In - person or Online meeting is by Appointment Only.
ACADEMIC CASE STUDY
Rationale: (smith, e. - ADVANCE ACCOUNTING)
• If I decide to acquire 20% or less of Online Confections, I think the best accounting approach would be the fair value method. Based on my understanding on what was explained on (Wiley, 2023, p 128), this makes sense because owning such a small stake typically means I wouldn’t have much influence over the company’s decisions. Essentially, I wouldn’t be part of the governance or operational strategies, so a simpler accounting method seems appropriate. With the fair value method, I would record my investment at its current market value on the balance sheet. This allows me to periodically reassess the investment based on market conditions, ensuring that its value is accurately reflected. It’s a straightforward approach that keeps my financial statements clear and relevant. When it comes to recognizing income, any dividends I receive from Online Confections would simply be recorded as income when declared. This makes tracking my returns on the investment easy, without needing complicated adjustments based on the company’s performance. Overall, the fair value method provides a clear and efficient way to manage my investment, reflecting the nature of my relationship with the company.
• If I decide to acquire 25% of Online Confections, the appropriate accounting method would be the equity method. This choice is grounded in the fact that owning 25% typically indicates significant influence over the company’s decisions, even if I don’t have full control. With this level of ownership, I can participate in the governance and strategic direction of Online Confections, making the equity method a better fit. Using the equity method, I would record my initial investment at cost and then adjust it for my share of the investee’s earnings or losses over time. This method allows me to reflect the economic realities of my investment, showing how Online Confections is performing and how that performance impacts my financial statements. In addition, under the equity method, I also have the option to carry my investment at fair value if I elect to do so through an irrevocable option. The rationale behind this approach aligns with the concept of significant influence, which is defined by the FASB ASC paragraph 825-10-25-4. This paragraph states that the equity method is appropriate when an investor has significant influence but not control over the investee. The IASB further clarifies that control involves three elements: power over the investee, exposure or rights to variable returns, and the ability to affect the amount of those returns. Since my 25% ownership does not provide me with control, the equity method remains the suitable choice. Additionally, if Online Confections declares dividends, I will reduce the carrying amount of my investment by the amount of dividends received.
• If I decide to acquire more than 50% of Online Confections, according to (Wiley, 2023, p 128) and as outlined in FASB ASC paragraph 825-10-25-4, the appropriate accounting method would be full consolidation. This method is justified by the principle of effective control, which occurs when ownership exceeds 50%. With this level of ownership, I have the authority to make key decisions regarding the company’s direction, governance, and strategy, necessitating the consolidation of financial statements. Using full consolidation, I would combine the financial statements of my chocolate company with those of Online Confections into a single set of financial statements. In this case, the investment would be recorded under cost, partial equity, or complete equity method, depending on the circumstances and specific accounting policies adopted. The rationale for this approach aligns with the IASB’s definition of control, which includes three key elements: power over the investee, exposure or rights to variable returns, and the ability to affect those returns. By acquiring more than 50%, I possess the necessary power to influence the company’s decisions, along with the potential for variable returns, making full consolidation the most suitable method. Additionally, full consolidation mandates the elimination of any intercompany transactions, balances, and profits to avoid double counting. This ensures that the financial statements present an accurate depiction of the consolidated operations without inflating figures due to internal transactions.
Journal Entries Link:
Here is some information of the disclosure notes for Online Confections of a Chocoholic in accordance to FASB, 946-20-50-1 Paragraph superseded by Accounting Standards Update No. 2013-08.
• Accounting Policies: Details on the accounting methods used, such as revenue recognition and inventory valuation.
• Ownership Structure: Information about ownership percentages, including your 75% stake, and how this affects financial reporting.
• Related Party Transactions: Any transactions between Online Confections and its owners or related entities.
• Financial Performance: Summary of reported earnings, significant fluctuations, or any material events affecting financial results.
• Risks and Uncertainties: Discussion of market risks, competition, and other factors that could impact future performance.
• Contingencies and Commitments: Information on any legal disputes, guarantees, or obligations that could affect the company’s financial health.
References:
FASB. (2024). 946-20-50-1 Paragraph superseded by Accounting Standards Update No. 2013-08. https://asc.fasb.org/1943274/2147480990/946-20-50-2
Jeter D., Chaney P. (2023). ACCOUNTING FOR INVESTMENTS BY THE COST, PARTIAL EQUITY, AND COMPLETE EQUITY METHODS. https://read.wiley.com/books/9781119794615/page/8/section/c04-sec-0020
Part One: Footnotes. (smith, e.)
Identify four to five adjustments that require footnotes.
For the pro forma balance sheet, several adjustments need to be clarified through footnotes. First, we have an increase of $170,000 in cash and receivables. This adjustment reflects the anticipated boost in our liquid assets due to the cash and outstanding receivables from the company we're acquiring. Essentially, this shows the extra cash and money owed to us that will come with the acquisition.
Next, we’ve added $140,000 for inventories. This amount represents the value of the stock we’re acquiring from the other company. By including this adjustment, we’re updating our total inventory value to reflect the newly acquired goods.
The adjustment for land shows an increase of $400,000. This reflects the fair market value of the land we're acquiring, based on recent assessments. It updates the balance to show the true worth of the land in the context of this transaction.
For buildings and equipment, there’s a significant adjustment of $1,000,000. This increase accounts for the fair value of these assets from the acquired company. The adjustment represents their updated worth and ensures that our records accurately reflect the value of the property and equipment involved.
Goodwill is another key adjustment, amounting to $230,000. This figure represents the premium we're paying over the fair value of the identifiable net assets. Goodwill includes factors like the acquired company’s reputation and customer relationships, which are not directly quantifiable but add significant value.
Additionally, we have an adjustment of $350,000 for bonds payable. This reflects the debt we’re assuming to finance the acquisition. It represents the total value of the bonds we will need to pay off as part of the deal.
Finally, the adjustments for common stock and other contributed capital show increases of $450,000 and $990,000, respectively. These adjustments reflect the new shares we're issuing to fund the acquisition. They represent the total value of the shares issued and the additional capital raised for the transaction.
Explain irregularities based on the adjusted numbers using footnotes. Consider the following questions to guide your response:
What might be a potential reasonable explanation for the irregularity?
Why might certain original amounts in the audited balance sheet have previously been zero?
When we look at the pro forma balance sheet, there are a few adjustments that might seem a bit surprising and need some extra explanation. For instance, there's a $170,000 increase in cash and receivables. This jump likely reflects the cash and money owed from the company we're acquiring. If this amount feels unusually high, it might be because we’re expecting a significant boost in our cash reserves and receivables from this acquisition, or maybe our initial estimates were a bit off.
Another area to note is the $140,000 increase in inventories. This adjustment shows the value of the stock we’re getting from the acquired company. If this seems a bit unexpected, it could be because the inventory was either more valuable than we initially thought or was simply more substantial than we had planned for.
The land adjustment of $400,000 might also catch your eye. This increase reflects the true market value of the land we're acquiring. If the land’s value seems significantly higher than what was recorded before, it might be because the original amount was underestimated or perhaps the land wasn’t included in our earlier records at all.
Then there’s the $1,000,000 increase for buildings and equipment. This is a pretty big number and might look irregular if our previous records showed much lower values. This adjustment likely reflects a revaluation of these assets or indicates that we’ve acquired high-value property and equipment that weren’t previously accounted for.
Goodwill, which increased by $230,000, represents the extra amount we paid over the fair value of the acquired company’s assets. If this figure seems high, it’s probably because the company has valuable intangibles like a strong reputation or customer relationships that aren’t immediately visible in the tangible asset values.
As for why some amounts in the original balance sheet were zero, it often comes down to what was on our books before the acquisition. For instance, the bonds payable were zero because we didn’t have any debt of that kind before. The new $350,000 in bonds reflects the debt we’ve taken on to help fund the acquisition.
Similarly, the initial values for common stock and other contributed capital might have been lower or zero if we hadn’t issued new shares or raised additional capital before the deal. The increases in these areas show the new shares we’ve issued and the extra money we’ve raised to finance the acquisition.
Provide a rationale for why the footnotes are required. Consider the following questions to guide your response:
I believe that footnotes are essential for fully understanding the pro forma balance sheet. They act like a backstage pass, giving us the behind-the-scenes details that explain why certain numbers have changed so significantly. Without these explanations, it’s easy to get lost or confused by the large shifts in financial figures.
When it comes to adjustments needing footnotes, I think there are a few key factors to consider. First, if an adjustment involves a substantial amount of money or a significant percentage of the total assets or liabilities, it’s crucial to provide a closer look. For example, if there’s a $1,000,000 increase in the value of buildings and equipment, that’s a major change. I think it’s important to explain why this adjustment is so large—whether it’s due to acquiring new property or reassessing the value of existing assets.
Footnotes also help clarify unexpected jumps in figures like cash or inventory. If cash increases by $170,000, I believe it’s essential to explain whether this is due to new inflows from an acquisition or another reason. This explanation helps prevent confusion about whether the increase is a positive development or something else entirely.
Furthermore, I think footnotes play a key role in ensuring transparency and adherence to rules. They show that we’re not just making significant adjustments without proper explanation. For instance, if goodwill increases by $230,000, the footnotes can clarify that this amount represents the premium we’re paying for intangible assets like brand value and customer relationships. Without this context, stakeholders might question why we’re paying so much more than the fair value of tangible assets.
What criteria did you use to determine that an adjustment needed a footnote?
What threshold number created a concern, and why?
Part Two: FASB Accounting Standards Codification (ASC)
Identify the correct codification topic, subtopic, section, and paragraph for each question to support your response. There is a total of four.
1. Pro Forma Financial Information
Codification Reference:
Topic: 805 - Business Combinations
Subtopic: 10 - Overall
Section: 50 - Disclosure
Paragraph: 2(h)
What It Means: This part of the code is all about how to handle pro forma financial information when a company merges with or acquires another company. It tells us that if there’s a significant business combination during the year, we need to show what the combined company’s financial results would have looked like if the merger or acquisition had happened at the start of the year. This helps everyone see how the deal would have impacted the company’s finances right from the beginning.
2. Goodwill Measurement
Codification Reference:
Topic: 350 - Intangibles - Goodwill and Other
Subtopic: 20 - Goodwill
Section: 35 - Subsequent Measurement
Paragraph: 30
What It Means: This section deals with how to measure goodwill after a company has been acquired. Goodwill is the extra amount paid over the fair value of the acquired company’s identifiable assets. This part of the codification guides how to handle and report goodwill, including checking if its value needs adjusting over time.
3. Disclosure of Business Combination Effects
Codification Reference:
Topic: 805 - Business Combinations
Subtopic: 10 - Overall
Section: 50 - Disclosure
Paragraph: 3
What It Means: This section covers what needs to be disclosed about the effects of a business combination. It ensures that we provide clear information about how the merger or acquisition affects the company’s financial statements. This includes details about the transaction itself and any changes made to the financial records as a result.
4. Presentation of Pro Forma Adjustments
Codification Reference:
Topic: 805 - Business Combinations
Subtopic: 10 - Overall
Section: 55 - Implementation Guidance
Paragraph: 21
What It Means: Here, the focus is on how to present pro forma adjustments in financial statements. This guidance helps in showing hypothetical scenarios, like how the financials would look if the acquisition had happened earlier. It’s crucial for giving a clear picture of the combined company’s financial health and performance.
Evaluate a scenario regarding interim reporting (ASC13-1). Include the following details in your response:
Determine if the codification allows for exceptions at interim reporting dates.
Determine what effect differences in interim reporting have on evaluation methods employed by analysts and other users.
Exercise13-. Insert Credit to: Chaney P., Jeter, D. (2024). Chapter 13. 13-1 REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Answer: Based on the operating profit or loss test, each segment (A, B, C, and D) has financial results that exceed 10% of the total operating profit or loss in absolute terms. This means that all four segments meet the threshold for being reportable. Therefore, segments A, B, C, and D all need to be reported because each one's performance significantly impacts the overall results.
Interim Reporting Under ASC 270-10-50
Exceptions in Interim Reporting: Under ASC 270-10-50, interim financial statements don’t have to be as detailed as annual reports. The idea is to simplify the process and make it more practical. While companies must report significant events and transactions that occur during the interim period, they can skip some of the more detailed disclosures required in annual reports. This approach helps companies provide timely updates without the full burden of annual reporting requirements.
Impact on Analysis: These differences can make it tricky for analysts and other users. Since interim reports might not have all the details of annual reports, comparing them directly can be challenging. Analysts often use interim reports to spot trends and assess performance over shorter periods, but they need to be careful about making direct comparisons with annual results because the interim data might be less comprehensive.
