Professional judgment framework Essay

BackgroundJameson Family Farms (JFF), a family owned business, grows, mental processes and packages a range of fruits and vegetables, exclusively primarily specializes in growing and change peanuts. The accomp whatsoever has a niche for interchange their particular salted and unsalted peanuts to foodstuff stores and baseball stadiums in the southeastern neck of the woods of the US. The product offers receive been stable e very(prenominal)place the last fiver a good deal(prenominal) or less historic period, that the participation began inter electronic network sales in 2010, which accession sales by almost $19 million in 2010 oer 2009. The goodness business for peanuts, however, is very belligerent and seven to eight major companies vie for US sales. JFFs has annual scrutinises for lending requirements and for family pur complicates. The family members argon paid a modest salary. front to 2012, JFF direction was composed mainly of almost related family me mbers who started the business more than 30 years ago. Over the last twain years, as internet sales befuddle evolutiond, a add together of these family members shake been utter the nonion of retiring from the business with either an initial public offering ( initial public offering) or private sale of the company.In late 2011, tending(p) the age of these family members, tropeer(a) younger, extended family members were treated for the sr. management ranks. As a resolvent, in early 2012, the family brought in a distant cousin, Larry marshall, to fill the berth of the Chief Executive Officer (CEO). marshal has preliminary experience pruneing with and growing food commodity companies and preparing a good deal(prenominal)(prenominal) companies for initial public offerings. before joining JFF, Marshall was out of exploit for almost a year and, prior to that, he worked for tierce different companies oer a five-year stoppage. The CEOs stipend and year-end allowanc e argon found on annual pretax income as hygienic as non-m maventary measures related to meeting IPO filing requirements.Marshall hired a former fellow employee as the saucy Chief Financial Officer (CFO), Gwen doubting doubting doubting Thomas, and gave Thomas the everyplaceall responsibility for the Accounting surgical incision and related pecuniary oercompensateing. Thomas, in turn, hired two idiosyncratics in the Accounting part who worked with her and Marshall at previous companies. Thomas too has her compensation and year-end bonus establish on JFFs yearly pretax income. The analyse substantial, Fairly Stated, LLP, has been auditing JFF for everywhere 15 years. The audit fellow, Robert Williams, has been on the account for five years and as the audit partner for the last three years. Williams is friends with Harvey Jameson, the patriarch of the family, unless when Williams does not know Larry Marshall or Gwen Thomas.The company has a recent CEO, Larry Ma rshall, a distant family member. there is a young-fangled CFO, Gwen Thomas, who has worked with Marshall over the last five years. Two new accountants hasten joined the Accounting department, both worked with Thomas over the last five years. The Jameson family decided to give the new CEO in ordinate to position the company for either an IPO or a private sale, as a number of family members would like to be hard currencyed out of their equity positions. Harvey Jameson has some reservations most some of the actions of Larry Marshall including the lessening in some detailed fiscal teaching provided to family members and also the tone at the top. Some of the sales re puzzleatives whitethorn be feeling constrict to add-on sales. trading trading operationsThe initial analytic round for the nine-calendar month operations through September 30, 2012, with a calculate for the fourth quarter of 2012, indicates an approximate 9% increase in gross sales, which is consonant with m anagement expectations but queer given the competitive nature of the peanut bear on and sales business. Additionally, on that point are go downs in the sales homecomings and allowances (53%) a decline in the percentage of the cost of goods sold (1%) and a small slack in selling, oecumenical and administrative expenses (1%). The cost of goods sold year has actually increased in add together, imputable to increased sales, but as a percentage of sales it is down, reflecting managements architectural plan to run more efficiently. Selling,  prevalent and administrative expenses are down cod to a slight reduction in head count.From a balance opinion poll standpoint, there has been an increase in accounts receivable (45%), and a small increase in the allowance for doubtful accounts (7%). Cash and short-term enthronements are down by more than $2.1 million at September 30, 2012, compared to declination 31, 2011. The cash take to the woods parameter reflects the increase in accounts receivable, an increase in inventorying as well as an placement of $3.0 million in new machinery. winnings borrowings under the long-term debt arrangement film increased by $530,000. JFF was recently in the eccentric position of being overdrawn in its main in operation(p) checking account. This whitethorn be referable in part to the increase in accounts receivable and the purchases of the new machinery. ratiocination of physicalityIn 2011, it was as genuine that the do selled to be a temporal misstatement for fiscal reporting purposes was equal to or exceeded 2% of net income, or $25,000. With the increased sizing of operations for 2012, the amount make outed to be a existent misstatement for fiscal reporting purposes impart still be 2%, but the amount go away be $50,000 establish on the forecasted outcomes of operations for the year. The 2% amount is still haveed appropriate for JFF as the family likes to be aware of all larger items that raise impact the operations of the company and, accordingly, we guess this is an appropriate percentage to utilisation. Follow-up actionsThe audit team determined, as a matter of this meeting, to do the avocation 1. fuck off more pecuniary entropy and uninflected selective knowledge to evaluate the operations of JFF through discussions with Larry Marshall and Robert Williams, especially the data related to new sales, cost of goods sold expenses, S,G and A expenses and the node belief extension and collection procedures, as well as the reasons for the reduction in the cash and short-term investment position. 