FM-BINUS-AA-FPU-78/V2R1

BINUS University

Academic Career: Class Program:

Undergraduate / Master / Doctoral *) International / Regular / Smart Program /
Global Class / BINUS Online Learning *)

√ Mid Exam  Compact Term Exam Term : Odd / Even / Compact *)

 Final Exam  Others Exam : _____________ Period (Only for BOL) : 1 / 2 *)

√ Kemanggisan  Senayan  Semarang Academic Year :

√ Alam Sutera  Bandung
√ Bekasi  Malang 2022 / 2023
Exam Type* : Onsite / Online Faculty / Dept. : School of Information
Systems / Accounting &
Information Systems
Day / Date** : Monday / 28 Nov 2022 Code - Course : ACCT6063003 -
Financial Audit II
Time** : 17:00:00 Code - Lecturer : D4757 - Ignatius Edward
Riantono
Exam :  Open Book  Open Notes BULC (Only for BOL) : N/A
Specification***  Close Book  Submit Project Class : LA16
 Open E-Book  Oral Test
Equipment*** : Student ID *** :
 Exam Booklet  Laptop  Drawing Paper – A3 Name *** :
 Calculator  Tablet  Drawing Paper – A2 Signature *** :
 Dictionary  Smartphone  Notes

) Strikethrough the unnecessary items **) For Online Exam, this is the due date ***) Only for Onsite Exam
Please insert the test paper into the exam booklet and submit both papers after the test.

The penalty for CHEATING is DROP OUT!

Requirements:
1. Explain your answer in word or pdf
2. No cheating between classmates or other students. Do it yourself and be confidences
3. Cheat or plagiarism detected will got 0 (zero) score for both or more students involved

Essay (20%)
1. Do you think the blank confirmation is included in the positive or negative confirmation?
Also explain what the advantages and disadvantages of each type of confirmation are,
along with what kind of situation it is suitable to use! (10%) LO1, LO2
2. Why is a cash account said to have a high inherent risk of possible fraud? Explain some
of the controls related to cash accounts! (10%) LO1
Case (80%)
3. Waste Management: Valuation of Fixed Assets.
Synopsis
In February 1998 Waste Management announced that it was restating its financial
statements for 1993 through 1996. In its restatement, Waste Manage- ment said that it
Verified by,

Bambang Leo Handoko (D5271) and sent to Department/Program on OCT 31, 2022
Page 1 of 5
 FM-BINUS-AA-FPU-78/V2R1
had materially overstated its reported pretax earnings by $1.43 billion. After the
announcement, the company’s stock dropped by more than 33 percent, and shareholders
lost over $6 billion.
The SEC brought charges against the company’s founder, Dean Buntrock, and
other former top officers. The charges alleged that management had made repeated
changes to depreciation-related estimates to reduce expenses and had employed several
improper accounting practices related to capital- ization policies, also designed to reduce
expenses. In its final judgment, the SEC permanently barred Buntrock and three other
executives from acting as officers or directors of public companies and required payment
from them of $30.8 million in penalties.

Upper Management Turnover

In the summer of 1996 Dean Buntrock, who founded Waste Management in 1968,
retired as CEO, but he continued to serve as chairman of the board of directors. Buntrock
was initially replaced as CEO by Phillip Rooney, who had started working at Waste
Management in 1969. By early 1997 Rooney resigned as director and CEO because of
mounting shareholder discontent.
After a new five-month search, Waste Management chose Ronald LeMay, the
president and COO of Sprint, to assume its post of chairman and CEO. Surprisingly, just
three months into his new role, LeMay quit to return to his former job at Sprint.
In addition, several other key executives who, unlike LeMay, had worked for
Waste Management for several years—including CFO James Koenig, Corporate
Controller Thomas Hau, and Vice President of Finance Bruce Tobecksen—also resigned
by the end of 1997.