The simplified disclosures in interim reports mean that analysts must dig a bit deeper to understand the full picture. They need to focus on the major changes and significant events reported and may need to seek additional context or information to get a complete understanding. This can be a bit of a puzzle, as the interim data might not tell the whole story.
In addition, interim reports can be affected by seasonal fluctuations or one-time events, which can skew the results. Analysts have to adjust their evaluation methods to account for these factors and ensure they’re not misled by temporary anomalies.
Explain whether it is appropriate to prorate an extraordinary loss in the second quarter over the three remaining quarters of the fiscal year (ASC13-3).
Exercise 13-3. Insert Credit to: Chaney P., Jeter, D. (2024). Chapter 13. 13-3 REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Answer: Based on the significance tests: Segment A and Segment B pass all three criteria (revenue, profit or loss, and assets) and are therefore considered reportable.
Segment C meets the profit or loss criterion but does not meet the revenue or asset criteria, so it is not a reportable segment on its own. Segment D does not meet any of the criteria and is also not reportable. For the segments that are not reportable (Segments C and D), they should be combined into an "Other" category in the financial statements. This category groups together all nonreportable segments. In the financial statement notes, it is important to describe the nature of these segments and provide their combined financial information.
According to ASC 225-20-25-2, extraordinary items, like significant losses, should be reported in the financial statements for the period when they actually happen. So, if a company experiences an extraordinary loss in the second quarter, that loss should be reported entirely in that quarter. It wouldn’t be right to spread this loss out over the rest of the year.
Here’s why prorating an extraordinary loss isn’t appropriate: The matching principle in accounting requires that expenses and losses be recorded in the same period in which they occur. This helps to ensure that each period’s financial results reflect the true impact of events. If you were to spread the loss across several quarters, it would distort the financial picture of the second quarter, where the loss actually happened, and mislead anyone reading the financial statements.
Additionally, extraordinary items are meant to highlight significant and unusual events that have a big impact on the company. Reporting the loss in the quarter it occurred ensures that the impact is clear and understood. If the loss were prorated, it might be harder for stakeholders to grasp the full effect of the extraordinary event in the period it actually occurred.
Finally, consistent reporting is key. If extraordinary losses were spread out over multiple periods, it would create confusion and inconsistency. It’s important that similar events are reported in a standard way to maintain clarity for those comparing financial results over time.
Determine if interim periods are considered standalone financial statements or an integral part of the annual financial statements under current Generally Accepted Accounting Principles (GAAP) (ASC13-5).
Chaney P., Jeter, D. (2024). Chapter 13. 13-5 REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Under current Generally Accepted Accounting Principles (GAAP), interim periods are not treated as standalone financial statements. Instead, they are considered an integral part of the annual financial statements. This means that interim reports, such as those for quarterly periods, are meant to be viewed as part of a continuous financial story rather than as separate, complete reports on their own.
ASC 270-10-50-1 makes this clear by stating that interim financial statements should be read in conjunction with the annual financial statements. This approach ensures that while interim reports provide a snapshot of a company’s financial position and performance during the year, they do not replace the comprehensive view provided by the annual reports. Rather, interim statements offer updates and insights that complement the full annual reports.
The rationale behind this is to provide a more complete and consistent view of a company’s financial health throughout the year. Interim reports help track performance and changes in the company's financial status on a more frequent basis, but they are part of a broader picture that includes the annual financial statements. By integrating interim periods into the annual financial framework, GAAP ensures that users get a continuous and coherent understanding of the company’s financial performance over time.
Explain if you agree or disagree with how interim periods are handled by GAAP (ASC13-5).
Exercise 13-5. Insert credit to: Chaney P., Jeter, D. (2024). Chapter 13. 13-5 REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Answer: Tax Provision Required for the Third Quarter: $61,628 (total estimated tax) - $38,400 (tax recognized) = $23,228. This amount ensures that the total tax provision for the year aligns with the estimated effective annual tax rate of 38%.
I find that GAAP’s approach to treating interim periods as part of the annual financial statements is quite practical. This method keeps stakeholders regularly updated on our financial status, helping them stay informed about our performance throughout the year. By integrating interim reports into the annual financial picture, GAAP provides a continuous and consistent view of our company’s financial health. This integration captures significant events and transactions as they happen, avoiding the confusion that might come with separate, standalone reports.
Additionally, this approach aligns with the matching principle in accounting, which aims to accurately reflect financial performance by reporting information in the same period it occurs. By treating interim periods as part of the annual report, we simplify the reporting process and offer a clearer picture of our overall performance over time.
On the other hand, some might argue that interim periods should be treated as standalone financial statements to provide a more detailed snapshot at specific points in time. The current GAAP method could make it harder to evaluate each interim period individually without considering the full annual context. More detailed interim reports might help analysts and investors make better-informed decisions based on quarterly results.
Moreover, including interim periods as part of the annual report might sometimes obscure significant changes or events that occur between reporting periods. More comprehensive interim disclosures could give a fuller view of our financial status at each reporting date, offering better insights into our performance throughout the year.
In sum, I generally agree with GAAP’s current handling of interim periods. It provides a consistent and integrated view of financial performance that aligns with accounting principles. However, I see the value in having more detailed interim reports for greater clarity. Balancing detailed interim disclosures with their integration into annual reports is key to effective financial reporting.
Explain whether additional disclosure requirements are necessary when a company presents only the annual income statement as opposed to a separate fourth‐quarter interim report (ASC13-6).
Exercise 13-6: Insert credit to: Chaney P., Jeter, D. (2024). Chapter 13. 13-6 REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Answer: March 31, 2024: The company should report property taxes of $15,000. There were no major repairs or inventory losses to report for this period, and no gain from the sale of equipment occurred.
June 30, 2024: The property tax expense remains $15,000. Major repairs amounting to $66,000 were incurred and should be reported for this quarter. There are no inventory losses or gains from the sale of equipment for this period.
September 30, 2024: Property taxes for this quarter are $15,000. There are no major repairs reported, but an inventory loss of $150,000, recognized in August, should be included. Additionally, the gain on the sale of equipment, which occurred at the end of July, amounts to $10,500.
December 31, 2024: The property tax expense is again $15,000. There are no major repairs or inventory losses to report. No additional gains from the sale of equipment are recorded in this quarter.
When we choose to present only our annual income statement and skip the separate fourth-quarter report, it's important that we provide additional information to cover any gaps. The fourth quarter often holds crucial details about our performance that aren't fully captured in the annual report alone. To make up for this, I believe we should include extra disclosures. This means outlining any major events or transactions that happened during the fourth quarter so that stakeholders can understand what influenced our year-end results.
Additionally, including comparisons between the fourth quarter and previous quarters, or the same quarter from the previous year, can be really helpful. These comparisons will give a clearer picture of how our performance has evolved over time. We should also offer detailed explanations for any significant changes in revenue, expenses, or profits during the fourth quarter. These explanations will help clarify why certain financial figures have varied and what caused those changes. Finally, it’s important to explain how the fourth-quarter performance impacted our overall annual results. This will help connect the end-of-year figures with the broader financial picture, making it easier for everyone to see how the final months affected the full year.
References:
Chaney P., Jeter, D. (2024). 13REPORTING FOR SEGMENTS AND FOR INTERIM FINANCIAL PERIODS. https://read.wiley.com/books/9781119794615/page/17/section/top-of-page
Financial Accounting Standard Boards. (2024). Interim reporting. https://asc.fasb.org/1943274/2147483087/270-10-05-1
Security and Exchange Commissions. (2024). https://www.sec.gov/edgar/browse/?CIK=27419&owner=exclude
Security and Exchange Commissions. (2024). 8K Form. https://www.sec.gov/answers/form8k.htm
*****
Summarize all three articles, one for each entity: a public company, a government-based organization, and a nonprofit organization.
Include citations.
Explain at least one accounting challenge faced by each of the entities presented in the articles.
Public Company: Apple Inc.
Regulatory update: FCC has submitted Carr Challenges Apple on Privacy, Human Rights in China April 25, 2022.
Apple Inc., known for its products like the iPhone and MacBook, is very known in the technology sector. The company’s success is built on strong brand loyalty and a commitment to continuous innovation. However, Apple faces a significant accounting challenge in managing its complex global supply chain. With operations in numerous countries, Apple has to deal with different currencies, tax laws, and regulatory environments. This requires a secured, and advance accounting system that ensures compliance with both U.S. GAAP and IFRS, allowing Apple to accurately report its financials while managing risks like currency fluctuations and international tax obligations.
Government-Based Organization: U.S. Department of Commerce
U.S. Department of Commerce Announces Strong Response to the Good Jobs Challenge, Demonstrating Applicants’ Commitment to Creating New Opportunities for America’s Workforce.
The U.S. Department of Commerce (DOC) plays an important role in supporting economic growth and innovation across the United States. Its responsibility includes managing the Census Bureau to overseeing patents and trademarks, the DOC handles a wide coverage of funding sources. The biggest accounting challenge for the DOC is ensuring accurate financial reporting across its many agencies. This involves properly allocating federal funds and maintaining compliance with complex federal regulations. Given the diversity of its operations, the DOC must integrate financial data from various systems to provide transparent and accountable reporting to Congress and the public.
Nonprofit Organization: Habitat for Humanity
Habitat for Humanity Reaches 29 Million Served as It Rises to Growing Challenges of Housing Quality and Affordability in the U.S. And around the World.
Habitat for Humanity is a well-loved nonprofit in the U.S., known for its mission to help families build and improve affordable homes. Relying on the generosity of donors, grants, and the hard work of volunteers, Habitat for Humanity faces a unique set of challenges. One major hurdle is managing the various funding sources, especially when donations come with specific restrictions. For example, a donation might be earmarked for building homes in a particular community, which requires careful tracking to ensure the funds are used as intended. This attention to detail is critical not just for transparency, but also to keep the trust of those who support their work. Another challenge is accounting for in-kind contributions, like donated building materials or volunteer labor. These contributions are invaluable, but they need to be accurately recorded to show the real impact of the organization's efforts.
References:
Regulatory update: FCC has submitted Carr Challenges Apple on Privacy, Human Rights in China April 25, 2022. (2022, April 26). Financial Law Reporter.
U.S. Department of Commerce Announces Strong Response to the Good Jobs Challenge, Demonstrating Applicants’ Commitment to Creating New Opportunities for America’s Workforce. (2022, February 23). States News Service.
Habitat for Humanity Reaches 29 Million Served as It Rises to Growing Challenges of Housing Quality and Affordability in the U.S. And around the World. (2019, November 19). States News Service.
Contribution:
Evelyn M. Smith
ACC 345: Financial Statement Analysis/Business Valuation
Milestone One: Introduction. 3
Links 3
History and Overview. 3
Summary. 5
Milestone One References 5
Milestone One: Introduction
Links
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Provide the most recent SEC Form 10-K Filing link for the company.
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Provide the most recent SEC Proxy Filing link for the company.
https://www.sec.gov/Archives/edgar/data/1096343/000109634321000059/markelproxy2021document.htm
History and Overview
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Provide a brief company history overview based on external research of the company. Consider the following questions to guide your response:
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How long has the company been in business?
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Who was the original founder of the company?
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What significant changes to company leadership have occurred?
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How has the company changed since its beginning? Consider expansion of locations or products/services, etc.
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Markel Group Inc. was founded in 1930 by Samuel A. Markel, starting out as a modest regional insurance company. Samuel's vision and leadership were crucial in shaping the company’s success. After him, Richard R. Whitt took the reins, leading Markel through a period of r growth. Today, Michael W. Crowley serves as CEO, continuing to drive the company’s global expansion and diversification.
From its regional roots, Markel has grown into a global presence, with significant operations in North America, Europe, and beyond. The company has evolved from focusing solely on insurance to offering reinsurance and investment services, and it now excels in specialty insurance areas like liability and property. Through key acquisitions, such as Alterra Capital Holdings in 2013 and State National Companies in 2021, Markel has broadened its product offerings and expanded its reach, establishing itself as a major player in the global insurance and financial services industry.
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Identify all of the company’s major locations for their facilities and/or other properties.
Markel Group Inc. has a broad international footprint, with its main headquarters in Richmond, Virginia, where much of the company’s core operations are managed. The company has a strong presence in London, a key hub for its European insurance and reinsurance activities, and Bermuda, which is essential for its global reinsurance business. Markel also operates in Toronto, serving the Canadian market, and has significant offices in Dubai, Hong Kong, and Sydney, supporting its business in the Middle East, Asia-Pacific, and Australian regions. These locations are crucial for Markel’s global reach and its ability to deliver specialized insurance and investment services worldwide.
