1. Group 2A Elayne Concepcion Tania Garces Sarahy Pagan
Cal Temp Services, Inc.
Group 2A
Elayne Concepcion
Tania Garces
Sarahy Pagan

2. Accounting Issues GAAP - revenue and accounts receivable recognition
CTS revenue recognition policies
Overstatement of accounts receivable
Other balance sheet accounts
Impact of adjustments

3. GAAP - Revenue Recognition
Revenues – Inflows of assets resulting from providing a product or service to a customer
REALIZATION PRINCIPLE
The earnings process is judged to be complete of virtually complete
There is reasonable certainty as to the collectibility of the asset to be received

4. GAAP - Accounts Receivable
VALUED
at the original exchange price between the firm and the outside party
REPORTED
Net of cash discounts, sales returns, and allowances and uncollectible accounts
The amount of cash expected to be collected

5. CTS – Revenue Recognition Policies
Revenues for engineering services are recognized upon completion (realization) of projects, which are less than a year
In accordance with GAAP

6. Did they comply? …NO!!!! Example – Vortext, Inc.
Recognized revenue on December 31, 2000 based on a REQUEST FOR A QUOTE.
Did not even obtain a PO

7. Overstatement of accounts receivable
As of December 31, 1999
Overstated by $253,427
As of December 31, 2000
Overstated by $666,242

8. Other balance sheet accounts
As of December 31, 1999
No other changes required for 1999
As of December 31, 2000
Line of credit should be credited for $196,000 for the draws posted as payments on a receivable that was reversed upon our analysis
Accounts Payable for $30,000 should be reinstated as it was closed against a false receivable as a credit memo.

9. Impact of Adjustments As of December 31, 1999 As of December 31, 2000
Pre-tax income was reduced from $43,436 to a loss of $209,991
As of December 31, 2000
Pre-tax income was reduced from $149,098 to a loss of $517,144

10. Litigation Consulting Engagement Issues
Evidence of collateral reporting fraud
Apparent motives of management
Damage to Second Union

11. Evidence of collateral reporting fraud
Pledged AR on a first line of credit with a local bank and later used the same asset as collateral with the line of credit with the Second Union Bank
Objection to the bank contacting major customers is a red flag indicator

12. Additional Evidence
Roberts admission upon bank pressure of providing the bank with information on accounts receivable that would not prove to be collectible
Signature on certification reports

13. Apparent motives of management
Survive the defense industry downsizing in the late 1990’s
Keep CTS afloat
Increase sales of large engineering projects and expand into other value-added services to achieve growth
Needed to establish a good banking relationship that would help them through this expansion
Meet loan covenants

14. Damage to Second Union As of December 31, 1999 As of December 31, 2000
Savings on additional drafts made by CTS $786,200
As of December 31, 2000
Savings on additional drafts made by CTS $196,000

15. Auditing Issues Distinction between error & fraud
Evaluation of management’s action
Auditor’s responsibility
Risk factors (red flags)
M&S reliance on management
Information availability

16. Error vs Fraud
Error are unintentional misstatements or omission in financial statements
Fraud, in contrast, arises form deceitful financial reporting and from misappropriation of assets
Intent is the primary difference between an error and a fraud

17. Evaluation of management’s action
CTS committed fraud
Management’s intention was to deceive financial statement users, specifically Second Union
Altered records and documents
Misrepresenting transactions

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19. Auditor’s responsibility
An audit is designed to obtain reasonable assurance about material misstatements
Does not impose a legal obligation to detect cleverly concealed fraud
Auditors are responsible to assess the likelihood of fraud in every audit
Design tests that would provide reasonable assurance of detection

20. Risk factors Aging of accounts receivable
Continual increase in accounts receivable
Frequent overdrafts on the CTS checking account
Repeatedly issued credit memos for older invoices
Conflicting or missing evidence

21. M&S reliance on management
Professionally skeptical of management, rather than assume unilaterally that management has integrity
Subsequent collections is not an adequate confirmation by itself
Traced deposits to copy of customers checks kept on files
Attention should also being paid for credits given on accounts receivable

22. Information availability
Collection problem or a softening of the credit requirements
Problems with cash flows
Riskier line of credit

23. The End