PREFACE

Contemporary Auditing: Real Issues and Cases, Ninth Edition can be used as either a supplemental text for an undergraduate auditing course or as a primary text for a graduate-level course in auditing. I typically use cases instead of textbook homework assignments when I am teaching undergraduate auditing. Over the more than thirty years that I have taught auditing, one of the most common complaints that I have heard from students in my courses is the lack of practical examples of auditing problems and decision contexts. The cases included in this text overcome this limitation of the standard undergraduate auditing course by requiring students to address actual, not contrived, situations that auditing practitioners have been forced to cope with in the past.

South-Western/Cengage Learning’s customized publishing capability makes it possible for instructors to select any combination of cases from this text for integration into their auditing courses. To facilitate the selection of cases by instructors, I have included two topical indices in the casebook. The first index, Summary of Topics by Case, lists each of the nearly 70 cases in this text and the primary auditing or auditing-related topics addressed in each case. The second index lists, in alphabetical order, the more than 140 key auditing topics addressed in this text and the specific cases in which those topics are raised. The "Suggestions for Use" section of each case solution also contains recommendations regarding the point at which each case should or could be integrated into an auditing course. At the graduate level, I have designed a one-semester course modeled around a selection of the cases presented in Contemporary Auditing: Real Issues and Cases, Ninth Edition. A syllabus for that course is included in this preface.

Each case solution includes the following five sections: Synopsis, Key Facts, Instructional Objectives, Suggestions for Use, and Suggested Solutions to Case Questions. The purpose of the Synopsis is to provide a concise summary of, and identify the principal issues raised by, each case so that instructors can quickly decide which cases are most appropriate for their particular purposes. I included the listing of Key Facts for each case as a pedagogical tool. If instructors use a pure case method approach to teaching the cases in this text, they will likely want their students to identify the key facts of each case during the classroom discussion. Alternatively, to facilitate covering individual cases as quickly as possible, instructors may choose to use the Key Facts listing as an overhead template. The Instructional Objectives section of each solution lists what I perceive to be the key learning objectives that an instructor will accomplish for each case. In addition to recommending at which point to incorporate individual cases in an auditing course, the Suggestionsfor Use sections provide helpful hints regarding the issues to emphasize in each case, strategies for focusing students’ attention on those issues, and other suggestions to enhance the learning experience afforded by each case. Finally, the Suggested Solutions to Case Questions provide

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answers that I

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have personally written for each case question. Past experience suggests that many instructors will disagree with some of my answers. Please recognize that the answers I provide are only suggested solutions. I am always more than happy to hear from instructors who can provide different viewpoints on the issues posed by the case questions.

Historically, cases have not been utilized extensively in accounting curricula, particularly at the undergraduate level. Consequently, auditing instructors may not be familiar with pedagogical issues related to the use of cases. In fact, many auditing and accounting instructors may not use cases in their courses because of pedagogical concerns. To mitigate such concerns, I recommend that instructors refer to the following excellent source regarding the integration of case materials into accounting courses: J.E. Campbell and W.F. Lewis, "Using Cases in Accounting Courses," Issues in Accounting Education, Fall 1991, pp. 276-283. Campbell and Lewis identify several different approaches available to accounting instructors for utilizing cases in their courses.

As Campbell and Lewis point out, a pure case method approach is not required when using cases as instructional materials and, in fact, may not be appropriate in many instructional contexts. As an example, because of the severe time constraints posed by the amount of technical material that must be covered in the undergraduate auditing course, I utilize one of two approaches in presenting my cases in that course. For certain cases, I require students to have read the case material and to have prepared written solutions to the case questions prior to class. During class, I focus exclusively on the case questions, calling on students randomly to obtain their views on the issues raised by the questions.

For other cases, I typically use a modified case method approach in which I serve as a moderator for an in-class discussion. I initiate this discussion by using one of several “launch strategies” that I have developed for my cases (see next paragraph). Generally, most of the issues posed by the case questions are adequately addressed by the completion of the class discussion. If not, any remaining issues raised by the case questions can be dealt with in fairly short order. The greater flexibility afforded by most graduate courses provides sufficient time to utilize a more conventional case method approach to presenting case materials. Campbell and Lewis note that as an instructor uses cases more extensively over a period of time, he or she will gradually develop an instructional mode for cases that is most "comfortable" for him or her.

