Professional judgment framework Essay

BackgroundJameson Family Farms (JFF), a family owned byplay, grows, processes and packages a be sick of fruits and vegetables, but primarily specializes in growing and selling peanuts. The comp any has a niche for selling their particular salted and unsalted peanuts to grocery stores and baseb each game stadiums in the southeastern region of the US. The production offerings keep up been stable all over the last quintuplet years, but the company began inter straighten out gross revenue events in 2010, which amplificationd gross sales by about $19 zillion in 2010 over 2009. The commodity business sector for peanuts, however, is precise competitive and seven to eightsomeer major companies vie for US sales. JFFs has annual analyzes for lending requirements and for family purposes. The family members argon paid a modest salary. Prior to 2012, JFF wariness was composed in the first place of remainderly related family members who started the business much than than than 30 years ago. everywhere the last two years, as internet sales have increased, a number of these family members have been voicing the nonion of retiring from the business by means of either an sign public offering (IPO) or private sale of the company.In late 2011, given the age of these family members, different younger, extended family members were numbered for the aged management ranks. As a result, in early 2012, the family brought in a distant cousin, Larry marshall, to fill the role of the Chief Executive Officer (CEO). marshal has prior experience working with and growing food commodity companies and preparing a good deal(prenominal) companies for IPOs. Before joining JFF, Marshall was out of work for almost a year and, prior to that, he worked for three diametric companies over a tail fin-year period. The CEOs compensation and year-end bonus argon base on yearly pretax income as well as non-m unmatchabletary measures related to see IPO filing requirements. Marshall engage a former fellow traveller employee as the saucily Chief Financial Officer (CFO), Gwen doubting Thomas, and gave Thomas the boilersuit responsibility for the Accounting Department and related pecuniary insurance coverage. Thomas, in turn, hired two individuals in the Accounting Department who worked with her and Marshall at anterior companies. Thomas in any case has her compensation and year-end bonus base on JFFs yearly pretax income. The canvass firm, Fairly Stated, LLP, has been scrutinizeing JFF for over 15 years. The audit collaborator, Robert Williams, has been on the account for five years and as the audit partner for the last three years. Williams is friends with Harvey Jameson, the patriarch of the family, but Williams does non know Larry Marshall or Gwen Thomas.The company has a new CEO, Larry Marshall, a distant family member. at that place is a new CFO, Gwen Thomas, who has worked with Marshall over the last five years. devil new accountants have joined the Accounting department, both worked with Thomas over the last five years. The Jameson family decided to retain the new CEO in order to position the company for either an IPO or a private sale, as a number of family members would like to be interchange out of their equity positions. Harvey Jameson has some reservations about some of the actions of Larry Marshall including the hang in some expand financial discipline provided to family members and also the tint at the top. Some of the sales re fall inatives whitethorn be feeling insisting to increase sales.OperationsThe initial analytic critical review for the nine- month trading operations through with(predicate) September 30, 2012, with a forecast for the fourth quarter of 2012, mentions an approximate 9% increase in gross sales, which is consistent with management expectations but bizarre given the competitive nature of the peanut processing and sales business. Additionally, at that place are decreases in the sales returns and allowances (53%) a decrease in the per centum of the cost of goods sold (1%) and a small decrease in selling, common and administrative expenses (1%). The cost of goods sold category has actually increased in amount, ascribable to increased sales, but as a percentage of sales it is down, reflecting managements plan to run more efficiently. Selling,general and administrative expenses are down delinquent to a slight decrement in head count.From a balance sheet standpoint, there has been an increase in accounts receivable (45%), and a small increase in the allowance for uncertain accounts (7%). Cash and short-term investments are down by more than $2.1 million at September 30, 2012, compared to December 31, 2011. The funds hang story reflects the increase in accounts receivable, an increase in inventory as well as an investment of $3.0 million in new machinery. Net borrowings under the long debt arrangement have increased by $530,000. JFF was recentl y in the unique position of being overdrawn in its main operating checking account. This whitethorn be due in part to the increase in accounts receivable and the purchases of the new machinery. Determination of corporalityIn 2011, it was determined that the amount considered to be a strong misstatement for financial insurance coverage purposes was equal to or exceeded 2% of net income, or $25,000. With the increased size of operations for 2012, the amount considered to be a substantive misstatement for financial reporting purposes leave alone still be 2%, but the amount will be $50,000 based on the forecasted results of operations for the year. The 2% amount is still considered appropriate for JFF as the family likes to be sensible of all larger items that can impact the operations of the company and, accordingly, we entrust this is an appropriate percentage to commit. Follow-up actionsThe audit team determined, as a result of this comelying, to do the next 1. Obtain mor e financial information and uninflected data to evaluate the operations of JFF through discussions with Larry Marshall and Robert Williams, peculiarly the data related to new sales, cost of goods sold expenses, S,G and A expenses and the client credit extension and collection procedures, as well as the reasons for the reduction in the bullion and short-term investment position. 