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Identify all of the customers recognized by the company.
Find this information in the annual Form 10-K filing, in Part 1, Item 1: Business.
In the annual Form 10-K filing for Markel Group Inc., Part I, Item 1: Business provides a broad overview of the company's operations and structure but does not specify individual customers by name. Instead, it describes the company's organizational framework and operational focus areas. Markel Group is a holding company with three main components:
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Insurance: Markel underwrites specialty insurance products through various platforms, including underwriting, fronting, and insurance-linked securities. This segment covers a range of insurance activities via its U.S. subsidiaries, which are licensed across all 50 states and the District of Columbia, and international subsidiaries located in Bermuda, Germany, and the United Kingdom.
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Investments: The company invests premiums and available earnings in fixed maturity and equity securities to generate returns and support its insurance operations.
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Markel Ventures: This division owns controlling interests in a diverse portfolio of businesses across various industries, contributing to the company’s growth and stability.
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List all of the names of the executive management team of the company.
Find this information in the annual Form 10-K filing, in Part 3, Item 10:
Directors, Executive Officers and Corporate Governance or in the Annual Proxy filing, under “Executive Officers,” or “Officers Compensation.” You may copy and paste a chart into this section from the annual Form 10-K filing. Be sure to add your own explanation of the information in the chart along with an attribution and a citation in the References section at the bottom of this template.
The "Signatures" section of the report is a formal requirement under the Securities Exchange Act of 1934, which ensures that certain reports are filed with the SEC in compliance with the law. By signing this section, the individuals named confirm that they have reviewed and approved the contents of the report.
Markel Group Inc.’s top executives, Thomas S. Gayner, the CEO, and Brian J. Costanzo, the CFO, have both signed the report. Their signatures, dated February 23, 2024, indicate that they are officially endorsing the report and taking responsibility for its accuracy.
In addition to Gayner and Costanzo, several other important figures have also signed the report. Steven A. Markel, the Chairman of the Board, and Meade P. Grandis, the Chief Accounting Officer, have added their signatures, showing their support and oversight. A number of directors, including Mark M. Besca, K. Bruce Connell, Lawrence A. Cunningham, Greta J. Harris, Morgan E. Housel, Diane Leopold, Anthony F. Markel, Harold L. Morrison, Jr., Michael O'Reilly, and A. Lynne Puckett, have also signed the document, each indicating their agreement with the report’s contents.
Their collective signatures serve as a final confirmation that the report is accurate and complete, and that it meets all necessary regulatory requirements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MARKEL GROUP INC.
/s/ Thomas S. Gayner
/s/ Brian J. Costanzo
Thomas S. Gayner
Brian J. Costanzo
Chief Executive Officer
Chief Financial Officer
(Principal Executive Officer)
(Principal Financial Officer)
February 23, 2024
February 23, 2024
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Steven A. Markel
Chairman of the Board
February 23, 2024
Steven A. Markel
/s/ Thomas S. Gayner
Director, Chief Executive Officer
February 23, 2024
Thomas S. Gayner
(Principal Executive Officer)
/s/ Brian J. Costanzo
Chief Financial Officer
February 23, 2024
Brian J. Costanzo
(Principal Financial Officer)
/s/ Meade P. Grandis
Chief Accounting Officer and Controller
February 23, 2024
Meade P. Grandis
(Principal Accounting Officer)
/s/ Mark M. Besca
Director
February 23, 2024
Mark M. Besca
/s/ K. Bruce Connell
Director
February 23, 2024
K. Bruce Connell
/s/ Lawrence A. Cunningham
Director
February 23, 2024
Lawrence A. Cunningham
/s/ Greta J. Harris
Director
February 23, 2024
Greta J. Harris
/s/ Morgan E. Housel
Director
February 23, 2024
Morgan E. Housel
/s/ Diane Leopold
Director
February 23, 2024
Diane Leopold
/s/ Anthony F. Markel
Director
February 23, 2024
Anthony F. Markel
/s/ Harold L. Morrison, Jr.
Director
February 23, 2024
Harold L. Morrison, Jr.
/s/ Michael O'Reilly
Director
February 23, 2024
Michael O'Reilly
/s/ A. Lynne Puckett
Director
February 23, 2024
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Lynne Puckett
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Identify all of the competition recognized by the company.
Find this information in the annual Form 10-K filing, in Part 1, Item 1: Business.
Markel Group Inc. operates in a highly competitive environment where it goes up against a mix of established insurance companies, global reinsurers, and Lloyd's syndicates. The company also encounters competition from newer players who bring innovative technologies and business models to the table. Additionally, alternative sources of capital and self-insurance mechanisms add another layer of competition. This ever-changing landscape means that Markel constantly adapts its strategies to stay ahead, balancing factors like pricing and service quality to meet market demands.
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Identify all of the major shareholders of the company.
Find this information in the Annual Proxy filing, under “Beneficial Ownership.”
Principal Shareholder/Beneficial Ownership
Mark M. Besca
K. Bruce Connell
Thomas S. Gayner
Greta J. Harris
Stewart M. Kasen
Diane Leopold
Lemuel E. Lewis
Anthony F. Markel
Steven A. Markel
Darrell D. Martin
Harold L. Morrison, Jr
Michael O’Reilly
A. Lynne Puckett
Richard R. Whitt, III
Robert C. Cox
Bradley J. Kiscaden
Jeremy A. Noble
Richard R. Grinnan
All directors, nominees and executive officers as a group
The Vanguard Group (Pennsylvania corporation)
100 Vanguard Blvd., Malvern, PA 19355q
BlackRock, Inc.
55 East 52nd St., New York, NY 10055r
Less than 1% of class.
a Includes the following shares subject to pledges: (i) 30,000 shares pledged by Anthony F. Markel as collateral for loans; (ii) 40,000 shares pledged by Steven A. Markel as collateral for loans; and (iii) 1,494 shares pledged by Mr. Whitt as collateral for a line of credit.
b Restricted Stock Units (RSUs) represent the right to receive unrestricted shares of Common Stock upon the lapse of restrictions, at which point the holders will have sole investment and voting power. RSUs that will not vest within 60 days of the date of the table are not considered beneficially owned for purposes of the table and are therefore not included in the Total Beneficial Ownership column because the holders are not entitled to voting rights or investment control until the restrictions lapse.
c Includes 172 shares held by Mr. Connell’s wife, as to which beneficial ownership is disclaimed.
d Includes 447 shares held as trustee for the benefit of Mr. Gayner’s wife and 2,000 shares held by Mr. Gayner’s wife, in each case, as to which beneficial ownership is disclaimed. Includes 2,705 shares indirectly held by Mr. Gayner in the Company’s 401(k) plan.
e Of the number shown, 14,997 RSUs have vested, but receipt of the shares has been deferred.
f Includes 2,028 shares held by Mr. Kasen’s wife, as to which beneficial ownership is disclaimed.
g Includes 500 shares held by Ms. Leopold’s husband, as to which beneficial ownership is disclaimed.
h Includes 36,489 shares held in Grantor Retained Annuity Trusts for which Mr. Markel is trustee and partial beneficiary; 6,220 shares held as trustee under trusts for the benefit of Mr. Markel and his children; and 2,443 shares held in trusts for his children for which Mr. Markel is trustee and partial beneficiary. Mr. Markel disclaims beneficial ownership of these shares except with respect to his interests in the trusts. Includes: 8,177 shares held as trustee for the benefit of Mr. Markel’s children as to which beneficial ownership is disclaimed; 2,121 shares held as trustee in a charitable lead unitrust for the partial benefit of Mr. Markel’s children; and 2,070 shares held by Mr. Markel’s wife, in each case, as to which beneficial ownership is also disclaimed.
i Includes 15,000 shares held by Mr. Markel’s wife, as to which beneficial ownership is disclaimed, and 2,045 shares indirectly held by Mr. Markel in the Company’s 401(k) plan.
j Includes 6,900 shares held by Mr. Martin’s wife, as to which beneficial ownership is disclaimed.
k Includes 2,520 shares indirectly held by Mr. Whitt in the Company’s 401(k) plan.
l Of the number shown, 1,000 RSUs have vested, but receipt of the shares has been deferred.
m Includes 14 shares indirectly held by Mr. Cox in the Company’s 401(k) plan.
n Includes 578 shares indirectly held by Mr. Kiscaden in the Company’s 401(k) plan.
o Includes 206 shares indirectly held by Mr. Noble in the Company’s 401(k) plan.
p Includes 69 shares indirectly held by Mr. Grinnan in the Company’s 401(k) plan.
q Based on a Schedule 13G/A dated February 10, 2021. Of the total shares, The Vanguard Group (a Pennsylvania corporation) has shared voting power of 14,545 shares, sole dispositive power with respect to 1,182,247 shares and shared dispositive power with respect to 33,176 shares.
r Based on a Schedule 13G/A dated January 29, 2021. Of the total shares, BlackRock, Inc. has sole voting power of 724,906 shares and sole dispositive power with respect to 824,768 shares.
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Describe business risks recognized by the company.
Find this information in the annual Form 10-K filing, in Part 1, Item 1A: Risk Factors. Item 1A in the annual Form 10-K will be lengthy. Do your best to summarize the risks the company has identified.
Markel Group Inc. faces a range of significant risks that could affect its financial stability and operations. Major risks include exposure to catastrophic events like natural disasters and terrorist attacks, which can lead to substantial losses despite the use of modeling tools. The company also contends with emerging claim and coverage issues due to evolving legal and social conditions, which may increase the frequency and severity of claims. Additionally, reliance on analytical models for pricing and reserving introduces the risk of inaccuracies that could impact financial performance.
Further risks involve challenges in managing long-tail insurance products, fluctuations in reserves for life and annuity reinsurance, and difficulties in securing favorable reinsurance terms. Market competition could squeeze profits and hinder premium growth, while efforts to innovate or expand may introduce new risks. Dependency on a few brokers for revenue and potential downgrades in credit ratings also pose significant threats. Finally, varying capital requirements and regulatory changes could adversely affect the company’s financial health and operational efficiency.
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Explain how the company is committed to Environmental, Social and Governance (ESG) efforts and sustainability.
Find this information in the annual Form 10-K filing, in Part 1, Item 1: Business or in Part 2, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. If your company does not provide this information in its SEC filings, you will need to do external research to determine your company’s commitment to ESG efforts and sustainability. Be sure to add your own explanation of the information you researched. Include appropriate attributions in your explanation and a citation in the References section at the bottom of this template.
Markel Group Inc. is dedicated to integrating Environmental, Social, and Governance (ESG) principles into its operations, reflecting its commitment to sustainability and ethical practices.
Environmental Efforts: Markel is focused on reducing its environmental impact. This includes initiatives like improving energy efficiency in its offices and minimizing waste. The company is actively working on strategies to lower its carbon footprint and make more sustainable choices in its day-to-day operations.
Social Responsibility: On the social front, Markel prioritizes creating a diverse and inclusive workplace. It invests in the development of its employees and engages with the community through various charitable activities. The company values ethical practices and strives to ensure that its business positively impacts both its workforce and the wider community.
Governance: Markel maintains strong governance standards with a focus on transparency and accountability. The company is committed to ethical business conduct and regularly reviews its governance practices to stay aligned with best practices and regulatory requirements.
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Describe the company’s Leadership in Energy and Environmental Design (LEED) status. Consider the following questions to guide your response:
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Is the company currently LEED certified?
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If the company is not currently LEED certificated, is it working towards becoming LEED certified?
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Review the Form 10-K filing to see if your company is LEED certified or if it discusses its certifications. If your company does not provide this information in its SEC Filings, you will need to do external research to determine your company’s LEED status. Be sure to add your own explanation of the information you researched. Include appropriate attributions in your explanation and a citation in the References section at the bottom of this template.
The company isn’t currently LEED certified, according to their latest Form 10-K filing (SEC, 2024). If you check their SEC filings, you won’t find any mention of LEED certification.
From what I’ve found, they haven’t specifically mentioned working towards LEED certification. However, they do have a strong commitment to sustainability and corporate responsibility, which is evident from their broader environmental and social initiatives.
Their Commitment to Sustainability
Even though LEED certification isn’t on their radar right now, the company is definitely walking the talk when it comes to making a positive impact. Here’s a glimpse of their efforts:
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Costa Farms has taken innovative steps by using insects to cut down pesticide use by 50%, showing a real commitment to reducing their environmental footprint (Markel Group, 2024).
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Markel Specialty is helping the next generation by offering scholarships to college seniors from underrepresented backgrounds in risk management and insurance (Markel Group, 2024).