One of the biggest challenges that I have faced in using cases extensively in my courses is a simple one, namely, “getting started.” I have found that one way to keep students interested and focused in a case course is to use a variety of different strategies for launching in-class discussions of cases. A sure recipe for quelling students’ interest is using the same “launch strategy” for each case. So, I would like to share with you a variety of different strategies or tactics that I have used to initiate in-class coverage or discussion of individual cases. As a point of information, many of these ideas are integrated into the Suggestions for Use sections included in the case solutions. As a caveat, some of these strategies are better suited for certain cases than they are for others. In fact, some of these strategies, such as the role-playing suggestion, would not “work” at all for certain cases in this text. One more caveat: several of these strategies overlap to a degree.

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1. Open a class discussion with a “quickie” group project. For example, several of the cases in this text involve auditors that made poor judgments in responding to ethical dilemmas or other decision contexts. Give students ten to fifteen minutes to meet in groups. Require each group to reach a consensus on the key mistakes made by the given

auditor and to develop a list of alternative decisions that auditor could have or should have considered. Each group can then present and defend their conclusions.

2. Choose two or more outgoing students to recreate a key event in a given case, an event that resulted in a face-to-face meeting of two or more individuals involved in the case. In this re-creation, allow the “actors” to change the outcome of that meeting.

3. Use a lottery of some type to choose students to answer specific case questions or to prompt them to participate in some other way in a case discussion. For example, I often write the number of each case question on a piece of paper and then insert those slips into envelopes. If there are seven questions and twelve students, five of the slips will be blank. Students randomly choose an envelope. “Winners” are required to answer the question they “selected.” To liven up this suggestion, you can convert it into a “Dirty Santa” type exercise in which students have the option of passing a tough or otherwise undesirable question to an unsuspecting classmate.

4. Ask individual students for a personal experience or anecdote relevant to the given case.

5. Use a handout that requires each class member to assign a numerical rating or ordinal ranking to some facet of the case. Examples of items that can be rated: ethical conduct of an individual involved in the given case, top three key facts or issues in the case, the jail term that should be or should have been assigned to a given scoundrel, students’ degree of confidence in a key but unsubstantiated assertion or allegation made by a party in the case, etc. Collect the individual ratings/rankings and either post selected student responses on the board or post all of the measures to a “scorecard,” which you then copy and circulate. This is one of my favorite types of case-opening exercises. For whatever reason, students seem to really enjoy these exercises. More important, these exercises tend to trigger considerable discussion and interaction among students.

6. Begin a case by requiring individual students to respond to an open-ended prompt such as, “This case is important because . . .” or “The most important thing I learned from this case was . . .”

7. Walk into your classroom, put your books down, single out a student, and inform that individual that he or she has exactly 60 seconds to provide a concise summary of the case to be discussed.

8. Ask students to relate the case to a recent event highlighted in the front-page press or business press.

9. In a case that poses an ethical dilemma, begin the case by asking students to identify the decision alternatives that were available to the key individual involved in that dilemma. After listing these alternatives on the board, take a poll to determine the

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alternatives that individual students would have selected. Have individual students defend their choice.

10. Choose a contentious issue in a given case and organize a three-group debate exercise. One group must defend one “side” of the given issue, the second group defends the other “side” of that issue, while the third group serves as the jury by voting on which group eventually prevails in the debate. Students in the first two groups will have to meet in class or outside of class to develop their arguments.

11. Call on a few students and ask them, in turn, one of the following questions: “What’s missing from this case?” “What else did you want to know about the given company, individuals, or other features of the case that was not revealed?” Even for lengthy cases,

students typically identify additional information that they would have liked to have

had in analyzing the given issues or aspects of the case. 12. Ask individual students, in turn, to identify a key fact or issue in the given case--a

time-honored, if not time-worn, strategy for opening a case discussion.13. Begin a case with your own monologue or lecture highlighting the key issues or

facts in the case. This is a strategy I seldom use. But, when “time is of the essence,” an instructor has to do what an instructor has to do.

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Suggested Syllabus for a Graduate Auditing Course Modeled Around Contemporary Auditing: Real Issues and Cases

The following syllabus is intended for a 15-week, one-semester graduate auditing course with an enrollment of 10 to 20 students. At the University of Oklahoma, we refer to this course as Contemporary Auditing Issues. Most of the students in this course are enrolled in the Master of Accountancy program or in our dual Bachelor of Accountancy/Master of Accountancy five-year program. All of these students have earned credit in one or more undergraduate auditing courses and are well versed in the "nuts and bolts" auditing issues. A set of cases that highlight a specific auditing issue or topic is presented during each module of the Contemporary Auditing Issues course. (Approximately one week is required to cover each module.) For instance, in Module 3, two cases requiring students to make extensive use of analytical procedures, Leslie Fay and Just for Feet, are discussed. Although analytical procedures is the focal topic of that module, each of those cases addresses several other auditing topics as well.

