As the discussion stresses in 1981, USSC extended the useful lives of several of its fixed assets and adopted salvage value for many of these same assets for the first time. Are these changes permissible under generally accepted accounting principles? Assuming these changes had a material effect on USSC’s financial condition and results of operations, how should the change have affected Ernst &. Whinney’s 1981 audit opinion? Assume that the current reporting standard were in effect at the time. .
This paper outlines that the Securities and Exchange Commission was able to identify Michael S. Hope, a former partner of Ernst &. Whinney. . He did the audit of the financial statements of United States Surgical Corporation in 1980 and 1981. Such statements appeared to be steady when it comes to the earnings of the company. . However, on the contrary, the company was losing money. . This case led to some charges filed against US Surgical. . In an investigation in 1984, it turned out that there were executives alleged of engaging in illegal practices. . Though SEC had pointed out US Surgical’s to be guilty of fraud, this was not a basis of defense against Ernst &. Whinney. .Ernst &. Whinney is a combination of companies with different cultures. . Such differences raised conflicts of interest between consulting and auditing. . Client opposition and antitrust issues caused so many problems. .Should the company focused on consulting, it could have had provided a better avenue for openness. . As consulting appears to be a friend of companies, on the other hand, conservative auditing was apparently an injustice to many companies. During this time, the auditor’s report– though should have been substantiated by figures-was dependent on the subjective opinion of the auditor. If the present professional means of audit in an objective approached is used during this time, it could have had been effective if coupled with consulting services. This would help the clients progress on their financial stability. They would concentrate on their strengths and work on their limitations to balance it off.
Prepare common-sized financial statement for USSC for the period 1979-1981. Also compute key liquidity, solvency, activity, and profitability ratio for 1980 and 1981. Given these data, identify what you believe were the high-risk financial statement items for the 1981 USSC audit.
The high risk financial statement items for 1981 USSC audit is in its profitability ratio. Retirement assets are recorded to be high. However, there is no concrete basis that supports nor aligns profit to assets, subjecting it to a doubt.
What factors in the auditor-client relationship create a power imbalance in favor of the client Discuss measures that the profession could take to minimize the negative consequences of this power imbalance.
Audit reports greatly rely on the auditor. Misstatements would lead to a false report that often became the basis of taking legal actions. A declaration of financial distress is crucial as it could create damage. On the other hand, the report of an auditor is affected by the way he understands the company. Although financial distress