Alleged Fraudulent Activities

In February 1998 Waste Management announced that it was restating its finan-
cial statements for 1993 through 1996. Although shareholders lost billions of dollars,
management had already collected salaries and bonuses based on the inflated earnings
and the resulting stock options. The SEC brought charges against founder Buntrock and
five other former top officers on charges of fraud. The SEC alleged that top management
had made several top-side adjustments in the process of consolidating the results reported
by each of their operating groups and intentionally hid these adjustments from the
operating groups themselves. These entries were routinely posted at the corporate offices
and fre- quently lacked adequate supporting documentation.
In addition, the SEC charged that upper management had employed several other
improper accounting practices designed to reduce expenses and artificially inflate
earnings.3 Specifically, to help conceal the intentional understatement of expenses, top
management allegedly used a practice known as netting, whereby one-time gains realized
on the sale or exchange of assets were used to eliminate unrelated current period operating
expenses, as well as accounting misstatements that had accumulated from prior periods.
It was also alleged that management made use of geography entries, which involved
moving millions of dollars to differ- ent line items on the income statement. Essentially,
these entries made it harder for auditors to compare operating results over time, a key
audit procedure used by Arthur Andersen. Finally, top management allegedly made or
authorized several false and misleading disclosures in financial statements.4 The
Verified by,

Bambang Leo Handoko (D5271) and sent to Department/Program on OCT 31, 2022
Page 2 of 5
 FM-BINUS-AA-FPU-78/V2R1
company’s auditor had proposed a series of action steps in early 1994 to help adjust the
improper accounting. However, rather than following these steps, top management at
Waste Management allegedly continued to manipulate results in 1994, 1995, and 1996.

Senior Executives Charged with Fraudulent Activity

A complete profile of the senior executives accused of fraud by the SEC is
provided in Table 5.6.1. Top management profited from the fraudulent accounting in at
least two ways. First, bonuses were based on the fraudulently inflated net income
amounts. And stock options increased in value as the share price increased based on the
news of inflated net income amounts. In total, the SEC brought charges of fraud against
six former top executives and calculated their ill-gotten gains, based on their bonuses,
retirement benefits, trading, and charitable giving alone.

Verified by,

Bambang Leo Handoko (D5271) and sent to Department/Program on OCT 31, 2022
Page 3 of 5
 FM-BINUS-AA-FPU-78/V2R1
Questions:
Based on your understanding of fraud risk assessment, what three condi- tions are likely to
be present when a fraud occurs (i.e., the fraud triangle)? Based on the information provided
in the case, which of these three condi- tions was most prevalent at Waste Management, and
why? (20%) LO1, LO2

4. Cash Receipts and Billing Control. The following narrative description of a company’s cash
receipts and billing system is in the auditors’ audit files: Rural Building Supplies Inc. is a
single-store retailer that sells a variety of tools, garden sup- plies, lumber, small appliances,
and electrical fixtures. About half of the sales are to walk-in customers and about half to
construction contractors. Rural employs 12 salaried sales associates, a credit manager, three
full-time clerical workers, and several part-time cash register clerks and assistant
bookkeepers. The full-time clerical workers are the cashier who handles the cash and the
bank deposits, the accounts receivable supervisor who prepares invoices and does the
accounts receivable work, and the bookkeeper who keeps journals and ledgers and sends
customer statements. Their work is described more fully in the narrative.