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AMF is actively involved in fighting hunger globally with their support for organizations like Stop Hunger Now and Rise Against Hunger(Markel Group, 2024).
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#CapTechCares Program at CapTech is a great example of community support, focusing on youth empowerment and increasing access to technology and food security (Markel Group, 2024).
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Brahmin has switched to using recycled materials for their handbag linings and dust bags, aligning with their sustainability goals (Markel Group, 2024).
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Markel’s Matching Gifts Program amplifies their employees’ charitable contributions to local causes, reflecting a long-standing commitment to community support (Markel Group, 2024).
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Lansing Foundation is making a difference through philanthropy, from providing housing for the homeless to funding medical research (Markel Group, 2024).
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Ellicott Dredges contributes to environmental restoration by developing equipment for cleaning up oil spills (Markel Group, 2024).
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Costa Farms Literacy Program partners with Alfalit International to offer reading and writing training to employees, showing a dedication to personal development (Markel Group, 2024).
Summary
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Summarize your findings for the valuation team. Include the following details in your response:
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Explain what you learned as you researched the company.
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Identify the key points the valuation team needs to be aware of.
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Through my research on Markel Group Inc., I learned that this company has a rich history and a significant global presence. Founded in 1930 by Samuel A. Markel, it has grown from its regional roots into a major player in the international insurance and financial services industry. The leadership journey, from Samuel A. Markel to Richard R. Whitt and now Michael W. Crowley, it’s clear that Markel has continually adapted and expanded its reach over the years. The company's international footprint is quite impressive, with key offices in cities like Richmond, London, Bermuda, and Sydney, showcasing their ability to operate and connect across different markets. Major shareholders, including The Vanguard Group and BlackRock, alongside influential individuals like Steven A. Markel, contribute to the company’s strong financial foundation and strategic vision. Even though Markel isn’t LEED certified, their commitment to sustainability is evident in their various initiatives. For instance, Costa Farms is making strides in eco-friendly pest control, and Markel’s support for community-focused programs highlights their dedication to making a positive impact. This blend of historical growth, global reach, and genuine corporate responsibility paints a picture of a company that’s both resilient and forward-thinking.
Here are the key things the valuation team should know about Markel Group Inc.:
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Company History and Leadership: Markel, founded in 1930 by Samuel A. Markel, has grown from a regional insurance company to a global player. The leadership journey from Samuel to the current CEO, Michael W. Crowley, shows how the company has adapted and expanded over the years.
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Global Reach: Markel has a strong international presence with offices in major cities like Richmond, London, Bermuda, and Sydney. This global footprint helps them serve a wide range of markets effectively.
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Key Shareholders: The company is backed by major investors such as The Vanguard Group and BlackRock. Influential individual shareholders, including Steven A. Markel, also play an important role in guiding the company’s strategy.
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Competitive Environment: Markel operates in a competitive field with established insurance giants and new market players. They face risks from big events like natural disasters and changes in the legal landscape, which could impact their financial performance.
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Sustainability Efforts: Although Markel isn’t LEED certified, they’re committed to sustainability. Their initiatives, like eco-friendly practices at Costa Farms and support for various charitable causes, show they care about making a positive impact on the environment and communities.
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Create at least one effective visualization that supports key points. Include the following detail in your response:
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Appropriate labels for the visualization(s).
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Create an effective visualization(s) based on your research to support your summary report. Examples of ideas for your visualization(s) include creating a timeline of the company history, creating a map of the company’s locations, creating a chart of major shareholders showing ownership and broken down by percentages, etc.
Milestone One References
Sec.gov. (2024). United States Securities and Exchange Commission Form 10-K. Markel Group Inc. mkl-20231231 (sec.gov)
Sec.gov. (2024). United States Securities and Exchange Commission Form. Schedule 14A Information. Markel Group Inc. https://www.sec.gov/Archives/edgar/data/1096343/000109634321000059/markelproxy2021document.htm
Sec.gov. (2024). United States Securities and Exchange Commission Form 10-K. Markel Group Inc. p-10K-136. mkl-20231231 (sec.gov)
Markle Group. (2024). Corporate responsibility. https://www.mklgroup.com/corporate-responsibility
AUDITING - Audit Assurance
EVELYN SMITH posted Jul 2, 2024 1:29 PM
Subscribed
Audit assurance plays a crucial role in the financial landscape by providing stakeholders with confidence in the accuracy and reliability of financial information.
Here’s my perception of its value:
Audit assurance is important because it ensures that financial statements are accurate and trustworthy. This builds confidence among investors, lenders, regulators, and others who rely on these statements to make decisions. Auditors carefully examine financial records to find errors or fraud, which helps prevent financial problems and keeps reporting honest. Audits also ensure that companies follow laws and regulations, especially in industries like healthcare and finance. By improving internal controls based on audit findings, companies run more efficiently and reduce the risk of mistakes. Reliable financial information from audits helps managers make smart decisions and gives lenders and investors confidence to provide funding.
The auditing scandal involving KPMG and its role in auditing a top Tory advertising agency (Mawardi, 2024) had significant implications for the auditing profession and led to several outcomes:
Impact on the Auditing Profession:
Reputation Damage: The scandal tarnished KPMG’s reputation and raised questions about the efficacy of audit practices.
Trust Issues: It eroded trust in the auditing profession as stakeholders questioned the independence and thoroughness of audits conducted by major firms.
Regulatory Scrutiny: Regulators and policymakers scrutinized auditing practices more closely, leading to calls for reform and stricter oversight.
Policy Changes:
Regulatory Reforms: The scandal prompted regulators to reevaluate audit oversight frameworks and regulations.
Enhanced Reporting Requirements: An increased requirements for auditors to disclose potential conflicts of interest and other pertinent information to regulatory bodies.
Improvements in Auditing Oversight:
Enhanced Audit Quality Controls: KPMG implemented stricter internal controls and quality assurance measures to improve the reliability and accuracy of audits.
Independence Safeguards: Measures were strengthened to ensure auditors maintain independence and objectivity when conducting audits.
Training and Compliance: Enhanced training programs and compliance checks were introduced to reinforce ethical standards and regulatory compliance. "We continue to invest significantly in audit quality, in our training, controls and technology, to drive further improvements and resilience in our audit practice.” Cath Burnet, head of audit KPMG UK, said. (Mawardi, 2024)
Protection of Companies and Investors:
Ensuring Accuracy: Improved auditing oversight helps ensure that financial statements accurately reflect a company’s financial health, reducing the risk of financial misstatements or fraud.
Enhancing Transparency: Stricter oversight promotes transparency in financial reporting, giving investors and stakeholders greater confidence in the information disclosed.
Risk Mitigation: Robust auditing practices mitigate risks associated with financial irregularities, protecting investors from potential losses and maintaining market stability.
References:
Mawardi, A. (2024, March 5). KPMG fined over scandal at top Tory advertising agency. https://eds-p-ebscohost-com.ezproxy.snhu.edu/eds/detail/detail
Mawardi, A. (2024, March 4). KPMG fined £1.5m over accounting scandal at top Tory ad agency. https://finance.yahoo.com/news/kpmg-fined-1-5m-over-105138065.html
The Future of Audit
EVELYN SMITH posted Aug 19, 2024 2:20 PM
Subscribed
Looking back to week 1, my idea of auditing has changed a lot. Initially, I viewed auditing primarily as a compliance driven function with a rigid focus on verifying financial records.
But now, I understand it as a more complex process involving a deep dive into internal controls, risk evaluation, and strategic analysis (Arens, Elder, & Beasley, 2018). I’ve come to appreciate the role auditors play in ensuring transparency and building trust in financial reporting, which supports market stability and investor confidence.
On the downside, I have also come to understand the pressures auditors face, including the challenge of maintaining objectivity amidst client relationships and the increasing complexity of accounting standards which can lead to potential oversights or misinterpretations.
Looking ahead, the audit profession is likely to face several challenges in our global economy and with rapidly changing technology. As companies operate across different countries, auditors must navigate various regulations and accounting practices, which can make audits more complex and riskier (PCAOB, 2021). Additionally, new technologies like artificial intelligence and blockchain bring both opportunities and hurdles. AI can streamline data analysis and automate tasks, but it also requires auditors to adapt and learn new skills to handle AI-generated insights (Swan, 2015). Blockchain offers greater transparency but demands new methods for auditing decentralized systems (Tapscott & Tapscott, 2016). Keeping up with these technological advances will be crucial for ensuring high-quality audits.
References:
Arens, A. A., Elder, R. J., & Beasley, M. S. (2018). Auditing and assurance services: An integrated approach (16th ed.). Pearson.
Knechel, W. R., Vanstraelen, A., & Zerni, M. (2015). Audit quality: Insights from the academic literature. Auditing: A Journal of Practice & Theory, 34(1), 117-142. https://doi.org/10.2308/ajpt-50984
PCAOB. (2021). Annual report on the interim inspection program. Public Company Accounting Oversight Board.
Swan, M. (2015). Blockchain: Blueprint for a new economy. O'Reilly Media.
Tapscott, D., & Tapscott, A. (2016). Blockchain revolution: How the technology behind bitcoin is changing money, business, and the world. Penguin.
Client Risk Profile
Evelyn Smith - Case Study
Company Overview
Digital Turbine, Inc. operates in the mobile advertising technology sector, specializing in app distribution and monetization solutions. The company partners with mobile carriers and OEMs to facilitate app discovery and engagement through its proprietary platform.
Client Management’s Integrity
In assessing Digital Turbine Inc.'s management integrity, it is highly recommended to conduct a thorough background check on key executives and board members to uncover any past legal issues or ethical lapses that could impact their credibility. Additionally, evaluating their reputation within the technology and advertising sectors will provide insights into their adherence to ethical standards and corporate governance practices. Transparency in communications with stakeholders, including shareholders and regulatory bodies, will further indicate their commitment to openness and accountability. This approach will ensure that Digital Turbine's management possesses the integrity necessary to uphold the standards expected in a reputable audit client.
Client Management’s Commitment to Generally Accepted Accounting Standards (GAAS)
Digital Turbine Inc.'s commitment to Generally Accepted Accounting Standards (GAAS) will be assessed by examining the consistency and accuracy of their financial reporting practices. This involves reviewing the historical reliability of their financial statements and assessing their compliance with Generally Accepted Accounting Principles (GAAP). The company's engagement with auditors, including their responsiveness in providing required documentation and explanations during audits, will also be a critical factor in determining their commitment to transparent and compliant financial reporting. By ensuring these aspects align with regulatory requirements and industry best practices, we can ascertain Digital Turbine's dedication to maintaining high standards of financial reporting integrity.
Financial Strength of the Client
Assessing Digital Turbine Inc.'s financial strength involves analyzing key financial metrics such as liquidity ratios (current and quick ratios), profitability indicators (gross and net profit margins), and leverage ratios (debt-to-equity ratio). These metrics provide insights into the company's ability to manage its liquidity, generate profits from operations, and handle financial obligations effectively. Additionally, a detailed review of their cash flow statements will reveal their ability to generate cash and manage working capital efficiently. Evaluating trends in revenue growth, market share, and customer acquisition will further help gauge their market position and stability. By conducting a comprehensive analysis of these financial aspects, we can determine Digital Turbine's financial health and resilience, crucial factors in evaluating their suitability as an audit client.
Identify Risk Factors for the External Audit: Digital Turbine Inc.
External Factors
Digital Turbine Inc. operates in the dynamic and competitive mobile advertising technology sector, which is subject to rapid technological advancements and changes in consumer behavior. External factors such as shifts in advertising spending by mobile app developers and device manufacturers can significantly impact the company's revenue and financial performance. Moreover, global economic conditions and geopolitical events can influence market volatility, affecting advertising budgets and ultimately impacting Digital Turbine's financial stability. Additionally, regulatory changes related to data privacy laws and advertising practices in various jurisdictions pose compliance challenges that could require adjustments to financial reporting practices.
Other Factors
Other risk factors for Digital Turbine Inc.'s external audit include its reliance on strategic partnerships and key customer relationships. The company's business model involves distributing mobile apps through partnerships with mobile carriers and device manufacturers, exposing it to risks associated with partner performance and contractual obligations. Furthermore, the integration of acquired businesses introduces complexities in financial reporting and internal controls, potentially leading to errors or misstatements. Assessing the adequacy of internal controls over financial reporting (ICFR) and the valuation of intangible assets from acquisitions will be critical in mitigating these risks. By addressing these external and other factors comprehensively, the audit team can effectively identify and manage potential risks during the audit of Digital Turbine Inc.
Objectives and Scope of the External Audit: Digital Turbine Inc.
