The Baptist Foundation of Arizona Case 6.6 The Baptist Foundation of Arizona Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

BFA Case Relevant Technical Knowledge The Conservatism Constraint Accountants must take care to not overstate assets or revenues and to not understate liabilities and expenses. As such, when faced with a choice between two different solutions, accountants should choose the path that is less likely to overstate assets or revenues and/or understate liabilities and expenses.

BFA Case Relevant Technical Knowledge PCAOB AS No. 5 – Paragraph 14 When auditors evaluate the system of internal control, they need to evaluate whether the identified controls adequately address the risks of material misstatement due to fraud. Indeed, because of their sensitive nature, the standard explicitly mentions controls related to “significant, unusual transactions, particularly those that result in late or unusual journal entries.”

BFA Case Relevant Technical Knowledge PCAOB AS No. 13 - Paragraphs 13 & 15 in “the audit of financial statements, the auditor should perform substantive procedures, including tests of details that are specifically responsive to the assessed fraud risks.” “the auditor should perform audit procedures to specifically address the risk of management override of controls” which include “examining journal entries and other adjustments for evidence of possible material misstatement” and “evaluating the business rationale for significant unusual transactions”

BFA Case Relevant Technical Knowledge PCAOB AS #12 – Paragraph #7 “The auditor should obtain an understanding of the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement.”

BFA Case Relevant Technical Knowledge AU Section 334 – Paragraph #4 “the auditor should be aware of the possible existence of material related party transactions that could affect the financial statements.”

BFA Case Relevant Technical Knowledge AU Section 334 – Paragraph #5 “in determining the scope of work to be performed with respect to possible transactions with related parties, the auditor should obtain an understanding of management responsibilities and the relationship of each component to the total entity. He should consider controls over management activities, and he should consider the business purpose served by the various components of the entity.”

BFA Case Relevant Technical Knowledge PCAOB AS #9 – Paragraph #7 “The nature and extent of planning activities that are necessary depend on the size and complexity of the company, the auditor's previous experience with the company, and changes in circumstances that occur during the audit.”

BFA Case Relevant Technical Knowledge PCAOB AS #12 – Paragraphs #23-25 “because of its importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company.” The control environment is influenced heavily by a company’s management team and is therefore often referred to as “the tone at the top”.

BFA Case Relevant Technical Knowledge PCAOB AS No. 12 – Paragraph #24 “obtaining an understanding of the control environment includes assessing: 1) Whether management's philosophy and operating style promote effective internal control over financial reporting; 2) Whether sound integrity and ethical values, particularly of top management, are developed and understood; and 3) Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control.”

BFA Case Relevant Technical Knowledge SARBOX Section 301 requires that the “audit committee of an issuer shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer.”

BFA Case Relevant Technical Knowledge PCAOB AS No. 12 – Paragraph #56 According to this paragraph, the auditor should make inquiries of both the management team and the audit committee about whether either group had received tips or complaints regarding the company's financial reporting through the whistleblower program.

BFA Case Relevant Technical Knowledge PCAOB AS No. 10 – Paragraph #5 The engagement partner should “direct engagement team members to bring significant accounting and auditing issues arising during the audit to the attention of the engagement partner or other engagement team members performing supervisory activities so they can evaluate those issues and determine that appropriate actions are taken.”

BFA Case Relevant Technical Knowledge SARBOX Section 401 Section 401 of SOX requires that each set of financial statements (and related disclosures), in accordance with U.S. GAAP, shall disclose all material “off-balance sheet transactions” and “other relationships” with “unconsolidated entities” that may have a “material current or future effect on the financial condition of the issuer.”

BFA Case Relevant Technical Knowledge PCAOB AS No. 12 – Paragraph #52 On each engagement, the team should discuss the possibility of fraud. “The discussion among the key engagement team members about the potential for material misstatement due to fraud should occur with an attitude that includes a questioning mind, and the key engagement team members should set aside any prior beliefs they might have that management is honest and has integrity.”

BFA Case Relevant Technical Knowledge PCAOB AS #5 Paragraph # 28 – “relevant assertions are those financial statement assertions that have a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated.” Paragraph #30 – “what could go wrong?”

BFA Case Relevant Technical Knowledge PCAOB AS #5 – Paragraph #39 “the auditor should test those controls that are important to the auditor's conclusion about whether the company's controls sufficiently address the assessed risk of misstatement to each relevant assertion.”

Epilogue - BFA BFA filed for Chapter 11 bankruptcy protection BFA filed suit against Arthur Andersen for negligence, causing the accounting firm’s bankruptcy

Epilogue - BFA Arthur Anderson paid $217 million to settle investor lawsuits Former president William Pierre Crotts and chief legal counsel Thomas Grabinski convicted of three counts of fraud