0-24 (OBJECTIVES 10-2, 10-6) The Art Appreciation Society operates a museum for the ben-
efit and enjoyment of the community.
When the museum is open to the public, two clerks who are positioned at the entrance col-
lect 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. Prenumbered 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 finan-
cial reporting.
10-25 (OBJECTIVES 10-1, 10-6) 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, liti-
gation. 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,
Required
Required
Data
Analytics
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 restate-
ment on the financial statements was negative (i.e., the restatement reduced the origi-
nally 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 num-
ber 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.
10-26 (OBJECTIVES 10-1, 10-4, 10-6) The following misstatements are included in the account-
ing records of the Dillon Manufacturing Company:
1. Cash paid on accounts receivable was stolen by the mail clerk when the mail was
opened.
2. A sales invoice was miscalculated by $1,000 as a result of a key-entry mistake.
3. Cash paid on accounts receivable that had been prelisted by a secretary was stolen
by the bookkeeper, who records cash receipts and accounts receivable. He failed to
record the transactions.
4. A material sale was recorded on the last day of the year even though the goods were
not shipped until three days later.
5. Merchandise was shipped to a customer, but no bill of lading was prepared. Because
billings are prepared from bills of lading, the customer was not billed.
6. The controller approved a payment to a consulting firm owned by his sister. The con-
sulting firm did not actually perform any services for the company.
7. The shipping clerk included several additional valuable items in a shipment that were
not included in the customer’s order and were not invoiced to the customer. The ship-
ping clerk has an arrangement with the customer to share the proceeds from sales of
the additional items shipped.
a. Identify whether each misstatement is an error or fraud.
b. For each misstatement, list one or more procedures that could be implemented to
prevent it from occurring on a continuing basis.
c. For each misstatement, identify evidence the auditor can use to uncover it