Objectives
The primary objective of the external audit for Digital Turbine Inc. is to provide an independent opinion on the fairness and accuracy of the company's financial statements in accordance with Generally Accepted Accounting Principles (GAAP). This involves confirming that the financial statements present a true and fair view of the company's financial position, results of operations, and cash flows for the fiscal year ending March 31, 2022. Additionally, the audit aims to assess compliance with relevant regulatory requirements and to identify any material misstatements or deficiencies in internal controls over financial reporting (ICFR).
Scope
The scope of the external audit for Digital Turbine Inc. will include:
• Associated Deliverables: The audit will deliver audited financial statements, including the income statement, balance sheet, statement of cash flows, and accompanying notes and disclosures. A management letter will be provided to communicate control weaknesses identified during the audit and recommendations for improvement.
• Data Type to be Investigated: The audit team will analyze financial data from Digital Turbine Inc., focusing on revenue recognition practices related to mobile app distribution and advertising technology. This includes reviewing contracts, revenue streams, and the recognition criteria applied to ensure compliance with GAAP.
• Tests to be Performed: The audit will include substantive tests and tests of controls. Substantive tests will verify the accuracy and completeness of revenue recognition, expense allocations, and the valuation of intangible assets from acquisitions. Tests of controls will assess the effectiveness of internal controls over financial reporting, particularly in areas susceptible to material misstatement.
References:
Southern New Hampshire University. (n.d.). Brightspace. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FORM 10-K. https://learn.snhu.edu/content/enforced/1642976-ACC-411-10317.202456-1/course_documents/ACC%20411%20Prospective%20Client%20Two%20-%20Digital%20Turbine%2010-K.pdf?isCourseFile=true&ou=1642976
PCAOB. (2024). Auditing Standard No. 16 Communications with Audit Committees. https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations/details/Auditing_Standard_16_Appendix_C
PCAOB. (2024). AS 1005: Independence. Amendments: Amending releases and related SEC approval orders. https://pcaobus.org/oversight/standards/auditing-standards/details/AS1005
PCAOB. (2024). AS 1010: Training and Proficiency of the Independent Auditor. Amendments: Amending releases and related SEC approval orders. https://pcaobus.org/oversight/standards/auditing-standards/details/AS1010
Audit Team Due Diligence Professional Care Checklist
Evelyn Smith - Case Study
1. Robert Woods, Audit Senior:
Robert Woods, as an audit senior and a dedicated CPA, brings valuable experience and a commitment to excellence in auditing. Outside of work, Robert also serves on the boards of several charities, fostering connections with local businesspeople, including the CFO of our client company. It's worth noting that Robert has a prior professional association with the client's CFO through our audit firm.
Upon careful analysis, it's evident that Robert's close relationship with the client's CFO and their prior professional connection may pose risks to his objectivity and independence. There is a potential for familiarity bias and conflicts of interest due to these relationships.
To address these concerns proactively, Robert will be reassigned to another audit engagement where he does not have personal or professional ties with the client's management. This reassignment is highly important to ensuring that Robert can maintain the highest standards of independence and objectivity in his role as an audit senior.
2. Alma Sanchez, Audit Manager:
Alma Sanchez, who is targeted to serve as the audit manager, brings extensive experience and leadership in audit engagements. However, it has come to our attention that Alma's husband, Tyr, holds a majority stake in the client company.
Upon review, our firm's policy strictly prohibits any direct investment, regardless of size, in audit clients. Alma's husband's majority stake in the client company presents a significant independence risk that must be addressed promptly.
As a result, Alma will be replaced with another audit manager who does not have any direct or material indirect investments in the client company. This action is necessary to uphold our firm's commitment to independence and ensure compliance with regulatory requirements.
3. Rancel Dumari, Lead Auditor:
Rancel Dumari is slated to lead the audit team, bringing a wealth of experience primarily from working with small nonprofit clients. However, the client company operates in the chemical manufacturing industry, which demands specialized knowledge and understanding of unique accounting standards and regulations.
Upon thorough analysis, it is clear that Rancel's background in nonprofit auditing may not fully equip him with the specific expertise required for auditing in the chemical manufacturing industry. This gap in industry knowledge could potentially impact the audit's quality and effectiveness.
To address this, Rancel will receive additional training and resources focused on building competency in chemical manufacturing industry practices. Furthermore, considering the complexity of the client's operations, we will also assign a co-lead auditor with relevant industry expertise. This collaborative approach will ensure comprehensive audit coverage and enhance the team's ability to deliver valuable insights and assurance to our client.
Audit Team Due Diligence Assessment Results:
Technical Competency:
The audit team has demonstrated strong technical skills in general auditing principles and practices. However, they acknowledge that there are specific areas where they could benefit from deeper industry knowledge, especially in chemical manufacturing. To address this, the team is committed to enhancing their understanding through targeted training sessions and workshops. By doing so, they aim to better grasp the complexities of chemical manufacturing processes and regulatory requirements. This will enable them to provide more insightful audits tailored to the client's specific needs in the chemical industry. Ultimately, their goal is to ensure they can deliver high-quality audits that offer valuable insights and peace of mind to stakeholders.
Independence (Lack of Bias):
The audit team takes independence seriously and has taken proactive steps to mitigate any risks related to personal or financial relationships with client personnel. They have reassigned team members where necessary to maintain objectivity throughout the audit process. Adherence to strict policies and procedures ensures that they operate with integrity and without bias. By upholding these standards, the team aims to build trust and confidence in their audit findings. They are committed to conducting audits that are fair, unbiased, and in line with ethical principles, thereby safeguarding the integrity of their work and the trust of their clients.
Professional Skepticism:
Professional skepticism (PCAOB, 2012) is a fundamental aspect of the audit team's approach. They understand the importance of maintaining a questioning mindset, especially in challenging audit environments. Through continuous training and support, the team cultivates an environment where skepticism is encouraged and valued. They actively seek to challenge assumptions and thoroughly evaluate audit evidence to ensure thoroughness and accuracy in their findings. By implementing a culture of professional skepticism, the team aims to provide comprehensive audit opinions that stakeholders can rely on with confidence. Their commitment to skepticism is the results of their dedication to delivering audits that are thorough, insightful, and trustworthy.
References:
Southern New Hampshire University. (n.d.). Brightspace. https://learn.snhu.edu/content/enforced/1642976-ACC-411-10317.202456-1/course_documents/
PCAOB. (2024). Auditing Standard No. 16 Communications with Audit Committees. https://pcaobus.org/oversight/standards/archived-standards/pre-reorganized-auditing-standards-interpretations/details/Auditing_Standard_16_Appendix_C
PCAOB. (2024). AS 1005: Independence. Amendments: Amending releases and related SEC approval orders. https://pcaobus.org/oversight/standards/auditing-standards/details/AS1005
PCAOB. (2024). AS 1010: Training and Proficiency of the Independent Auditor. Amendments: Amending releases and related SEC approval orders. https://pcaobus.org/oversight/standards/auditing-standards/details/AS1010
PCAOB. (2012). AS 1015. STAFF AUDIT PRACTICE ALERT NO. 10. MAINTAINING AND APPLYING
PROFESSIONAL SKEPTICISM IN AUDITS. https://assets.pcaobus.org/pcaob-dev/docs/default-source/standards/qanda/12-04-2012_sapa_10.pdf?sfvrsn=8098521e_0
PCAOB. (2024). AS 1015: Due Professional Care in the Performance of Work. Amendments: Amending releases and related SEC approval orders. Guidance on AS 1015: Staff Audit Practice Alerts No. 9(PDF) and No. 10. https://pcaobus.org/oversight/standards/auditing-standards/details/AS1015
Financial Statement Audit Report (Case Study - E. Smith)
To the shareholders and the board of directors of Cloud9 Inc.
Audit Summary:
We have completed an audit of the financial statements for Cloud9 Inc. These statements include the balance sheet as of December 31, 2025, and the accompanying statements of income, retained earnings, and cash flows for the year ended on that date. Additionally, we reviewed the related notes that reflects important details of the financial statements (AICPA, 2024).
Anomalies Found:
During our review of Cloud9 Inc., we found several critical anomalies in the financial reporting process. One significant issue was the upfront recognition of a $120,000 contract revenue, even though the work is spread out over a longer period of 24 months. This practice, which also included the premature recognition of an onboarding fee, deviates from ASC 606 guidelines that require revenue to be recognized as obligations are met. Such an approach causes an overstatement of revenue in the current period and an understatement in the future, potentially misleading stakeholders about the company’s true financial performance. Additionally, a classification error was found where $325,153.43 was incorrectly recorded as accrued liabilities instead of accounts payable. While this did not impact the profit and loss statement, it caused a 2.84% understatement of accounts payable and a 2.81% overstatement of accrued liabilities, affecting the balance sheet's accuracy and highlighting the need for greater precision in financial reporting. Furthermore, we noted an understatement of fixed assets and accounts payable by $463,197 as of December 31, 2025. Although this amount is below the performance materiality threshold of $1 million, it still compromises the balance sheet's accuracy and could influence financial ratios and the overall financial position. Addressing these misstatements is crucial to ensure that Cloud9's financial statements accurately reflect the company's financial standing.
Analysis:
The misstatement regarding the upfront recognition of $120,000 in revenue is a material concern, as it inflates current-period income and misaligns with ASC 606, potentially misleading stakeholders about Cloud9’s financial health. Immediate correction is necessary to comply with GAAP and ensure accurate financial reporting. Additionally, a classification error involving $325,153.43, where amounts were recorded as accrued liabilities instead of accounts payable, while not affecting the income statement, does impact the balance sheet’s accuracy and highlights a control deficiency that needs to be addressed. Lastly, the $463,197 understatement of fixed assets and accounts payable, though below the performance materiality threshold, still affects the balance sheet and could influence financial ratios. Correcting this is essential to maintain the integrity of Cloud9’s financial statements and reflect the company’s true financial position.
Critical Audit Matters:
A key issue identified in the audit is Cloud9’s revenue recognition practice. This premature recognition, which deviates from ASC 606, can distort the company’s financial performance, leading to an inaccurate portrayal of its earnings and overall financial health. Additionally, a classification error involving accounts payable and accrued liabilities, while not material on its own, highlights the importance of accurate financial reporting and classification for reliable financial statements. Finally, the understatement of fixed assets and accounts payable, although below the performance materiality threshold, raises concerns about the accuracy of the balance sheet and financial ratios. Correcting this is essential to maintain the integrity of Cloud9’s financial reporting and ensure a true representation of the company’s financial position.
Auditor’s Opinion:
In our view, the financial statements of Cloud9 Inc. as of December 31, 2025, accurately reflect the company's financial position and the results of its operations and cash flows for the year. They are presented fairly, in all material respects, in accordance with Generally Accepted Accounting Principles (GAAP) (AICPA, 2024).
Basis of the Opinion:
We conducted our audit following Generally Accepted Auditing Standards (GAAS). Our responsibilities under these standards are detailed in the Auditor’s Responsibility section of this report. We maintain independence from Cloud9 Inc. and adhere to the ethical requirements relevant to our audit. Based on the audit evidence we've gathered, we believe it is sufficient and appropriate to support our opinion (PCAOB, 2024).
Client’s Responsibility:
Management is responsible for preparing and presenting the financial statements in accordance with GAAP. This includes designing, implementing, and maintaining internal controls to ensure the financial statements are free from material misstatements, whether caused by fraud or error (AICPA, 2024).
Auditor’s Responsibility:
Our role is to express an opinion on the financial statements based on our audit. We performed our audit in line with GAAS, which requires us to plan and execute the audit to provide reasonable assurance that the financial statements are free from material misstatement (PCAOB, 2024).
References:
Public Company Accounting Oversight Board (PCAOB). (2024). AS 2201: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
Southern New Hampshire University. (n.d.). ACC-411-10317-M01 Auditing Principles 2024. Brightspace. ACC 411 Project Three Summary of Audit Findings. https://learn.snhu.edu/d2l/lp/auth/saml/login
Public Company Accounting Oversight Board (PCAOB). (2024). AS 3105: Departures from Unqualified Opinions and Other Reporting Circumstances. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
Public Company Accounting Oversight Board (PCAOB). (2024). AS 3101: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
American Institute of Certified Public Accountants (AICPA). (2024). Audit and Accounting Guide. New York, NY: AICPA.
Internal Controls Audit Report (Case Study - E. Smith)
To the shareholders and the board of directors of Cloud9 Inc.
Audit Summary:
We have reviewed and audited the internal controls over financial reporting for Cloud9 Inc. as of December 31, 2025. This audit was conducted using the guidelines outlined in the Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO, 2013).
