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ACC 476/726 – Auditing
Discussion Case Questions
Fall 2004

General Information

The audit discussion cases are real-world examples of problems that auditors face in practice. Each individual case is brief, and every member of the class should read the case prior to class and come prepared to participate in class discussion.

Instead of the questions in the casebook, we will discuss specific issues related to the topic currently being discussed in class. The questions can usually be answered using your own opinions and the case information. The issues to be discussed for the cases follow.

Berkshire Hathaway – Tuesday, September 7, 2004

Background: The case captures the dynamics of auditor-client relations. The SEC has recently been critical of the audit profession, arguing that CPA firms are too ready to agree with clients' questionable accounting decisions. This case demonstrates what can happen to an audit firm when it stands up to an audit client over an audit issue. Actors: Warren Buffett, Peat Marwick partner in 1983, KPMG partner in 1984 (assume a new partner was involved)

1.Consider the merits of each side’s position over the accounting treatment of the proportionate stock redemption (capital gain vs. dividend). Which position do you believe is correct? Explain why. (Note: a proportionate stock redemption is a transaction in which ownership interests are redeemed proportionate to the total shares outstanding. As a result, each shareholder owns the same percentage of the company after the redemption as before. For example, assume you owned 1000 shares of a company, representing 5 percent of the total shares outstanding. The company redeemed 10 percent of the shares. After the transaction, you own 900 shares, and they would still represent 5 percent of the total shares outstanding.) 2.Do you think Peat Marwick made a good decision in demanding that Berkshire Hathaway account for the proportionate redemption as a capital gain? (Ignore whether you believe that the transaction should be treated as a dividend or capital gain.) 3.Do you think Warren Buffett overreacted in firing Peat Marwick? Consider the quote from Warren Buffet in the Berkshire Hathaway annual report in your response. (In analyzing this question, ignore whether you believe that the transaction should be treated as a dividend or capital gain.) 4.Is GAAP a precise set of concepts? As an auditor, do you prefer precise accounting standards, or should companies have some flexibility in their application of GAAP? (The issue has sometimes been referred to as rule-based versus principle-based standards.) 5.The audit firm reversed its position regarding the proportionate stock redemption from 1983 to 1984. Why? Should the auditors have considered the potential for future transactions in their decision as to how to treat the proportionate stock redemption in 1983? 6.Was it necessary to restate the 1983 financial statements to be consistent with the 1984 treatment with respect to the recording of the proportionate stock redemption? 7.The dispute in this case was over an accounting principle. Would the outcome have been different if the dispute was over the amount of an accounting estimate (for example, the allowance for doubtful accounts)?

Over

Leigh Ann Walker - Thursday, September 9, 2004 (Mark Dalton, Karen Siu, Luis Vasquez)

Background: The case highlights the importance of ethics to the CPA profession. Actors: Leigh Ann Walker, Jackie Vaughan, Don Roberts (Group 1 – Mark Dalto, Karen Siu, Luis Vasquez)

1.Do you believe Walker's actions call into question her personal integrity as an auditor? Consider whether her actions suggest whether she is likely to kitchen-table (perform work without charging the time), or prematurely sign-off (indicate work is completed without performing it). 2.Ignore that Walker was caught in the lie. Do you think her decision to lie was understandable? How else could she have addressed...
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