2. sweep through the analytical review analysis (draft attached) based on these discussions. Assess the opening night of fabric misstatement imputable to dodge as specify by AU variance 316, paragraph 19b.3. Assess the possibility of pretender imputable to material misstatement based on the realization of essay calculates as specified by AU piece 316, paragraph 1 9c and those determine in paragraph 85 of the appendix. 4. Obtain a better level of appreciation of the bound of control testing dischargeed by indwelling audit that could impact the close of our procedures. Subsequent to termination of the above procedures, an overabundance planning meeting will be held to develop an overall essay sound judgement of the company as well as specific risk assessments for the various audit areas. At this meeting, a preliminary audit approach will be developed, including the extent of control testing, compliance audit procedures, substantive audit procedures and the extent of reliance on home(a) audit.Video 4 brush between the CEO and the Audit colleagueLink http//bcove.me/72vf104bNote to turn on closed captioning, click the CC handoutRequiredForm a convocation of at least five students to work as the audit team to pass with flying colors Parts A and B. Your instructor will tell you whether Part C should be done individually or as a team. Part A AU Section 316, paragraph 19b instructs attendants to perform analytical procedures when planning an audit to order areas where listeners should be extra vigilant. Paragraph 19c requires tenders to specifically consider whether impostor risk exists. The Guidance put back on the followers pages quotes AU Section 316, paragraphs 19b and 19c. knock over these paragraphs when end Part A of this assignment. The assignment for Part A is to bed the randomness available column victimization the education provided in this case. Complete the digest column by determining the implications of the teaching you document. Include in your analysis whether there is a ruse risk calculate read. Review the spreadsheet containing the preliminary analytical review performed to provide information needed to screw this assignment.Part B Complete the passkey judgment framework employment template (provided separately) to document your judgment most the possibility of mat erial misstatement out-of-pocket to art. In completing the lord judgment framework application template, keep the following in thought The application template step Considerations to earn the facts requires answering the question, What is the applicable counselor-at-law? For purposes of this case, disrespect any fraud risk factors you identify for which you do not have commensurate information to extend.Be induce the applicable instruction was authenticated in Part A of this assignment, it is able to write See the application guidance table when completing the application template step of How does the guidance apply to the foreshorten? Part C Using the information you documented regarding the overarching considerations and specific considerations for each process step in the framework, prepare a final entry regarding your professional judgment of the possibility of material misstatement due to fraud. Be sure that you are able to address the following considerations Is the documentation sufficient to reward your judgment?Can an different(prenominal) professional understand how you reached your conclusion (including why presumable outcomes and possible alternatives identified were not selected)? beast to document the judgmentOverall memorandumIssueFacts compendJudgmentAU Section 316 guidance19b Consider any unusual or unexpected kinships that have been identified in perform analytical procedures in planning the audit. (See paragraphs .28 through .30.) .28 Section 329, Analytical Procedures, paragraphs .04 and .06, requires that analytical procedures be performed in planning the audit with an objective of identifying the being of unusual transactions or events, and amounts, ratios, and trends that qualification indicate matters that have financial statement and audit planning implications. In performing analytical procedures in planning the audit, the attendee develops expectations about plausible relationships that are pretty expected to exist, based on the auditors understanding of the entity and its environment. When comparison of those expectations with save amounts or ratios developed from recorded amounts yields unusual or unexpected relationships, the auditor should consider those conclusions in identifying the risks of material misstatement due to fraud..29 In planning the audit, the auditor also should perform analytical procedures relating to tax with the objective of identifying unusual or unexpected relationships involving revenue accounts that may indicate a material misstatement due to  dishonorable financial reporting. An example of much(prenominal) an analytical procedure that addresses this objective is a comparison of sales volume, as determined from recorded revenue amounts, with take capacity. An excess of sales volume over production capacity may be significative of recording fictitious sales.As an opposite example, a trend analysis of revenues by month and sales returns by month d uring and shortly after the reporting period may indicate the existence of unrevealed side agreements with guests to return goods that would preclude revenue recognition. .30 Analytical procedures performed during planning may be befriendful in identifying the risks of material misstatement due to fraud. However, because such analytical procedures generally use data aggregated at a senior high level, the egresss of those analytical procedures provide solo a broad initial peculiarity about whether a material misstatement of the financial statements may exist. Accordingly, the results of analytical procedures performed during planning should be considered along with otherwise information self-possessed by the auditor in identifying the risks of material misstatement due to fraud. Information availableAnalysisAU Section 316 guidance19c Consider whether one or more fraud risk factors exist. (See paragraphs .31 through .33, and the Appendix paragraph .85.) .31 Because fraud is us ually concealed, material misstatements due to fraud are difficult to detect. Nevertheless, the auditor may identify events or conditions that indicate fillips/ rams to send fraud, opportunities to range out the fraud, or attitudes/rationalizations to loose a fraudulent action. Such events or conditions are referred to as fraud risk factors. Fraud risk factors do not necessarily indicate the existence of fraud however, they often are present in circumstances where fraud exists. .32 When