You will notice that the “Interlude” segment between Modules 4 and 5 in the following syllabus refers to an "Audit Risk Analysis" project. This in-class project is intended to help prepare students for a similar project that each of them will be required to complete individually. Early in the semester, each student is assigned a public company for which he or she will perform an extensive audit risk analysis. Each student is required to analyze the most recent financial data for his or her assigned company, which is typically obtained from the company's most recent annual report, the EDGAR web site, or any of several on-line financial databases. Students also obtain other pertinent financial and non-financial data regarding their assigned companies. These latter data would include information gleaned from articles appearing in The Wall Street Journal, major metropolitan newspapers, and various business publications concerning the company or its industry; peer group data provided for the company's industry or sub-industry by such investment services as RMA, Dun & Bradstreet, Moody's, etc.; and financial disclosure documents filed with the SEC, such as 8-K auditor change announcements.

Each student is required to prepare a written report and make an oral presentation, accompanied by PowerPoint slides, describing the key audit risks posed by the company assigned to him or her. Typically, these reports begin with a historical overview of the given company and its industry. Next, students generally discuss the potentially problematic non-financial items that they identified for the assigned company, such as, a management compensation scheme tied to reported earnings, an upcoming merger, restrictive bond covenants,

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etc. Next, I suggest that the students present the results of the analytical procedures they applied to their company's financial data to identify “red flag” financial statement items. I require that these procedures be performed on both a longitudinal and cross-sectional basis. Students make use of trend analysis, common-sized financial statements, and key financial ratios prepared on a comparative basis for their assigned company and its peer group. Each student completes his or her 15 to 20 minute in-class presentation with a summary recommendation regarding whether the given company appears to be an acceptable audit client or, alternatively, whether the company would pose an unacceptably high level of audit risk and/or business risk for an audit firm. The key purpose of the Audit Risk Analysis project is to require students to integrate and operationalize the important concepts and issues they have studied during the semester.

Syllabus for Contemporary Auditing Issues

Course Objectives

1. To discuss and analyze problematic situations that auditors have dealt with in the past so that students can obtain a better understanding of how to cope constructively with such scenarios in the future.

2. To enhance students' understanding of the fundamental technical concepts of the auditing discipline.

3. To increase students' awareness of the key ethical issues that accounting practitioners face

and to acquaint them with key ethics models and ethical reasoning strategies.

Text

M.C. Knapp, Contemporary Auditing: Real Issues and Cases, Ninth Edition (South-Western/Cengage Learning, 2012).

AICPA Code of Professional Conduct.

Course Grades

Course grades will be a function of the following items and their respective weights:

Midterm Exam 20%Final Exam 35%Audit Risk Analysis Project 20%Class participation, including quizzes 25%

Examinations

The midterm and final examinations will consist primarily of short answer and essay questions. No make-up exams or quizzes will be given. If an exam or quiz is missed due to a university-

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excused absence, the points on that item will be added to the final. The comprehensive final exam will be given during the final class period of the semester.

Quizzes & Class Participation

This course is designed to be a seminar and thus requires the active participation of all enrolled students. Each class period we will discuss specific auditing cases. Students are expected to have read each assigned case and be prepared to discuss the key concepts and issues raised by those cases. In addition, students are expected to be able to respond to the set of questions at the end of each case. On occasion, in-class, closed-book quizzes may be given on assigned cases prior to class discussion of those cases.

Audit Risk Analysis Project

During the first few weeks of the semester, each student will be assigned a public company for which he or she will complete an audit risk analysis project--no two students will be assigned the same company. Each student will assume the role of an audit manager of a public accounting firm who has been asked by an audit partner to assess the acceptability of the given company as an audit client and to write a memo summarizing this assessment. This is an "open-ended" assignment, which means that you can choose to structure your memorandum in any way you deem appropriate. However, at a minimum, your memorandum should cover the following points.

1. The memorandum should present a brief company profile that comments on, among other items, the history of the firm, its major products, its principal officers, recent developments concerning the firm (such as a merger, planned merger, or new products or technological advancements), etc.

2. Of particular interest to the partner will be what some audit firms refer to as "key items." These are potential "hot spots" that may demand special attention during the course of the audit. Examples: existence of a management compensation plan (bonus scheme) tied to reported profits; a significant number of related parties and related-party transactions; new, high-risk projects/products; important technological advancements or changes in the company's industry; a significant increase in bad debts over the past year, etc.

