TASK
The Art Appreciation Society operates a museum for the benefit and enjoyment of the community.
When the museum is open to the public, two clerks who are positioned at the entrance collect a $10.00 admission fee from each nonmember patron. Members of the Art Appreciation Society are permitted to enter free of charge upon presentation of their membership cards.
At the end of each day, one of the clerks delivers the proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver all cash held in the safe to the bank and receive an authenticated deposit slip that provides the basis for the weekly entry in the accounting records.
The Art Appreciation Society board of directors has identified a need to improve its internal controls over cash admission fees. The board has determined that the cost of in- stalling turnstiles, sales booths, or otherwise altering the physical layout of the museum will greatly exceed any benefits. However, the board has agreed that the sale of admission tickets must be an integral part of its improvement efforts. Smith has been asked by the board of directors of the Art Appreciation Society to review the internal control over cash admission fees and provide suggestions for improvements.
a. Indicate weaknesses in their processes over cash admission fees that Smith should identify, and recommend one improvement for each of the weaknesses identified. Organize the answer as indicated in the following illustrative example.*
Weaknesses in Processes Recommendations
1. There is no basis for establishing the number of paying patrons.
1. Pre-numbered admission tickets should be issued upon payment of the admission fee.
b. Indicate which of the weaknesses, if any, increase the likelihood of misappropriation of assets.
c. Indicate which of the weaknesses, if any, increase the likelihood of fraudulent financial reporting.
Public companies are required to file restated financial state- ments with the SEC when they discover after the audited financial statements have been issued that the financial statements are materially misstated. The misstatements may have been the result of fraudulent actions on the part of management or other client personnel, or of undetected errors or misapplication of accounting principles. There is often a negative stock market reaction to material financial statement restatements and, in some cases, litigation. In this problem, you will analyze data related to restatements of financial statements of public companies announced over the period January 1, 2010, through December 31,2017. The Excel dataset, available on the textbook website, was developed by accessing the Restatements module provided by Audit Analytics, an online research provider. Access the Restatements 2010_2017 dataset on the textbook website (www.pearsonhighered.com/arens) and open the Excel file. Review the file to understand the contents, and then use either Excel or Tableau to complete the following:
a. Create a bar graph of the number of restatements announced by year (extract the year from the Disclosure Date column). For each year, include a separate bar for fraud- related restatements (indicated by an “x” in Fraud Indicator column O) and non-fraud-related restatements. Summarize your observations about the frequency of restatements over time, and the frequency that are fraud-related versus non-fraud-related. Discuss possible explanations for any trends observed.
b. The Effect column of the file (column M) indicates whether the net effect of the restatement on the financial statements was negative (i.e., the restatement reduced the originally reported net income) or positive (i.e., the restatement increased net income). Create a bar graph by year indicating the number of negative effect restatements and the number of positive effect restatements. Which type of effect is more common? Summarize your observations and discuss possible explanations for any trends observed.
c. Using the Litigation column (column U), compute the percentage of restatements that result in the filing of a lawsuit (indicated by an “x” in the column). What is the overall percentage over this period? What factors do you believe increase the likelihood that a lawsuit is filed following the announcement of a restatement? Are lawsuits more
likely for fraud-related restatements as compared to non-fraud-related restatements?
d. Using information included in the Excel file, determine which financial statement accounts/areas are most commonly misstated. Graph the frequencies for each area for fraud-related restatements and non-fraud-related restatements, respectively.
Summarize your observations and discuss possible explanations for any differences observed.
