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RSM 323 - Case Assignment _2 Practice - Suggested Solution

RSM 323 - Case Assignment _2 Practice - Suggested Solution...

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LH Fall 2010 Page 1 of 3 RSM 323 Case Assignment #2 Practice Suggested Solution To: Partner, Black & Lupin Chartered Accountants From: CA/CGA/CMA, External Auditor Re: Super Circuits Limited (“SCL” ) Updated Audit Planning Memo Bias Lavender Brown has expressed her intention to make SCL a public company in the near future. As a result, there is a bias for SCL to make the Financial Statements look as attractive as possible (i.e. higher revenues and income as Lavender believes this will attract investors) in order to obtain more i nterest in SCL’s shares. There is reason to believe that this bias is at play in the Financial Statements for the following reasons: o As part of our interim review, we note that revenues for the 10 month period ended April 30, 2010, are already very close to the full-year revenue figures for fiscal 2009. This may be a result of Lavender ’s desire to increase revenue. o During the year, the company changed its revenue recognition policy for maintenance contracts. This change in policy is consistent with SCL ’s b ias to overstate results. o It is SCL ’s standard practice to obtain evidence of customer acceptance of the delivery and installation of product revenue before recognizing revenue. However, interim work revealed that revenue of $640,000 was recorded prior to obtaining customer sign-off. This issue may also be evidence of SCL ’s desire to increase revenue , despite the fact that they have represented the error was due to new technicians. o The company has begun a new line of business related to transaction fee revenue generated from the sale of ATM machines. SCL is currently recording 100% of the transaction fee revenue on a gross basis, with an associated expense for the 60% attributable to other parties. While there is no bottom line impact, SCL is misrepresenting revenue growth. This method of recognizing revenue may be evidence of SCL ’s bias to increase revenue. o The new package also appears to generate numbers that would result in higher revenue and net income numbers than the old system. Therefore, there may a bias in the new sys tem to show favourable results since all differences seem to be in favour of SCL’s bias.
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