Assessment 2 – Scenario / Case study
Ethical Issues in accounting
Scenario 1:
Your client has earned more income than expected. On July 2nd the client
pays for advertising and asks you to backdate the expense to the preceding
financial year. Backdating the deduction would lower the client’s immediate tax
payments. After all there is a difference of only 2 days, what should you do?
Write a report to explain what control devices could prove that you have behaved
unethically if you backdated the transaction in the accounting records? Could an
ATO audit prove that the expense occurred in July rather than in June? Why is
falsifying ATO documents both unethical and illegal. (10 marks)
Scenario 2:
Your company owes $40,000 to the commonwealth bank. The loan requires your
company to maintain a current ratio (current assets divided by current liabilities)
of 1.50 or higher. At present the company’s ratio is 1.4. At this level you are in
violation of your loan agreement. You can increase the current ratio to 1.53 by
paying off some current liabilities right before end of year. Is this ethical to do
so? What other issues might you need to be aware of in this situation? (10 marks)
Scenario 3:
You are the lead auditor at KPMG. You are undertaking an audit at Smithfield Inc
and you think this company may be understating their liabilities on the balance
sheet. The Smithfield Inc. transactions are very complex and any outsiders may
never figure this out. You ask your firm KPMG’s Standards Committee how you
should handle the situation? Their reply is ‘Require Smithfield Inc. to report all
its liabilities’. Smithfield is your most important client and they are pressuring
you to certify their liabilities. You can rationalise that Smithfield’s reported
amounts are okay. What should you do? If you decide that you will certify the
liabilities as they are, what might be the consequences of this action? (10 marks)
Audit reporting
Scenario 4:
Go to the website of the ASX, choose a company and obtain its most recent
financial report. Study the independent audit opinions contained in the financial
statements and answer the following questions.
1. What is the name of the independent auditing firm? Do you think the auditing
firm really is independent? What office of this firm signed the audit report? Is
it a qualified or unqualified audit report? How long after the year-end did the
auditors issue their opinion? (10 marks)
2. Who bears primary responsibility for the financial statements? How can you
tell? (5 marks)
3. Does it appear that the firm’s internal controls are adequate? How can you
tell? (5 marks)
4. What standard of auditing did the outside auditors use in examining the
financial statements? By what account standards were the statements
evaluated? (5 marks)
5. By how much did the firm’s cash balance (including and cash equivalents)
change during the year? What were the beginning and ending cash balances?
(5 marks)
Please Note: Student must include the link for the Company’s Annual Report/
Audit Report that was used to answer these questions. (2 marks)
Reporting performance indicators
Goal: Create an excel spreadsheet to help evaluate various options for an ethical
dilemma.
Scenario 5:
Mike Schoenfeld is vice-resident of Left Bank in Lane Cove and active in
Roseville community affairs. Schoenfeld also serves on the board of directors
of Baker Publishing Company in Chatswood. Baker is expanding and relocating
its plant. At a recent meeting the board members decided to buy land which is
being rezoned. The owner of the property Jack Fletcher is a customer of Left
Bank. Fletcher is completing a divorce and Schoenfeld knows that Fletcher is
eager to sell his property. In view of Fletchers difficult situation, Schoenfeld
believes Fletcher would accept almost any offer for the land. Realtors have
appraised the property at $5 million.
Apply the ethical judgement to help Schoenfeld decide what his role should be in
Baker’s attempt to buy the land from Fletcher.
Consider Mike’s dilemma, in addition to the facts in this problem, the board of
Baker Publishing is considering additional options. First there is a comparable
site in the same general area with and appraised value of $3.9 million. But
this location is home to a woodland fungus that may aid in the treatment of
diabetes. Second, the board is considering expanding the existing location’s
square footage by 25%. The board has received a bid of $3.2 Million on the new
construction from Schoenfeld’s brother–in–law.
Assume the following: if the board makes an offer on Fletcher’s’ property, it will
propose a price of 3.5 Million.
If an offer is made on the comparable site, it will be $3.4 Million. If the board
chooses to remodel and expand the current location, the bid price will be
accepted.
Your task is to create a spreadsheet that weighs the issues associated with each
scenario option and calculate the best choice.
After you have prepared your spreadsheet, answer these questions:
1. What additional issues did you include in your list?
2. Which option does your spreadsheet suggest the board choose?
3. For each option, which issue did you weigh the most? (In other words which
issue was most important?)
4. If you were Schoenfeld which option would you recommend to the board and
why?
(20 marks)
Assessment 2 total: 82 marks
Assessment 2
Step-by-Step:
1. Open a new Excel Spreadsheet.
2. Create a bold-faced heading for your spreadsheet that contains the following:
a. Reporting performance indicators
b. Ethical Dilemma
c. Today’s date
3. In row 5, create the following column headings:
a. Issues
b. Option 1 (Fletcher)
c. Option 2 (Comp Site)
d. Option 3 (Remodel)
e. Option 4 (Do Nothing)
4. In the issues column list the issues that should be considered in making a
decision. Add as many issues as you believe are relevant Here’s a starter list
a. Cost
b. No potential environmental issues
c. Absence of conflict of interest
d. No Exploitation of seller’s circumstances
e. Local community support
5. Next, using a range of 1 to 10 assign a score to each issue for each option.
The higher the number the more desirable it is for Schoenfeld and the Baker
Publishing board. For example, if the local community response for Option 1
is unimportant, the score should be close to 1 or 2.
6. Underneath your last row of issues create a ‘Total’ row, and add up the
numbers for each column. This number represents the score for the option.
Assuming all relevant issues have been appropriately ranked, the option with
the highest score indicates the best choice.

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