3air_im12 - 40 CHAPTER 12 Finance and Investment Cycle...

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40 CHAPTER 12 Finance and Investment Cycle LEARNING OBJECTIVES Review Checkpoint s Exercises and Problems Cases 1. Describe the finance and investment cycle, including typical source documents and controls. 1, 2, 3, 4, 5, 6, 7, 8, 9 40 26 2. Give examples of test of controls procedures for obtaining information about the controls over debt and owner equity transactions and investment transactions. 10, 11, 12, 13, 14 40 53, 54 3. Describe some common errors, irregularities, and frauds in the accounting for capital transactions and investments, and design some audit and investigation procedures for detecting them. 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25 41, 42, 43, 44, 45, 46, 47, 48, 49, 50 27, 51, 52, 53, 54, 55, 56 POWERPOINT SLIDES PowerPoint slides are included on the website. Please take special note of: * Finance and Investment Cycle SOLUTIONS FOR REVIEW CHECKPOINTS 12.1 Reference is to the AM International vignette in the text. According to GAAP, errors should be given prior period adjustment treatment. However, "errors" are defined as mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared. A "change in estimate" is said to result from new information or subsequent developments and accordingly from better insight or improved judgment. Also, a change from an accounting principle that is not GAAP to one that is GAAP is a correction of an error. These definitions are cast in terms that suggest innocent error instead of fraud. Literal translation of the words (mathematical mistakes, mistakes in application, oversight or misuse of facts) might be taken to imply that fraudulent overstatement of assets is an "error." However, the change in estimate words (new information or subsequent developments) also seem to apply. The prior period adjustment treatment (versus alternative change in estimate treatment) is not entirely clear from a reading of GAAP. Students can argue about it; practicing accountants do.
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41 “Subsequently discovered information" can result in recall, correction, and reissuance of financial statements. This suggests prior period adjustment accounting in the form of restatement of prior financial statements. In practice, this treatment has been seen with respect to fraudulently misstated financial statements when the fraud is subsequently discovered and the prior financial statements can be fixed timely. (Sometimes, the auditors just recall the report, and a new report never emerges from the wreckage!) 12.2 Reference is to the Park 'N Fly vignette in the chapter. This question highlights the problem of specific quantitative criteria in accounting standards. A desperate management can craft transactions to meet the letter of the rules while violating their spirit. Some auditors would insist on capitalization and liability recognition; others would breathe a sigh of
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This note was uploaded on 02/08/2012 for the course IAF IAF520 taught by Professor Aldcorn during the Winter '08 term at Seneca.

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3air_im12 - 40 CHAPTER 12 Finance and Investment Cycle...

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