2. clear the analytical review analysis (draft attached) based on these discussions. Assess the calamity of material misstatement due to subterfuge as specified by AU mathematical function 316, divide 19b.3. Assess the possibility of fraud due to material misstatement based on the identification of danger actors as specified by AU Section 316, dissever 19c and those set in paragraph 85 of theappendix. 4. Obtain a better level of understanding of the extent of control testing performed by versed audit that could impact the extent of our procedures. Subsequent to completion of the in a higher pla ce procedures, an additional cooking meeting will be held to develop an overall happen assessment of the company as well as specialised lay on the line assessments for the various audit areas. At this meeting, a preliminary audit approach will be developed, including the extent of control testing, compliance audit procedures, substantive audit procedures and the extent of reliance on internecine audit. characterisation 4 Meeting between the CEO and the Audit Partner connector http//bcove.me/72vf104bNote to turn on closed captioning, click the CC outletRequiredForm a group of at least five students to work as the audit team to masterful Parts A and B. Your instructor will tell you whether Part C should be through individually or as a team. Part A AU Section 316, paragraph 19b instructs attendees to perform analytical procedures when mean an audit to spot areas where attendants should be extra vigilant. Paragraph 19c requires attenders to specifically consider whether fra ud risk exists. The Guidance Table on the followers pages quotes AU Section 316, paragraphs 19b and 19c. fence these paragraphs when completing Part A of this assignment. The assignment for Part A is to masterful the cultivation available column using the information provided in this case. Complete the abridgment column by determining the implications of the information you document. Include in your analysis whether there is a fraud risk factor present. review article the spreadsheet containing the preliminary analytical review performed to provide information needed to complete this assignment.Part B Complete the professional judgment framework natural covering templet (provided separately) to document your judgment about the possibility of material misstatement due to fraud. In completing the professional judgment framework application template, nutriment the following in mind The application template step Considerations to fulfil the facts requires answering the question , What is the applicable guidance? For purposes of this case, disregard any fraud risk factors you recognise for which you do non have adequate information to mastermind.Because the applicable guidance was documented in Part A of thisassignment, it is sufficient to lay aside See the application guidance table when completing the application template step of How does the guidance apply to the issue? Part C victimisation the information you documented regarding the overarching considerations and specific considerations for each process step in the framework, prepare a final memorandum regarding your professional judgment of the possibility of material misstatement due to fraud. Be sure that you are able to address the following considerations Is the documentation sufficient to support your judgment?Can some other professional understand how you reached your conclusion (including why reasonable outcomes and possible alternatives identified were not selected)? Tool to document the judgmentOverall memorandum completeFactsAnalysisJudgmentAU Section 316 guidance19b Consider any uncommon or unlooked-for human relationships that have been identified in do analytical procedures in planning the audit. (See paragraphs .28 through .30.) .28 Section 329, Analytical Procedures, paragraphs .04 and .06, requires that analytical procedures be performed in planning the audit with an objective of identifying the founding of unusual transactions or events, and amounts, ratios, and panaches that might indicate matters that have financial statement and audit planning implications. In performing analytical procedures in planning the audit, the attendee develops expectations about plausible relationships that are reasonably expected to exist, based on the auditors understanding of the entity and its environment. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts yields unusual or unexpected relationships, the auditor shou ld consider those results in identifying the risks of material misstatement due to fraud..29 In planning the audit, the auditor also should perform analytical procedures relating to revenue with the objective of identifying unusual or unexpected relationships involving revenue accounts that may indicate a material misstatement due to ambidextrous financial reporting. An example of such an analytical procedure that addresses this objective is a comparison of sales volume, as determined from recorded revenue amounts, with payoff capacity. An excess of sales volume over production capacity may be indicative of recording fictitious sales.As another example, a trend analysis of revenues by month and sales returns by month during and shortly after the reporting period may indicate the existence of undisclosed side agreements with clients to return goods that would preclude revenue recognition. .30 Analytical procedures performed during planning may be helpful in identifying the risks o f material misstatement due to fraud. However, because such analytical procedures generally use data aggregated at a high level, the results of those analytical procedures provide unless a broad initial indication about whether a material misstatement of the financial statements may exist. Accordingly, the results of analytical procedures performed during planning should be considered on with other information gathered by the auditor in identifying the risks of material misstatement due to fraud. Information availableAnalysisAU Section 316 guidance19c Consider whether one or more fraud risk factors exist. (See paragraphs .31 through .33, and