Anomalies Found:
During the audit of Cloud9 Inc., key areas of internal controls and financial processes were thoroughly evaluated. At the entity level, it was assessed and found to be effective, with strong evidence that the company has established a secured environment to prevent or detect material misstatements. Critical controls, such as performance reviews and segregation of duties, play a significant role in ensuring accurate financial reporting and minimizing risks (COSO, 2013). Furthermore, IT general controls were tested and confirmed to be effective, supporting the reliability of Cloud9’s financial systems by safeguarding against unauthorized access, changes, or errors (ISACA, 2024). In addition to these findings, the audit determined that there are no pending legal issues requiring disclosure, and despite a decline in earnings, there are no concerns regarding the company’s ability to continue as a going concern. The opening of Cloud9’s first retail store introduces new risks, such as theft, increased sales returns, and leasing-related challenges. While these risks are currently managed effectively and do not materially impact Cloud9’s overall operations, they could become more significant if not carefully monitored. Proper management of these risks is crucial for maintaining the integrity of the company’s financial reporting (COSO, 2013).
Analysis:
The materiality analysis of Cloud9’s internal controls demonstrates that entity-level controls are highly effective, significantly reducing the risk of material misstatements in financial reporting. Our audit did not identify any deficiencies that would require corrective action, indicating a strong and reliable control environment, which supports an unmodified opinion on the company’s internal controls (COSO, 2013).
Similarly, the IT general controls are performing well, playing a crucial role in maintaining the overall effectiveness of Cloud9’s internal control framework. Although deficiencies in IT controls could materially impact financial reporting, our audit revealed none, affirming the security and reliability of the company’s financial systems (ISACA, 2024). Additionally, the controls over the purchasing process are also effective, ensuring accurate management of vendor payments and payables. The strong procedures in place minimize the risk of significant financial misstatements, with no major control deficiencies identified, further supporting the integrity of Cloud9’s financial reporting (AICPA, 2024).
Critical Audit Matters:
The effectiveness of entity-level controls at Cloud9 is a critical factor in the reliability of its financial reporting. Our audit findings indicate that these controls are robust, providing a solid framework for preventing or detecting significant misstatements. A strong control environment like this is essential for ensuring the accuracy and dependability of Cloud9’s financial statements, reinforcing confidence in the company’s financial integrity (COSO, 2013).
Similarly, the IT general controls at Cloud9 play a pivotal role in safeguarding financial data and ensuring precise reporting. Our audit confirms that these controls are functioning effectively, securing financial systems from unauthorized access and minimizing the risk of errors. Additionally, the controls in the ordering process, including the management of vendor files and careful invoicing, are also performing as intended. These measures are crucial in minimizing errors in financial reporting (ISACA, 2024; AICPA, 2024).
Auditor’s Opinion:
In our opinion, Cloud9 Inc. maintained, in all material respects, effective internal controls over financial reporting as of December 31, 2025, based on criteria established in the COSO framework (COSO, 2013).
Basis of the Opinion:
We conducted our audit in accordance with generally accepted auditing standards (GAAS) and the standards applicable to internal control over financial reporting established by the Public Company Accounting Oversight Board (PCAOB). We are independent of Cloud9 Inc. and have fulfilled our ethical responsibilities in accordance with relevant ethical standards (PCAOB, 2024).
Client’s Responsibility:
Management is responsible for designing, implementing, and maintaining effective internal controls over financial reporting. This includes ensuring that the controls prevent or detect material misstatements, whether due to fraud or error (COSO, 2013).
Auditor’s Responsibility:
As auditors, our role is to provide an informed opinion on these financial statements based on the work we've done. We conducted our audit following Generally Accepted Auditing Standards (GAAS). These standards guide us in planning and executing our audit to ensure we can confidently determine whether the financial statements are free of material misstatements (PCAOB, 2024).
References:
Public Company Accounting Oversight Board (PCAOB). (2024). AS 2201: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
Southern New Hampshire University. (n.d.). ACC-411-10317-M01 Auditing Principles 2024. Brightspace. ACC 411 Project Three Summary of Audit Findings. https://learn.snhu.edu/d2l/lp/auth/saml/login
Public Company Accounting Oversight Board (PCAOB). (2024). AS 3105: Departures from Unqualified Opinions and Other Reporting Circumstances. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
Public Company Accounting Oversight Board (PCAOB). (2024). AS 3101: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2201
American Institute of Certified Public Accountants (AICPA). (2024). Audit and Accounting Guide. New York, NY: AICPA.
Project Analysis
E. Smith
Rubric criteria 4: Summarize
The Balance Sheet for the company shows current assets totaling $9,260.00, which include cash of $914.00, accounts receivable of $3,071.00, prepaid rent of $2,000.00, prepaid insurance of $1,600.00, and merchandise inventory valued at $1,675.00. These assets represent the resources the company expects to convert into cash or use up within a year (Financial Accounting Standards Board [FASB], 2024, ASC 210-10).
In terms of liabilities, the company has current liabilities amounting to $2,186.65, which include accounts payable of $1,750.00, wages payable of $270.00, and interest payable of $166.65. Additionally, the company has long-term liabilities with a notes payable of $10,000.00, which are obligations due beyond the next year. The total liabilities thus sum to $12,186.65, indicating the company's overall financial commitments (FASB, 2024, ASC 210-10).
Rubric criteria 5: Current Assets and Liabilities
A. The Balance Sheet is laid out to clearly differentiate between short-term and long-term financial aspects of a company. This structure helps to quickly assess how well the company can handle immediate expenses versus its long-term commitments. By separating current assets from long-term assets, and current liabilities from long-term liabilities, stakeholders can easily gauge the company’s liquidity and overall financial stability. (Financial Accounting Standards Board [FASB], 2024, ASC 210).
Currently, the company has $9,260.00 in current assets and $2,186.65 in current liabilities. The difference of $7,073.35 suggests that the company has a healthy cushion of liquid assets available to cover its short-term obligations. This surplus is a positive sign, indicating that the company should be able to manage its day-to-day financial needs without strain.
B. Assets and liabilities can indeed have both short-term and long-term components. For example, accounts receivable could include both amounts expected to be collected within a year (short-term) and amounts expected beyond a year (long-term), depending on the terms of the receivables. Similarly, notes payable might be split between short-term portions due within a year and long-term portions due beyond a year. This division helps in understanding when cash will flow in and out of the company, ensuring that both short-term and long-term obligations are managed effectively (Financial Accounting Standards Board [FASB], 2024, ASC 210-10).
C. To spot any unusual changes or potential issues, financial analysts use various tools. Ratio analysis compares current assets to current liabilities, offering insights into liquidity. Trend analysis looks at how these figures change over time, highlighting any significant variations. Financial forecasting predicts future financial positions based on current data, helping to identify potential problems before they arise. These tools are essential for keeping track of financial health and ensuring the company stays on top of its financial commitments (Brigham & Ehrhardt, 2024).
Rubric criteria 6: Footnotes
Footnotes in financial statements are like the fine print that provides crucial details behind the numbers on the balance sheet. While you might see that current assets total $9,260.00 and current liabilities are $2,186.65, these figures alone don't tell the whole story. Footnotes explain the nuances that help make sense of these numbers. For example, they can reveal if a significant portion of accounts receivable, listed as $3,071.00, is overdue or if there are potential issues with collecting these payments. Without this context, you might assume that all receivables are readily collectible, which could lead to unrealistic cash flow expectations.
Similarly, footnotes provide details about prepaid expenses like the $2,000.00 in prepaid rent and $1,600.00 in prepaid insurance. They might explain whether these amounts cover several months or just a short period. Knowing this helps in understanding how much of these prepaid funds will be available in the near term and impacts cash flow planning.
Footnotes also shed light on current liabilities. For instance, while accounts payable shows $1,750.00, footnotes can clarify the payment terms or any disputes with suppliers. This information is crucial for assessing if the company is managing its payables well or if there might be potential cash flow issues ahead. By providing these insights, footnotes help create a fuller picture, making it easier to make informed financial decisions and manage resources effectively.
Rubric criteria 7: FIFO
Using FIFO (First-In, First-Out) for inventory management is a smart choice for this company, especially given the fluctuations in prices and the nature of their products. FIFO means that the oldest inventory items are sold first. This approach is particularly useful when prices are on the rise, as it allows the company to sell products bought at lower prices before moving on to the more expensive stock. For example, with golf club sets and bicycles, FIFO ensures that the company is selling the older, cheaper items first, which helps in managing costs and keeping profit margins more predictable. (Financial Accounting Standards Board [FASB], 2024).
In practical terms, FIFO helps the company stay aligned with current market conditions. For golf clubs, using FIFO means the ending inventory is valued at the most recent, and likely higher, purchase prices, giving a clearer picture of current inventory value. For bicycles, FIFO helps manage costs by matching older, lower-priced inventory with sales, smoothing out the effects of price changes. This method not only helps in keeping financial statements accurate but also aids in making better decisions based on a clearer view of the company’s inventory costs and financial health.
Rubric criteria 8: FASB
FASB Codification
Financial Accounting Standards Board. (2024). Accounting Standards Codification: Cash flow statements—Overall (ASC 305-10-20). https://asc.fasb.org
FASB. (2024). Cash and Cash Equivalents. https://asc.fasb.org/305/10/showallinonepage
ASC 305 - Cash Flow Statements (specifically Section 305-10-20 for definitions and guidance on cash and cash equivalents)
Financial Accounting Standards Board. (2024). Accounting Standards Codification: Inventory—Overall (ASC 330-10-30). https://asc.fasb.org
FASB. (2024). Inventory. https://asc.fasb.org/330/showallinonepage
ASC 330 - Inventory (covers the general guidance on inventory accounting and valuation)
Financial Accounting Standards Board. (2024). Accounting Standards Codification: Receivables (ASC 310). https://asc.fasb.org
FASB. (2024). Receivables. https://asc.fasb.org/310/10/showallinonepage
ASC 310 - Receivables (provides guidance on the accounting for receivables, including the recognition, measurement, and impairment of receivables)
Brigham, E. F., & Ehrhardt, M. C. (2024). Financial management: Theory & practice (16th ed.). Cengage Learning.
Financial Data Integrity (e. smith)
Accounting System Questions
1. How does an accounting system provide accurate calculations to prevent errors?
An accounting system ensures accurate calculations and error prevention through several built-in mechanisms. One critical example is the use of double-entry bookkeeping, which requires every transaction to be recorded in at least two accounts—debit and credit. This method helps ensure that the accounting equation (Assets = Liabilities + Equity) remains balanced, making discrepancies easier to spot (Kieso, Weygandt, & Warfield, 2020). For instance, if a company records a sale of $1,000, it will simultaneously increase the revenue account and the cash or accounts receivable account by the same amount. If there’s a mistake in recording or if the accounts don’t balance, it signals a need for further investigation.
Another example is the use of automated reconciliation tools within accounting software. These tools regularly compare internal records with external statements, such as bank statements, to identify mismatches (Horngren, Sundem, & Elliott, 2019). For example, if a company’s accounting system shows a book balance of $5,000 but the bank statement shows $4,950, the system will highlight this discrepancy, prompting a review and correction.
Additionally, systems often incorporate validation rules and error-checking algorithms that prevent incorrect data entry by flagging inconsistencies or out-of-range values, thereby reducing the likelihood of manual errors (Weygandt, Kimmel, & Kieso, 2021). These features collectively enhance the accuracy of financial reporting and help maintain the integrity of accounting records. A popular accounting software that utilizes these features is QuickBooks.
2. What are potential concerns related to data security?
When managing data in an accounting system, there are several important security concerns to keep in mind. Unauthorized Access: Imagine if someone without permission could see or tamper with sensitive financial information. This could happen if strong security measures aren’t in place (Peltier, 2016). To protect against this, it's crucial to use strong passwords and multi-factor authentication (MFA) to ensure that only authorized people can access the data. Limiting access based on each person's role also helps keep things secure.
Data Breaches: A data breach is like having your private information stolen. It can occur due to hacking or accidental exposure, and it can have serious consequences, including financial loss and damage to your reputation (Anderson, 2020). To prevent this, it's important to use encryption to protect data both when it’s stored and while it's being sent over the internet. Regular security checks also help spot and fix vulnerabilities before they can be exploited.
Backup and Recovery: Think of backups as a safety net for your data. Without them, losing data due to system crashes, accidental deletions, or disasters can be devastating (Whitman & Mattord, 2018). Regularly backing up your data and having a solid recovery plan ensures you can quickly get back on track if something goes wrong.
