Today . . .

1
Today . . .

• Case 8
• Introduce Lesson 9 rules and concepts
• Outline Case 9 and Case 9.a
• Exam 2 and suggested solution on the course web
  site (rather than Discussion Questions)

2
Precision Vision Corp.

• Canadian company (implies . . .?)
• Materiality ??? for PVC?
• Formal correcting journal entries (as if
  corrected the likely misstatement)
• Likely effects of SAB No. 99 and SAS No. 89

3
Precision Vision Corp. - correction summary
mgt. suggests recording Sales 21,200 AR
21,200 Warranty exp.10,000 Warr. Liab.
10,000
to correct 100 Sales 21,200 AR
21,200 Cost of sales 3,125 Inv.(end)
625 Nonrecur. Cr. 2,500 Warr.
exp. 15,000 Warr. Liab. 15,000 Prepaid ins.
1,000 Ins. exp. 1,000
4
Precision Vision Corporation Audit Difference
SummaryIncome Statement
5
Essential Concepts of Lesson 9(Auditors Reports
and Their Interpretation)

• Incentives and role of officially-established
  measurement criteria (GAAP)
• Managements discretion applying GAAP fo hard
  numbers, allocations, accounting estimates,
  disclosures
• Auditors report modification rules (GAAS) for
  auditing defects, accounting defects, and unusual
  circumstances
• Auditors incentives and reporting decision model
• Behavioral interpretation of audit report
  modifications

6
Audit Reports under Various Circumstances
Standard Audit Report 1. Standard
Responsibility Paragraph 2. Standard Scope
Paragraph 3. Standard (Unqualified) Opinion
Paragraph
Immaterial exception
7
Certification (source chooses measurement
criteria and auditor -- will it work?)
Auditor
Audit Report



Management
Investors
Audited Financials
8
Accounting Measurement Types

• Hard numbers - attached to physical (fiscal)
  quantities of primary transactions cash,
  receivables, inventory, fixed asset additions,
  payables, related sales and cost of sales
• Allocations - spread hard numbers over time,
  segments, units produced depreciation expense,
  accumulated depreciation, goodwill amortization,
  overhead assignment.
• Accounting estimates - approximate value of
  transactions or losses that may occur in the
  future or have occurred bad debts, warranty
  expense, for inventory obsolescence losses
• Uncertainties - disclosure of possible losses
  that cannot yet be quantified as a point
  estimate, but affect interpretation of current
  financial statements.

9
Probability that an event or condition has or
will occur
10
Case 9.a (see course website)

• Using WSJ Index/ Dow Jones Index / NAARS find
• Non standard audit report/financial statements
• Restatement of previous financial statements
• Resignation of auditor
• Using Edgar (sec.gov)/ NAARS/ Yahoo find /copy
• footnote/ audit report
• Form 8-K explanation to SEC
• Stock price changes for 12 month surrounding
  announcement
• Write one/two page narrative and attach the above

11
Case 9.a example - Applied Materials, Inc.
12
World Wide Acquisitions, Inc.(reverse the
reporting process)

• Co. A - divided audit report
• Co. B - going concern paragraph
• Co. C - except for (unjustified acctg. change)

• Co. D - accounting change paragraph (D has none)
• Co. E - related party paragraph
• Co. F - standard report -- any problems?