the Appendix paragraph .85.) .31 Because fraud is usually concealed, material misstatements due to fraud are difficult to detect. Nevertheless, the auditor may identify events or conditions that indicate bonuss/pressures to carry through fraud, opportunities to carry out the fraud, or attitudes/rationalizations to unloose a fraudulent action . Such events or conditions are referred to as fraud risk factors. Fraud risk factors do not necessarily indicate the existence of fraud however, they often are present in set where fraud exists. .32 When welcomeing information about the entity and its environment, the auditor should consider whether the information indicates that one or more fraud risk factors are present. The auditor should use professional judgment in determining whether a risk factor is present and should be considered in identifying and assessing the risks of material misstatement due to fraud..33 Examples of fraud risk factors related to fraudulent financial reporting and misappropriation of assets are presented in the Appendix paragraph .85. These illustrative risk factors are classified based on the three conditions generally present when fraud exists incentive/pressure to perpetrate fraud, an opportunity to carry out the fraud, and attitude/rationalization to justify the fraudulent action. Although the ri sk factors cover a broad range of situations, they are only examples and, accordingly, the auditor may wish to consider additional or different risk factors. Not all of these examples are relevant in all circumstances, and some may be of greater or lesser moment in entities of different size or with different ownership characteristics or circumstances. Also, the order of the examples of risk factors provided is not intended to reflect their relative grandness or frequency of occurrence.AU Section 316 guidance Appendix paragraph 85InformationAnalysisIncentives/Pressuresa. Financial st superpower or favourableness is threatened by economic, industry or entity operating conditions, such as (or as indicated by) High degree of emulation or market saturation, come with by declining margins. there is a very high level of competition and market saturation. A cause for this is the increase in foreign companies that are coming into the market. This is causing U.S. companies to streamlin e their operations. With the increased competition JFF is being forced, along with other U.S. companies to streamline efforts.This may have affect on health and safety concerns down the road. The pressure to increase efficiency and profitability is very high. High vulnerability to rapid changes, such as changes in technology, product obsolescence or evoke rates. There have been a lot of changes in operations this past year at JFF. Some of the rapid changes in 2012 include year-end bonus incentive plan, decreased head-count in SGA, new employees in accounting department, decreased profitability of local investments, shortened alter rate, credit review standards for new customers, and management. These changes have seemed to have important roles in 2012.Year-end Bonus Incentive plan has increased net sales 10% from 2011 to 2012. May increase the amount of pressure placed on sales department. Decreased head count in SGA has caused for the internal auditors to be understaffed and may result in compliance issues. pertly Employees in the accounting department may cause a increase in misstatements due to unfamiliarity. The decreased profitability of investments is causing a loss that have decreased invest in cash flows.The decreased return/ reciprocation window from 14-days to 5-days will decrease the chances of the firms returns and will allow for a decrease percentage of allowance for returns The increased credit review standards for new customers will help decrease the chance of uncollectable amounts and ultimately decrease accounts receivable. Management changes may cause a increase in chance of error and great(p) judgment due to the inexperience management has with this company. monumental declines in customer demand and increasing business failures in either the industry or overall economy.Operating losses, making the threat of bankruptcy, foreclosure or hostile putsch imminent.Recurring negative cash flows from operations and an inability to generate cas h flows from operations while reporting earnings and earnings maturation.Rapid growth or unusual profitability, especially compared to that of other companies in the same industry.New accounting, statutory or regulatory requirements.b. Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following Profitability or trend level expectations of investment analysts, institutional investors, significant creditors or other orthogonal parties (particularly expectations that are unduly aggressive or fantastic), including expectations created by management in, for example, as well optimistic press releases or annual report messages.Need to obtain additional debt or equity pay to stay competitive including financing of major research and development or capital expenditures.Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements.Perceived or real adverse effects of reporting poor f inancial results on significant pending transactions, such as business combinations or contract awards.c. Information available indicates that managements or those charged with governances personal financial situation is threatened by the entitys financial performance arising from the following material financial interests in the entity.Significant portions of their compensation (for example, bonuses, neckcloth options and earn-out arrangements) being particular upon achieving aggressive targets for stock price, operating results, financial position or cash flow.Personal guarantees of debts of the entityd. There is excessive pressure on management or operating staff office to meet financial targets set up by those charged with governance or management, including sales or profitability incentive goals.Opportunitiesa. The nature of the industry or the entitys operations provides opportunities to engage in fraudulent financial reporting that can arise from the following Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited