Case 1 - ISSUES IN ACCOUNTING EDUCATION Vol 24 No 2 May...

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219 ISSUES IN ACCOUNTING EDUCATION Vol. 24, No. 2 May 2009 pp. 219–236 Sky Scientifc, Inc.: An Auditing Minefeld Stephen M. BeMiller, Randy Wirtz, and Deborah L. Lindberg ABSTRACT: In 1994, Sky Scientifc, Inc. dramatically overstated assets and under- stated expenses in its fnancial statements. A Securities and Exchange Commission (SEC) investigation into those fnancial statements led to charges being fled against both the company and its auditors. This case takes a detailed look into the independent audit oF Sky’s fnancial statements For the purpose oF understanding how the auditors Failed to see the extent to which Sky’s fnancial reporting was misleading and to ade- quately challenge the assertions presented in the fnancial statements beFore Sky fled them with the SEC. This case provides an opportunity to examine numerous issues related to the audit engagement process, including audit planning, the evaluation oF management representations, the audit evidence process, and auditors’ going-concern judgments. The roles and responsibilities oF the concurring auditor and an outside specialist are also discussed. Keywords: Sky Scientifc; mining; auditing standards; audit Failures; overstatement oF assets. INTRODUCTION S ky Scientifc, Inc. (Sky) was Founded by William Dorow in 1991 as a privately held mining and processing company, which purportedly operated fve mining properties in the western United States (SEC 1999). 1 In 1993 the company went public with a market capitalization oF $2 million. At that time American Capital Network (ACN), the frm hired to promote Sky’s stock, began circulating tout sheets 2 under the titles ‘‘Wall Street Watch’’ and ‘‘Chicago ±inancial Services, Inc.’’ to generate interest in the company and its stock. These eFForts were successFul as its stock price increased 600 percent, From $0.75 to $4.50 per share, and its market capitalization rose to $80 million. Sky reported assets oF $69.7 million and estimated revenues oF $31 million in 1994 (SEC 1999). The reality oF Sky’s fnancial position was much diFFerent than what was reported. Assets reported on the balance sheet in 1994 were overstated by at least 95 percent, since in reality Sky was a company with little to no cash, questionable investments in certifcates oF deposit (CDs), no revenues, and substantial doubt about its ability to continue as a going concern. Moreover, none oF the mines would be operating For several years. Barry Stephen M. BeMiller is a Junior Auditor at the Illinois Agricultural Auditing Association, Randy Wirtz is a Staff Accountant at Caterpillar, Inc., and Deborah L. Lindberg is a Pro- fessor at Illinois State University. 1 The material presented in this case was drawn From several SEC accounting and auditing enForcement releases and administrative proceedings; since some oF the inFormation From these sources is overlapping, reFerences provided in the text oF this case will be the primary source where the inFormation was Found.
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This note was uploaded on 02/19/2012 for the course ACCT Audit taught by Professor Niki during the Spring '12 term at Saint Mary's University Texas.

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Case 1 - ISSUES IN ACCOUNTING EDUCATION Vol 24 No 2 May...

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