Compliance Issues: Accounting data often falls under various regulations, like GDPR or SOX, which have strict rules about how data should be handled. Failing to comply with these regulations can lead to legal trouble and loss of trust (Parker, 2019). It’s important to make sure your system meets all legal requirements and regularly review your compliance status.
Software Vulnerabilities: Just like a house with broken locks is more vulnerable to burglars, software with security flaws can be exploited by attackers (Krebs, 2021). Keeping your accounting software updated with the latest security patches helps protect it from known threats and keeps your data safe.
3. How does an accounting system save time?
An accounting system can save time significantly through automation and organization. For example, consider a small business owner who manually tracks expenses and generates financial reports using spreadsheets. This process involves entering each transaction by hand, categorizing expenses, and manually calculating totals, which can take several hours each week (Smith, 2022). By switching to an accounting system like QuickBooks, the business owner can automate expense tracking by linking their bank accounts directly to the software. Transactions are imported and categorized automatically, and financial reports, such as profit and loss statements, can be generated instantly with a few clicks (Jones, 2023). This automation reduces the time spent on data entry and reconciliation, minimizes errors, and allows the owner to focus more on growing their business rather than managing paperwork.
4. How does using an accounting system enable separation of duties?
Using an accounting system enables effective separation of duties by clearly defining and restricting access based on roles and responsibilities within an organization. For instance, in a system like SAP, the roles of data entry clerks, accountants, and auditors can be distinctly separated. Data entry clerks are limited to entering transactions, accountants handle reconciliations and financial reporting, and auditors review the financial data for accuracy (Gable & Stewart, 2020). This segregation helps prevent fraud and errors by ensuring that no single individual has control over all aspects of financial transactions and reporting, thereby enhancing internal controls and accountability.
5. What are the benefits of an ERP system?
An ERP system, such as Oracle, offers comprehensive benefits by integrating various business processes into a unified system. For example, Oracle ERP centralizes financial management, supply chain operations, and human resources into one platform, allowing for real-time data visibility and improved decision-making (Smith & Davis, 2021). This integration streamlines workflows, reduces redundant data entry, and provides a single source of truth, which enhances overall operational efficiency and enables better forecasting and strategic planning.
6. What are the benefits of QuickBooks?
An entry-level accounting system like QuickBooks provides numerous benefits for small businesses by offering a cost-effective and user-friendly solution for financial management. For instance, QuickBooks automates tasks such as invoicing, expense tracking, and financial reporting, allowing small business owners to manage their finances with minimal accounting expertise (Johnson, 2022). Its intuitive interface and built-in templates simplify the bookkeeping process, which helps save time, reduce errors, and enables business owners to focus more on growing their business rather than managing their accounts.
Variance and Anomalies Questions
7. How can an accounting system help you find anomalies or variances in financial data?
An accounting system helps in identifying anomalies or variances in financial data by using automated tools to compare actual financial results against expected figures or historical benchmarks. For instance, if a company's system detects a significant deviation in expenses or revenues compared to previous periods, it can flag these discrepancies for further investigation. For example, suppose an accounting system flags a sudden increase in office supply expenses that deviates markedly from the norm. This alert can prompt a deeper review to identify potential issues such as unapproved purchases or accounting errors (Jones & Brown, 2021).
8. Assume you calculated a financial ratio variance of 2x the usual balance for accounts receivable. Why did you calculate a financial ratio variance of 2x the usual balance?
Calculating a financial ratio variance of 2x the usual balance for accounts receivable indicates a significant deviation from the norm. For example, if a company's typical accounts receivable turnover ratio is around 10 times a year, a variance of 2x would suggest the turnover ratio has dropped to 5, indicating slower collection times. This could be due to various factors such as more lenient credit terms, increased customer defaults, or inefficiencies in the collection process (Smith, 2022).
9. You are a small company that calculates a normal current ratio at 1.95. This period the current ratio is only 1.45. Why has the ratio decreased?
The decrease in the current ratio from 1.95 to 1.45 suggests that the company's short-term liquidity has worsened. This decline could be attributed to a significant increase in current liabilities or a decrease in current assets. For instance, if a small company experienced a large increase in accounts payable or took on more short-term debt without a corresponding increase in current assets, the current ratio would decrease (Johnson & Lee, 2023). This reduced ratio may signal potential liquidity problems and could be a red flag for creditors and investors.
References
Include at least one reference used to complete this chart. This section is for the full citation. Sources should be cited using APA style.
Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2019). Introduction to financial accounting (11th ed.). Pearson.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate accounting (16th ed.). Wiley.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
Anderson, R. (2020). Security engineering: A guide to building dependable distributed systems (3rd ed.). Wiley.
Krebs, B. (2021). Krebs on security. https://krebsonsecurity.com
Parker, D. B. (2019). Computer security: An overview (6th ed.). Prentice Hall.
Peltier, T. R. (2016). Information security policies, procedures, and standards: A practitioner's reference (3rd ed.). Auerbach Publications.
Whitman, M. E., & Mattord, H. J. (2018). Principles of information security (6th ed.). Cengage Learning.
Jones, A. (2023). How QuickBooks Streamlines Small Business Accounting. Financial Times.
Smith, B. (2022). The Benefits of Automated Accounting Systems. Business Insider.
Gable, M., & Stewart, G. (2020). Enterprise resource planning systems: Implementation and benefits. Journal of Business Research, 112, 102-110.
Johnson, R. (2022). Benefits of entry-level accounting software for small businesses. Accounting Today.
Smith, J., & Davis, K. (2021). The impact of ERP systems on business efficiency. International Journal of Information Management, 57, 45-53.
Johnson, R., & Lee, M. (2023). Analyzing changes in financial ratios: Causes and implications. Financial Management Journal, 34(2), 78-89.
Jones, A., & Brown, K. (2021). Detecting anomalies in financial data with modern accounting systems. Journal of Accounting Technology, 19(4), 123-134.
Smith, J. (2022). Understanding accounts receivable variance. Business Finance Review, 45(3), 56-65.
Case study (smith, e.)
Rubric Criteria 1:
Property, Plant, and Equipment (PPE) are crucial long-term assets that reflect a company’s operational capacity and financial stability. The costs associated with acquiring PPE go beyond the purchase price, including direct costs like freight and installation, as well as indirect costs such as taxes and legal fees. These costs must be capitalized to accurately represent the asset's true value on the balance sheet, ensuring that the company’s financial statements provide a complete picture of its investment in productive assets (Financial Accounting Standards Board [FASB], 2024; Weygandt, Kimmel, & Kieso, 2022).
Depreciation is key to spreading the cost of PPE over its useful life. The straight-line method, which allocates expenses evenly over time, is commonly used for its simplicity and predictability, making it ideal for assets with consistent use. However, companies with assets that depreciate quickly might opt for accelerated methods like the declining balance method. Choosing the right depreciation method impacts financial reporting and decision-making, influencing how the company’s financial health is perceived by stakeholders (FASB, 2024; Warren, Reeve, & Duchac, 2020).
When disposing of PPE, it’s essential to remove the asset's cost and accumulated depreciation from the books, record any proceeds from the sale, and recognize any gain or loss. This process ensures that the financial statements accurately reflect the transaction's economic impact. Proper handling of PPE—from acquisition to disposal—ensures accurate financial reporting, supports strategic planning, and maintains the integrity of the company’s financial position (FASB, 2024).
Rubric Criteria 2.
Goodwill and intangible assets are like the hidden gems on a company’s balance sheet, representing value that goes beyond what you can see or touch. Goodwill arises when a company acquires another business for more than its tangible assets—essentially paying for intangible factors like brand strength and customer loyalty. For instance, if a tech company buys a competitor for $10 million, but the competitor’s physical assets and liabilities only total $7 million, the $3 million difference is recorded as goodwill. This reflects the added value of the acquired company’s reputation and customer base (Financial Accounting Standards Board [FASB], 2024).
Intangible assets, such as patents, trademarks, or copyrights, are valuable but not physical. These assets are gradually expensed over time through amortization. For example, if a company holds a patent on a unique technology, it might amortize the patent's value over 10 years, reflecting the period it expects to benefit from the patent. This method ensures that the financial statements accurately represent the asset’s diminishing value over time (FASB, 2024; Kieso, Weygandt, & Warfield, 2023).
Rubric Criteria 3:
Long-term investments can be crucial for a company’s financial strategy, providing stability and growth potential. Whether to retain these investments depends on their returns and strategic benefits. For example, if a company holds stock in a promising tech startup that’s appreciating in value, it might be wise to keep this investment to bolster financial strength and future growth (Warren, Reeve, & Duchac, 2020).
Regarding leased assets, the right-of-use (ROU) asset is recognized at the lease's start and represents the value of the asset the company can use during the lease term. The ROU asset is calculated by discounting the lease payments to their present value. This amount is then amortized over the lease term. For instance, if a company leases office space for five years with total payments of $100,000, the ROU asset is initially recorded at the present value of these payments and amortized evenly over the five years, aligning the expense with the benefits received (FASB, 2024).
Rubric Criteria 4:
Here are the applicable FASB Codification sections for the specified items:
FASB. (2024). ASC 360-10: Property, Plant, and Equipment. Financial Accounting Standards Board. https://asc.fasb.org
FASB. (2024). Investments: ASC 320-10 (for debt and equity securities). https://asc.fasb.org/320/showallinonepageplus
FASB. (2024). Intangibles: ASC 350-10. https://asc.fasb.org/1943274/2147480091/360-10-S99-2
References:
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2020). Financial accounting (15th ed.). Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2022). Accounting principles (14th ed.). Wiley.
Financial Accounting Standards Board. (2024). ASC 350-20: Goodwill and Other Intangibles. https://asc.fasb.org
Financial Accounting Standards Board. (2024). ASC 842-20: Leases. https://asc.fasb.org
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2023). Intermediate accounting (17th ed.). Wiley.
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2020). Financial accounting (15th ed.). Cengage Learning.
Part One: (smith, e. (2024) Justification of Benefits of Incorporating the TBL Framework
A. Key Components of the TBL Framework
The Triple Bottom Line (TBL) framework evaluates business performance beyond financial profit by considering social, environmental, and economic factors (Elkington, 1997).
1. People (Social Component):
Benefits to Society: Focus on the well-being of employees, communities, and stakeholders results to a positive societal impact. This includes legal labor practices, diversity and inclusion initiatives, and community engagement programs. By investing in employees' welfare and community development, businesses helping in social stability, reduce inequality, and enhance overall quality of life. For instance, Patagonia implements fair labor practices and supports local communities through environmental grants, thereby enhancing social stability and contributing to societal well-being (Patagonia, n.d.).
2. Planet (Environmental Component):
Benefits to the Environment: Sustainability initiatives such as depleting carbon footprint, saving resources, and participating in eco-friendly practices mitigate environmental impact. This not only preserves natural resources and biodiversity but also addresses climate change and pollution concerns. Businesses that prioritize environmental sustainability build resilience against regulatory risks, enhance brand reputation among environmentally conscious consumers, and create long-term value through responsible stewardship. Companies like Tesla prioritize sustainability by producing electric vehicles, reducing carbon emissions, and promoting clean energy adoption, which mitigates environmental impact (Tesla, n.d.).
3. Profit (Economic Component):
Benefits to the Company: While traditionally focused on financial profit, the TBL framework expands the notion of profitability to include long-term economic viability. Integrating sustainability into business strategies reduces operational costs through efficiency improvements, minimizes risk exposure related to regulatory compliance and supply chain disruptions, and attracts investors seeking sustainable and ethical investments. Furthermore, businesses that embrace sustainable practices often experience increased customer loyalty and improved employee productivity and retention, leading to enhanced financial performance. Unilever's Sustainable Living Plan not only improves operational efficiency and reduces costs but also promote integrity and attracts eco-conscious consumers, thereby generating profitability (Unilever, n.d.).
B. Organizational Value of Using the TBL Framework
Integrating the TBL framework aligns organizational mission and vision with sustainable development goals (Savitz & Weber, 2006).
• Justification:
Strategic Alignment: The TBL framework ensures that corporate decisions reflect the organization's commitment to ethical business practices. By embedding social and environmental considerations alongside financial goals, businesses can mitigate risks associated with social and environmental impacts, thereby safeguarding long-term profitability and stakeholder trust. Companies like Interface Inc. have aligned their mission with sustainability goals, reducing environmental footprint through initiatives like Mission Zero®, which aims for zero environmental impact by 2020 (Interface Inc., n.d.).
Connection to Mission and Vision: Organizations committed to sustainable development integrate TBL principles into their mission and vision statements, demonstrating a clear commitment to creating value not only for shareholders but also for society and the environment. This alignment strengthens brand reputation, enhances stakeholder relationships, and attracts like-minded talent and partners who share similar values. Whole Foods Market integrates TBL principles into its mission to promote healthier eating and support local communities, aligning business growth with environmental sustainability (Whole Foods Market, n.d.).
