Golden Bear Golf, Inc.
1)Which “management assertions” were relevant to Paragon’s construction projects? Describe an audit procedure that Arthur Anderson could have employed to corroborate that assertion for each.
Professional auditing standards identify 5 “management assertions” that commonly underlie a set of financial statements. These 5 assertions are: occurrence, completeness, valuation/allocation, rights/obligations, and presentation/disclosure. With respect to the audit of Paragon’s construction project, some of these key assertions were overlooked by auditor Arthur Anderson. The main assertions that Anderson should have focused on for this audit include occurrence, valuation, and disclosure.
Occurrence is a relevant assertion in the audit of Paragon because it ensures that all recorded transactions have actually taken place. In order to inflate its revenues and profits, Paragon was recording revenues for nonexistent projects. More specifically, Anderson auditors failed to adequately investigate $4 million of uninvoiced construction costs. Lead partner, Michael Sullivan did not employ any procedures to determine whether these uninvoiced costs had actually been incurred as of year-end. Anderson could have demanded that Golden Bear produce invoices for these transactions and then Anderson could have confirmed these transactions with vendors/clients.
Valuation was another relevant assertion to Paragon’s construction projects because it ensures that transactions are recorded at the appropriate amounts. Paragon took advantage of the percentage-of-completion revenue recognition method that construction companies typically use to value revenue earned throughout a project. Paragon switched from its “cost-to-cost” method to what they referred to as the “earned value” method. This latter method enabled the company to rely on subjective estimates of costs incurred rather than objective criteria. Thus, enabling the company to materially misstate its...
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