the amount of retained earnings, the chief executive officer (CEO) wants to pay a $1,000 cash dividend to the stockholders. Can the company pay this dividend?
c. As of January 1, Year 3, what percentage of the assets were acquired from creditors?
d. As of January 1, Year 3, what percentage of the assets were acquired from investors?
e. As of January 1, Year 3, what percentage of the assets were acquired from retained earnings?
f. Create an accounting equation using percentages instead of dollar amounts on the right side of the equation.
g. During Year 3, Carter Company earned cash revenue of $1,800, paid cash expenses of $1,200, and paid a cash dividend of $500. Record these events using the accounting equation.
g-1. Prepare an income statement dated December 31, Year 3.
g-2. Prepare a statement of changes in stockholders’ equity dated December 31, Year 3.
g-3. Prepare a balance sheet dated December 31, Year 3.
g-4. Prepare a statement of cash flows dated December 31, Year 3.
j. What is the balance in the Revenue account on January 1, Year 4?

40% of all customers who enter a store will make a purchase. Suppose that 6 customers enter the store and that these customers make independent purchase decisions.

Round answers to four decimal places.

(1) Calculate the probability that exactly five customers make a purchase.

Probability               

(2) Calculate the probability that at least three customers make a purchase.

Probability             

(3) Calculate the probability that two or fewer customers make a purchase.

Probability             

(4) Calculate the probability that at least one customer makes a purchase.

Probability