C. B Corporation Benefits
• Organizational Benefits of Attaining B Corp Certification:
Credibility and Trust: B Corp certification is a testament of a company's commitment to high standards of social and environmental performance, accountability, and transparency. This certification enhances credibility among consumers, investors, and stakeholders who prioritize ethical business practices and sustainability. Etsy's B Corp certification underscores its commitment to ethical sourcing and fair-trade practices, enhancing trust among environmentally and socially conscious consumers (Etsy, n.d.).
Access to Networks: Becoming a B Corp brings access to a global network of like-minded organizations and companies committed to using business as a force for good. This network facilitates collaboration, knowledge sharing, and partnerships that support sustainable growth and impact. Danone North America leverages its B Corp certification to collaborate with other certified companies, sharing best practices and driving collective impact in sustainable agriculture and food systems (Danone, n.d.).
Legal Protection: B Corp certification offers legal protection for directors and officers who prioritize stakeholder interests over shareholder value, ensuring alignment with sustainable business practices even during ownership changes or financial pressures. B Lab's certification offers legal protection to companies like Ben & Jerry's, enabling them to prioritize social and environmental goals over shareholder interests during decision-making processes (Ben & Jerry's, n.d.).
References:
Ben & Jerry's. (n.d.). Benefits of becoming a B Corp. Retrieved from https://www.benjerry.com
Danone. (n.d.). B Corp certification at Danone North America. Retrieved from https://www.danone.com
Etsy. (n.d.). Etsy's commitment to B Corp certification. Retrieved from https://www.etsy.com
Interface Inc. (n.d.). Mission Zero®: Our promise to eliminate any negative impact we may have on the environment by 2020. Retrieved from https://www.interface.com
Patagonia. (n.d.). Our commitment to social responsibility. Retrieved from https://www.patagonia.com
Savitz, A. W., & Weber, K. (2006). The triple bottom line: How today's best-run companies are achieving economic, social, and environmental success—and how you can too. Jossey-Bass. https://www.semanticscholar.org/paper/The-Triple-Bottom-Line%3A-How-Today's-Best-Run-Are-Savitz-Weber/d
Tesla. (n.d.). Tesla's mission to accelerate the world's transition to sustainable energy. Retrieved from https://www.tesla.com
Unilever. (n.d.). Sustainable Living Plan. Retrieved from https://www.unilever.com
Whole Foods Market. (n.d.). Our mission and values. Retrieved from https://www.wholefoodsmarket.com
Posey’s Pet Emporium
To: Juanita Spellman, CFO
From: Evely Smith
Date: June 23, 2024
Subject: Accounts Payable Process Review
This memo outlines my findings regarding the state of current financial controls, Posey's Pet Emporium identifies discrepancies and anomalies, assesses risks related to potential fraud, and proposes recommendations for risk mitigation.
1. Policies and Procedures
• General Payment Policy: All payments must be backed by a valid source document, such as a third-party invoice, along with an approved purchase order or check request. This ensures every payment is properly authorized and documented.
• Purchase Order Transactions: Upon receipt of goods and service, accounts payable receives documentation from the relevant department. They then perform a three-way match of the purchase order, invoice, and receiving document to verify the accuracy of each payment, ensuring that payments are only made for items that have been received and confirmed.
• Employee Expense Reimbursements: Employees use a web-based system to request reimbursement for business expenses, which must be supported by appropriate documentation. These requests are electronically approved by the employee's department head. Accounts payable reviews the supporting documents and approves the reimbursement reports, ensuring that all expenses are valid and supported by proper documentation.
• Check Processing and Distribution: Checks are processed on Tuesdays and Thursdays, with distribution occurring on both days by the accounts payable team. The standard procedure is to mail checks to vendors within thirty days of the invoice date. In cases where faster processing is needed, approval for expedited handling can be granted by either the controller or the accounts payable team lead. This ensures that payments are processed promptly and distributed in accordance with company policies.
2. Internal Controls:
• Three-way match: The three-way match of the purchase order, invoice, and receiving document ensures that payments are made only for goods and services that have been received and verified.
• Approval process: Employee reimbursement requests are approved electronically by the employee's department head, ensuring that expenses are properly authorized.
• Review of supporting documentation: Accounts payable reviews the supporting documentation for employee reimbursement requests, ensuring that expenses are properly supported by documentation.
• Controller's review: The controller reviews and approves any exceptions to the general policy of mailing checks directly to vendors, ensuring that there is proper oversight and control over check distribution.
3. External Controls:
• W-9 requirement: All vendors are required to complete a W-9 form prior to being added to the vendor file for payment. This ensures that the company has the necessary tax information for reporting purposes.
• Form 1099: Payments made to independent contractors or unincorporated vendors for services require the company to prepare and mail a Form 1099 after the calendar year-end. This ensures compliance with tax reporting requirements
A. Discrepancies in the controls:
• Check processing and distribution: The document states that checks are processed on Tuesdays and Thursdays and distributed on Tuesdays and Fridays. However, it does not specify the frequency or timing of when checks are actually mailed to vendors. This lack of clarity could lead to delays or confusion in the check distribution process.
• Employee reimbursement requests: While the document mentions that employee reimbursement requests are approved electronically by the employee's department head, it does not specify any additional levels of approval or review by accounts payable. This could potentially result in inadequate oversight and control over employee reimbursements.
B. Numbers that appear irregular (red flags):
• In the Accounts Payable table, there are entries for No. 200 with different dates, invoice numbers, and debit/credit amounts, indicating irregularities in recording or processing accounts payable transactions.
• The ending balance in the AP table for No. 200 on 8/31/2022 shows a debit of $6,382.78 and a credit of $6,639.41, suggesting an imbalance in the account’s payable ledger.
• Invoice 4328 on 8/15/2022 shows a $4,000 debit to Vendor D without clear corresponding entries in the subsidiary ledger for this amount, suggesting a possible error or omission.
• Invoice 4336 on 8/30/2022 appears twice in the general ledger, indicating a risk of duplicate payments if not properly addressed.
To identify risks of fraud, theft, or leak of information, consider the following steps.
A. Security Procedures:
Ensure that checks are processed and distributed according to established security protocols. This includes verifying that authorized personnel handle check processing and distribution, and implementing controls to prevent unauthorized access to checks or check stock.
B. Roles and Access to Data:
Examine access to the accounts payable systems to ensure only authorized personnel, based on their roles and the principle of least privilege, can access sensitive financial information. Also, review how responsibilities are divided in the accounts payable process to ensure that different people initiate, approve, and record transactions, reducing the risk of unauthorized actions or collusion.
C. Approval Paths and Security Levels:
• Assess the approval hierarchy for tasks within accounts payable to ensure it aligns with necessary security levels. This ensures that higher-risk transactions or sensitive activities require appropriate levels of approval from authorized individuals.
• Purchase order modifications or cancellations: The document mentions that purchase orders should be modified or voided after goods have been returned to the vendor. It is important to review the approval path for such modifications or cancellations to ensure that they are properly authorized and documented, reducing the risk of fraudulent activities.
• Review and Rectify Irregular Entries: Investigate irregularities in accounts payable entries (e.g., No. 200 discrepancies, imbalance in ledger balances, missing subsidiary ledger entries, duplicate payments). Implement corrective actions such as reconciliations, audits, and enhanced controls to prevent and detect errors or fraudulent activities.
• Vendor setup and changes: The process for setting up new vendors or making changes to existing vendor information should be carefully controlled and monitored. This includes verifying the authenticity of vendor information and ensuring that any changes are properly authorized and documented to prevent fraudulent activities or unauthorized payments.
Based on the document, there are several inconsistencies or anomalies that require risk mitigation. These include:
1. Lack of clarity in check distribution process: The document states that checks are processed on Tuesdays and Thursdays and distributed on Tuesdays and Fridays. However, it does not specify the frequency or timing of when checks are actually mailed to vendors. This lack of clarity can lead to delays or confusion in the check distribution process, increasing the risk of checks being lost, stolen, or misappropriated. Risk mitigation measures could include implementing a clear and documented check distribution schedule, ensuring checks are securely stored before distribution, and implementing tracking mechanisms to monitor the status of checks.
2. Inadequate oversight in employee reimbursement requests: The document mentions that employee reimbursement requests are approved electronically by the employee's department head, but it does not specify any additional levels of approval or review by accounts payable. This lack of oversight can increase the risk of fraudulent or inaccurate reimbursement claims. Risk mitigation measures could include implementing a multi-level approval process for reimbursement requests, conducting periodic audits of reimbursement claims, and providing training to employees on proper expense reporting procedures.
3. Lack of clarity in payment processing timelines: The document states that it is the general policy of accounts payable to mail checks to vendors within thirty days of the invoice date. However, it does not specify any consequences or actions to be taken if payments are consistently delayed beyond the thirty-day timeframe. This lack of clarity can lead to inconsistent payment processing and potential disputes with vendors. Risk mitigation measures could include establishing clear consequences for delayed payments, implementing monitoring mechanisms to track payment processing timelines, and conducting regular reviews of payment processing efficiency.
4. Insufficient controls for non-U.S. citizen payments: The document states that payments to non-U.S. citizens cannot be disbursed prior to the receipt of a completed Foreign National Information Form certifying foreign status or any other applicable documents. However, it does not provide details on how these documents are verified or the level of scrutiny applied to ensure compliance. This lack of clarity can increase the risk of improper payments or non-compliance with legal and tax requirements. Risk mitigation measures could include implementing a robust verification process for non-U.S. citizen payments, conducting periodic reviews of compliance with documentation requirements, and providing training to employees involved in the payment process.
Summary of findings based on analysis:
A. Inconsistencies or anomalies present:
• Lack of clarity in check distribution process: The document does not provide a clear schedule or process for mailing checks to vendors, leading to potential delays or confusion in the check distribution process.
• Inadequate oversight in employee reimbursement requests: The document mentions that reimbursement requests are approved by the employee's department head, but it does not specify any additional levels of approval or review by accounts payable.
• Lack of clarity in payment processing timelines: The document states a general policy of mailing checks to vendors within thirty days of the invoice date, but it does not specify any consequences or actions for delayed payments.
• Insufficient controls for non-U.S. citizen payments: The document mentions the requirement of a completed Foreign National Information Form for payments to non-U.S. citizens, but it does not provide details on the verification process or the level of scrutiny applied.
B. Risks discovered:
• Risk of check loss or misappropriation: The lack of clarity in the check distribution process increases the risk of checks being lost, stolen, or misappropriated, potentially leading to financial loss or fraudulent activities.
• Risk of fraudulent reimbursement claims: The lack of additional levels of approval or review for employee reimbursement requests increases the risk of fraudulent or inaccurate claims going undetected, potentially resulting in financial loss for the company.
• Risk of payment delays and disputes: The lack of clarity in payment processing timelines can lead to inconsistent payment processing and potential disputes with vendors, damaging vendor relationships and potentially affecting the company's reputation.
• Risk of non-compliance with legal and tax requirements: The lack of clarity in the verification process for non-U.S. citizen payments increases the risk of improper payments or non-compliance with legal and tax requirements, potentially leading to legal and financial consequences for the company
In summary, while Posey’s Pet Emporium maintains foundational controls in its accounts payable process, there are critical areas for improvement to mitigate risks of fraud, overpayment, and information exposure. Addressing these issues will strengthen control effectiveness and enhance overall financial integrity.
Please let me know if you require further clarification or additional information.
Thank you.
Attachments: Posey’s Pet Emporium Accounts Payable Policies and Procedures, Posey’s Pet Emporium Accounts Payable Ledgers and Journals
Sincerely,
Evelyn Smith
Business Analyst
References:
Southern New Hampshire University. (n.d.). ACC-315-10598-M01 Accounting Information. Brightspace. Posey’s Pet Emporium Accounts Payable Policies and Procedures. https://learn.snhu.edu/d2l/le/content/1609490/viewContent/32404160/View
Savage, A., Brannock, D., Foksinska, A. (2022). Purchasing and Payments Processes. https://read.wiley.com/books/9781119744429/page/19/section/top-of-page
Savage, A., Brannock, D., Foksinska, A. (2022). What Is the Relationship Between Purchasing, Inventory Management, and Supply Chain Management?. https://read.wiley.com/books/9781119744429/page/19/section/head10-1
Savage, A., Brannock, D., Foksinska, A. (2022). What Is Fraud?. https://read.wiley.com/books/9781119744429/page/24/section/c15-sec-0001