Auditing and Key Control Essay

Submitted By nahianomar
Words: 1367
Pages: 6

1) In 1990’s WorldCom was recognized as a global communication provider, it has its operations running in more than 65 countries. It’s most charismatic CEO Ebber’s main aim for WorldCom was not to capture market share or be global but was to be no.1 stock on Wall Street. It involved itself in mergers and acquiring small long distance companies and consolidating third-tier long distance carriers with larger market share. WorldCom lowered line costs (the company’s largest single expense) by capitalizing them as “prepaid capacity” and reversing allowances without sufficient justification. The corporate motive for this fraud was to meet Wall Street’s expectations for growth and also to hide real, deteriorating operative results, which were caused by the bursting dot-com and telecom bubbles. But there were individual drivers also: personal financial enrichment through misappropriation of corporate assets (especially cash) and a mix of other personal targets such as the improvement of social and business status (for example, CEO, CFO), the advancement of a professional career (for example, CFO, chief controller), and job security among several senior accountants. More over after some follow-up meeting, Mr. Ebber assured everyone to the 150 million will come as savings from the disputed billing to the WorldCom. Furthermore, the senior managers were urged to maintain the 42% E/R ratio in any circumstances whatsoever. The operating expenses, costs were shifted from income statement to balance sheets thus to increase their reported pre-tax income and earnings per share. Since the operating expenses are not recognized under income statement and do not immediately reduce the company’s pre-tax income it appeared to seem that mollifying markets weren’t reducing the company’s profitability. The actual was the vice versa. However, WorldCom managed to capitalize $771 million of non-revenue generating line expenses into an asset account called “construction in progress”. This led to cause high net income where actually it wasn’t, also resulted from de -recognition of expenses for unused network capacity. In my point of view, Journal entries in the amount of $150 million and $771 million, respectively, were made by two General Accounting employees – Dan Renfroe and Angela Walter—without detailed support. This is not a correct accounting practice as it is against the basic principles of bookkeeping and accounting. This is because detailed support in the form of documentation is the key element in providing support to a journal entry and explains the reason or purpose why the journal entry was created in the first place. Such support is very important and relevant from the point of view of the persons reviewing the journal entry and those intending to approve the journal entry. Most importantly, it is extremely relevant and essential from the point of view of external auditors of the company or business. Thus, such support or related documentation enables the reviewer or approver to assess and acknowledge the completeness, reasonableness, accuracy, and appropriateness of the journal entry.

5) To develop the controls Sarbanes-Oxley requires, CPAs need to be able to identify key control exceptions. They also must correctly apply a familiar concept—materiality. The Sarbanes-Oxley Act of 2002 has put demands on management to detect and prevent material control weaknesses in a timely manner. To help management fulfill this responsibility, CPAs are creating monthly key control processes to assess and report on risk. When management finds a key control does not meet the required minimum quality standard, it must classify the result as a key control exception. CPAs need to be able to identify key control exceptions and apply materiality to determine their financial impact. For many years accountants have used quantitative estimates to help them identify potentially material transactions and events. Working materiality levels or quantitative estimates…