3. Somewhere within the memorandum you will need to discuss the apparent financial condition of the firm and highlight key financial ratios, such as, the current ratio, return on assets, inventory turnover, etc. In particular, you should bring to the partner's attention the ratios and trends that may be indicative of the future prospects of the firm (good or bad). For instance, if the return on sales percentage has plummeted in recent years, that fact should probably be brought to the attention of the partner (and, of course, you should provide some explanation as to why this sharp downturn has occurred). Both cross-sectional and longitudinal analyses will be appropriate. Additionally, tabular summaries and exhibits (graphs, pie charts, time-series charts, etc.) will be useful means to present quantitative data regarding the firm.

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4. Finally, you should conclude your memo with a recommendation for the partner. For example, the recommendation may be that the firm appears to be an acceptable client although it does pose a fairly high level of audit risk and business risk, you may recommend that the company not be considered any further as an audit client, or your recommendation may be that more information is needed before an acceptance/rejection decision is made. (If this latter conclusion is reached, you should identify the additional information you believe needs to be obtained before an acceptance/rejection decision can be made).

Feel free to use all reference sources available in the library or online, such as, Disclosure, Dun & Bradstreet, Moody's, Robert Morris & Associates, Standard & Poor’s, Value Line, WSJ Index, etc., in preparing your memorandum. Those online sources that supply comparative industry data will be particularly helpful. For a discussion of other factors to consider when evaluating a potential client, refer to any undergraduate auditing text. I would expect that coverage of the above (minimum) items would require a memorandum of approximately six to eight pages doubled-spaced, not including all appropriate exhibits [maximum length = 10 pages (not including exhibits)]. Grading criteria: thoroughness, accuracy (in interpreting the given firm's factual data), coherent structure, conciseness, the degree to which your conclusion is supported by your analysis, grammar, and neatness.

Class Presentation and Discussion of Audit Risk Projects: During the final two weeks of the semester, each student will be required to make a 15-20 minute PowerPoint presentation regarding his or her audit risk project. This presentation should provide an overview of the numbered items identified above and/or other appropriate information.

Due Date: Students will turn in a copy of their type-written memo to the instructor at the beginning of the class in which they discuss their audit risk project. In addition to the type-written memo, students should provide the instructor with the file of information from which the financial data for their report was drawn (e.g., an annual report, peer group data, etc.).

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Tentative Class Schedule

Module 1

Key Topic: Introduction/Icebreaker

Cases: Enron, New Century Financial Corporation, Madoff Securities

Module 2

Key Topic: The Professional Roles of Independent Auditors

Cases: Leigh Ann Walker, Avis Love, Bill DeBurger, Tommy O'Connell, Charles Tollison

Module 3

Key Topic: Use of Analytical Procedures and Audit Planning

Cases: Leslie Fay, Just for Feet

Module 4

Key Topic: Auditing High Risk Accounts

Cases: Jack Greenberg (inventory), Happiness Express (receivables), CBI (accounts payable), Golden Bear (revenues), Ligand Pharmaceuticals (sales returns)

Interlude:

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Subject: In-class Audit Risk Analysis project

Cases: None

Supplementary Most recent annual report of a public company and other pertinentMaterial: data, including peer group data.

Module 5

Key Topic: Unique Problems Facing Women and Minorities in Public Accounting

Cases: Hopkins vs. Price Waterhouse, Sarah Russell, Bud Carriker

Module 6

Key Topic: Internal Control Issues

Cases: Howard Street Jewelers, United Way of America, Buranello’s Ristorante

Mid-Term Examination

Module 7

Key Topic: Coping with Complex or Unique Client Transactions

Cases: Gemstar-TV Guide, The North Face

Ethics Models Module

Key Topic: Principal ethical paradigms that underlie applied business ethics. [Professor Nim Razook will present the lecture on this topic.]

Key Topic: Discussion of the nature, content, and purpose of the AICPA Code of Professional

Conduct.

Cases: None

Module 8

Key Topic: Ethics and the Private Accountant

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Cases: Suzette Washington, F&C International, Wiley Jackson, Arvel Smart, Freescale

Semiconductor

Module 9

Key Topic: Ethics and the Independent Auditor/CPA

Cases: Cardillo, Creve Couer Pizza, American Fuel & Supply, Waverly Holland, David Quinn

Module 10

Key Topic: Auditor Independence

Cases: AIG, Belot Enterprises

Module 11

Key Topic: Evolution of Auditors' Civil Liability

Cases: Fred Stern, First Securities Company of Chicago

Module 12

Key Topic: International Cases: Auditing Around the World

Cases: Kansayaku; Registered Auditors, South Africa; Zuan Yan; Gazprom; Shari’a; Societe Generale; Parmalat

Module 13

Key Topic: International Cases: Special Topics

Cases: Republic of Somalia, Republic of the Sudan, Tae Kwang Vina, Kaset Thai Sugar Company, Institute of Chartered Accountants of India

Presentations

Final Exam

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