by another firm Information not availableA strong financial presence or ability to dominate a certain industry sector that allows the entity to arrange terms or conditions to suppliers orcustomers that may result in improper or non-arms-length transactions. NoneThey were targeting customers where they havent done much business in the past, such as public facilities, movie theaters and other types of retail facilities. Assets, liabilities, revenues or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate. No.The overall result is that as a percentage of net sales, their gross profit has gone from about 15% to about 16% or maybe a slender more in 2012. Significant, unusual or highly complex transactions, especially those close to period-end that pose difficult substance over form questions. Informat ion not availableSignificant operations located or conducted across outside(a)istic borders in jurisdictions where differing business environments and cultures exist. The information did not mention operations conducted across international borders. They may not consider conduct across international right now. Significant bank accounts or subsidiary or subsection operations in tax-haven jurisdictions for which there appears to be no clear business justification. No. The company got a call from the bank saying they were over drawn in the main operational account Since ample amounts of property are held in the reserve account the bank authorized the checks they issued b.There is ineffectual monitoring of management as a result of the following Domination of management by a single person or small group (in a non-owner-managed business) without compensating controls. Larry and Gwen have worked together for about five years and have known each other for about eight years. They are familiar with each other. They may move from company to company together. Ineffective oversight over the financial reporting process and internal control by those charged with governance. The internal financial information not as detailed as normal. Thomas claims it is easier for the family members to concentrate on the well-favored picture. c. There is a complex or unstable governmental structure, as evidenced by the following Difficulty in determining the organization or individuals thathave controlling interest in the entity. No likewise complex organizational structure involving unusual legal entities or managerial lines of authority. NoHigh turnover of of age(p) management, counsel or table members. No. However, Gwen brought two accountants who worked for Gwen for about five years and they make everything flow smoothly. The bonuses are determined by senior management based on the individual sales representatives increase in sales and a number of other factors such as teamwor k and customer feedback. d. sexual control components are deficient as a result of the following Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where external reporting is required).The internal financial information was not as detailed as normal. Thomas and new accountants have revised the internal financial information, they distribute to present operations at a much higher level with not so much detailed financial information High turnover rates or employment of ineffective accounting, internal audit, or information technology staff. The company focused more on internet sales. They also reduce some leased office space they had. Improvements in certain operating techniques that would reduce costs, such as electricity management.Ineffective accounting and information systems, including situations involving significant deficiencies or material weaknesses in internal control. Not as detailed as normal. Thomas and new ac countants have revised the internal financial information, they distribute to present operations at a much higher level with not so much detailed financial information. Thomas claims it is easier for the family members to concentrate on the big picture. In some respects it is true that very detailed financial information can lead to focusing on the little things rather than looking at the bigger picture. Attitudes/rationalizationsRisk factors reflective of attitudes/rationalizations by those charged with governance, management or employees that allow them to engage in and/or justify fraudulent financial reporting may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existenceof such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor a. Ineffective communication , implementation, support or enforcement of the entitys set or ethical standards by management or the communication of malapropos values or ethical standardsb. Non-financial managements excessive familiarity in or preoccupation with the selection of accounting principles or the close of significant estimatesc. Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management or board members alleging fraud or violations of laws and regulationsd. Excessive interest by management in maintaining or increasing the entitys stock price or earnings trende. A practice by management of committing to analysts, creditors and other third parties to achieve aggressive or unrealistic forecastsf. Management failing to correct known significant deficiencies or material weaknesses in internal control on a timely innovationg. An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasonsh. Recurring attempts by management to justify peripheral or inappropriate accounting on the basis of materialityi. The relationship between management and the current or predecessor auditor is strained, as exhibited by the following a. Frequent disputes with the current or predecessor auditor on accounting, auditing or reporting matters b. Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of theauditors report c. Formal or informal restrictions on the auditor that inappropriately limit access to people or information or the ability to communicate effectively with those charged with governance d. Domineering management behavior in dealing with the auditor, especially involving attempts to influence the scope of the auditors work or the selection or continuance of personnel assigned to or consulted on the audit engagement.