C213 Study Guide - Solution.docx

What percentage of reported receivables will be

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what percentage of reported receivables will be collected or how long equipment and other assets will last. Frauds - Result from intentional errors. Fraudulent financial reporting occurs when management chooses to intentionally manipulate the financial statements to serve their own purposes, such as meeting Wall Street’s earnings forecasts as was the case with WorldCom . Recommend the proper internal controls to prevent accidental loss or intentional theft or fraud for a particular situation. The text doesn’t provide sufficient detail to cover this learning objective. Identify motivations and common techniques used to manage earnings. Earnings management occurs when management attempts to manipulate the impression the financial statements present to users. They can change the timing of transactions, use aggressive accounting procedures, and alter transactions to achieve these goals. Earnings management, exclusive of using fraud to management earnings, is a gray area where there are no clear ethical rules to determine when it is ethical or not. Managers manage earnings to: Meet internal targets – sometimes people that can influence the financial results are also given bonuses based on those results, which gives those employees an incentive to manage earnings. Meet external expectations – Most publicly traded firms are followed and stock analysts who make predictions about future performance for their clients. Firms try to guide these analysts’ expectations to prevent surprises that might lower the firm’s stock price. 22
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Income smoothing – Investors like predictable earnings because they make determining the firm’s future performance easier to predict. Managers many manage earnings to smooth out fluctuations that make future earnings harder to predict. Window dressing for an IPO or a loan – If a firm plans to raise outside capital by selling stock or borrowing money, the firm’s management has an incentive to make the financial statement results more attractive to those outside creditors and investors. Explain the effect of the Sarbanes-Oxley Act on financial reporting. Congress passed the Sarbanes-Oxley (SOX) Act in 2002 to increase oversight of audits of public companies. It major provision established increased regulation on the firm’s management and the auditors of those companies. Main Provisions That Affect Auditors SOX established the Public Company Accounting Oversight Board (PCAOB). The word “accounting” is a bit deceptive since the PCAOB’s primary responsibilities involve regulating auditors. Its three main tasks are: to register accountings who audit public companies to and monitor and discipline them to sets the standards auditors have to use when auditing public companies. In addition to setting up the PCAOB, SOX also placed additional restrictions of auditors of public companies. These include: Limits on the non-auditing services the auditor can provide to their audit clients.
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  • Spring '16
  • Kenneth Cassell
  • Balance Sheet, Generally Accepted Accounting Principles

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