Cal Temp Cal Temp Services, Inc.Services, Inc.
Group 2AGroup 2AElayne Concepcion
Tania GarcesSarahy Pagan
Accounting Accounting IssuesIssues
GAAP - revenue and accounts receivable recognition
CTS revenue recognition policies Overstatement of accounts receivable Other balance sheet accounts Impact of adjustments
GAAP - Revenue GAAP - Revenue RecognitionRecognition
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
GAAP - Accounts GAAP - Accounts ReceivableReceivable
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
CTS – Revenue CTS – Revenue Recognition Recognition
PoliciesPolicies
Revenues for engineering services are recognized upon completion (realization) of projects, which are less than a year
In accordance with GAAP
Did they comply? …Did they comply? …NO!!!!NO!!!!
Example – Vortext, Inc. Recognized revenue on December
31, 2000 based on a REQUEST FOR A QUOTE.
Did not even obtain a PO
Overstatement of Overstatement of accounts receivableaccounts receivable
As of December 31, 1999 Overstated by $253,427
As of December 31, 2000 Overstated by $666,242
Other balance sheet Other balance sheet accountsaccounts
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.
Impact of AdjustmentsImpact 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
Litigation Litigation Consulting Consulting
Engagement IssuesEngagement Issues Evidence of collateral reporting fraud Apparent motives of management Damage to Second Union
Evidence of collateral Evidence of collateral reporting fraudreporting 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
Additional EvidenceAdditional 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
Apparent motives of Apparent motives of managementmanagement
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
Damage to Second UnionDamage 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
Auditing Auditing IssuesIssues
Distinction between error & fraudEvaluation of management’s actionAuditor’s responsibilityRisk factors (red flags)M&S reliance on management Information availability
Error vs FraudError vs Fraud Error are unintentional misstatements
or omission in financial statements Fraud, in contrast, arises form
deceitful financial reporting and from misappropriation of assets
IntentIntent is the primary difference between an error and a fraud
Evaluation of Evaluation of management’s actionmanagement’s action
CTS committed fraud Management’s intention was to deceive
financial statement users, specifically Second Union
Altered records and documents Misrepresenting transactions
Auditor’s responsibilityAuditor’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
Risk factorsRisk 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
M&S reliance on managementM&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
Information availabilityInformation availability
Collection problem or a softening of the credit requirements
Problems with cash flows Riskier line of credit
The End