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

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Presentation on theme: "Cal Temp Services, Inc. Group 2A Elayne Concepcion Tania Garces Sarahy Pagan."— Presentation transcript:

1 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 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 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 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


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