Control Narrative
Rural’s retail customers pay for merchandise by cash or credit card at cash registers
when they purchase merchandise. A building contractor can purchase merchandise on
account if approved by the credit manager. The credit manager bases approvals on general
knowledge of the contractor’s reputation. After credit is approved, the sales associate files a
prenum- bered charge form with the accounts receivable (A/R) supervisor to set up the
contractor’s account receivable.
The A/R supervisor independently verifies the pricing and other details on the charge
form by reference to a management-authorized price list, corrects any errors, prepares the
sales invoice, and supervises a part-time employee who mails the invoice to the contractor.
The A/R supervisor electronically posts the details of the invoice in a customer database,
and the computerized system simultaneously transmits the transaction details to the
bookkeeper. The A/R supervisor also prepares (1) a monthly computer-generated A/R
subsidiary ledger without reconciliation to the A/R control account and (2) a monthly report
of overdue accounts.
The cashier performs the cash receipts functions, including supervising the cash
register clerks. The cashier opens the mail, compares each check with the enclosed
remittance advice, stamps each check “for deposit only,” and lists the checks on the deposit
slip. The cashier then gives the remittance advices to the bookkeeper for recording. The
cashier deposits the checks each day and prepares a separate deposit of the cash from the
cash registers. The cashier retains the verified bank deposit slips (stamped and dated at the
bank) to use in reconciling the monthly bank statements. The cashier sends to the bookkeeper
a copy of the daily cash register summary. The cashier does not have access to the
bookkeeper’s journals or ledgers.
The bookkeeper receives information for journalizing and posting to the general
ledger from the A/R supervisor (details of credit transactions) and from the cashier (cash
reports). After recording the remittance advices received from the cashier, the bookkeeper
electroni- cally transmits the information to the A/R supervisor for subsidiary ledger
updating. Upon receipt of the A/R supervisor’s report of overdue balances, the bookkeeper
sends monthly statements of account to contractors with unpaid balances. The bookkeeper
authorizes the A/R supervisor to write off accounts as uncollectable six months after sending
Verified by,

Bambang Leo Handoko (D5271) and sent to Department/Program on OCT 31, 2022
Page 4 of 5
 FM-BINUS-AA-FPU-78/V2R1
the first over- due notice. At this time, the bookkeeper notifies the credit manager not to
approve additional credit to that contractor.
Required:
a. Take the role of the supervising auditor on the Rural engagement. Your assistants pre-
pared the narrative description. Now you must analyze it and identify the internal control
weaknesses. Organize them under the heading of employee job functions: credit
manager, accounts receivable supervisor, cashier, and bookkeeper. (10%) LO2
b. What the possibilities for fraud you notice in this control system? (10%) LO2

5. You are an auditor at a public accounting firm. You and your team are entrusted by Partner
to handle clients engaged in the home appliance retail business. Your client is a company
that has go public. The client's financial statement in the previous year reported a loss,
however this year reported a material gain. After you check, it turns out that the client reports
income that is not much different from the previous year, however, there can be a profit due
to the decrease in Cost of Goods Sold (COGS). The client reports that the amount of
inventory has increased drastically, even though sales have not increased and the account
payable balance is almost the same as in previous years, this has led to suspicion of a double
counting scheme in the client's inventory. In addition, when a random check was carried out
incidentally at one of the client's warehouses, it was found that many inventory were out of
date but the client did not make adjustments.
Question:
a. If you wanted to perform an analytical procedure to check the suspected occurrence of
this double counting scheme, what ratio would you calculate? Explain your answer!
(10%) LO2
b. What assertions are related to the above case? Explain your answer! (10%) LO2

6. Your client Corp A is a company engaged in the production of heavy equipment and markets
its products on a business to business (B2B) basis. Goods produced by Corp A are heavy
equipment such as: Excavators, Bulldozers, Mobile Cranes, Motor Scrapers, etc. There are
also a number of finished products in the form of heavy equipment which are self-used by
Corp A. After several years of self-use, that heavy equipment is sold, which is in the fiscal
year that you are currently auditing. Corp A recorded it as sales revenue which is increased
their operating profit.
Question:
a. Do you think that recognize it as sales revenue is correct? Explain your answer! (10%)
LO2, LO3
b. What audit objectives relate to the above case! Explain your answer! (10%) LO2, LO3

Verified by,

Bambang Leo Handoko (D5271) and sent to Department/Program on OCT 31, 2022
Page 5 of 5