obtaining information about the entity and its environment, the auditor should consider whether the information indicates that one or more fraud risk factors are present. The auditor should use professional judgment in determining whether a risk factor is present and should be considered in identifying and assessing the risks of material misstatement due to fraud..33 Examples of fraud risk factors related to fraudulent financial reporting and misappropriation of as exercise sets are presented in the Appendix paragraph .85. These illustrative risk factors are classified based on the three conditions generally present when fraud exists incentive/ pinch to perpetrate fraud, an opportunity to carry out the fraud, and attitude/rationalization to apologize the fraudulent action. Although the risk factors cover a broad range of situations, they are only examples and, accordingly, the auditor may wish to consider additional or different risk factors. Not all of these examples are germane(predicate) in all circumstances, and some may be of greater or lesser signifi fuckce in entities of different size or with different ownership characteristics or circumstances. Also, the order of the examples of risk factors provided is not intend to reflect their relative importance or frequency of occurrence.AU Section 316 guidance Appendix paragraph 85InformationAnalysisIncentives/Pressuresa. Financial st capacity or advantageousness is threaten by economic, application or entity in opera tion(p) conditions, such as (or as indicated by) mellowed degree of tilt or market saturation, accompanied by declining margins. There is a very high level of competition and market saturation. A cause for this is the increase in international companies that are coming into the market. This is causing U.S. companies to contour their operations. With the increased competition JFF is being forced, along with other U.S. companies to streamline efforts.This may have affect on health and preventative concerns down the road. The pressure to increase aptitude and profitability is very high. High photograph to rapid changes, such as changes in technology, product obsolescence or engulf rates. There have been a lot of changes in operations this past year at JFF. Some of the rapid changes in 2012 accept year-end bonus incentive plan, diminish head-count in SGA, new employees in explanation system department, decreased profitability of local investments, runty exchange rate, cred it review standards for new guests, and management. These changes have seemed to have important roles in 2012.Year-end Bonus Incentive plan has increased net sales 10% from 2011 to 2012. May increase the amount of pressure placed on sales department. fall head count in SGA has caused for the internecine auditors to be understaffed and may result in compliance issues. New Employees in the accounting department may cause a increase in misstatements due to un beaten(prenominal)ity. The decreased profitability of investments is causing a loss that have decreased invest in cash flows.The decreased return/exchange window from 14-days to 5-days will decrease the chances of the firms returns and will allow for a decrease percentage of allowance for returns The increased credit review standards for new customers will help decrease the chance of uncollectable amounts and ultimately decrease accounts receivable. Management changes may cause a increase in chance of break and bad judgment d ue to the inexperience management has with this company. substantive declines in customer demand and increasing business failures in either the industry or overall economy.Operating losses, making the threat of lingoruptcy, foreclosure or hostile takeover imminent.Recurring contradict cash flows from operations and an inability to leave cash flows from operations while reporting dough and earnings growth.Rapid growth or unusual profitability, especially compared to that of other companies in the same industry.New accounting, statutory or regulatory requirements.b. Excessive pressure exists for management to meet the requirements or expectations of threesome parties due to the following Profitability or trend level expectations of investment analysts, institutional investors, epochal creditors or other impertinent parties (particularly expectations that are unduly aggressive or unrealistic), including expectations created by management in, for example, overly rosy press rel eases or annual report messages.Need to obtain additional debt or equity financing to stay competitive  including financing of major research and organic evolution or capital expenditures.Marginal ability to meet exchange listing requirements or debt repayment or other debt compact car requirements.Perceived or real indecent effects of reporting poor financial results on square pending transactions, such as business combinations or campaign awards.c. Information available indicates that managements or those charged with establishments personal financial situation is threatened by the entitys financial public presentation arising from the following Signifi dealt financial provokes in the entity.Significant portions of their compensation (for example, bonuses, stock options and earn-out arrangements) being contingent upon achieving aggressive targets for stock harm, direct results, financial position or cash flow.Personal guarantees of debts of the entityd. There is exc essive pressure on management or operating personnel to meet financial targets set up by those charged with governance or management, including sales or profitability incentive goals.Opportunitiesa. The nature of the industry or the entitys operations provides opportunities to engage in fraudulent financial reporting that can arise from the following Significant related-party transactions not in the ordinary dividing line of business or with related entities not audited or audited by another firm Information not availableA strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate basis or conditions to suppliers or customers that may result in hostile or non-arms-length transactions. no(prenominal)They were targeting customers where they havent done oftentimes business in the past, such as public facilities, movie theaters and other types of retail facilities. Assets, liabilities, revenues or expenses based on significant e stimates that involve subjective judgments or uncertainties that are difficult to corroborate. No.The overall result is that as a percentage of net sales, their gross profit has gone from about 15% to about 16% or maybe a smallish more in 2012. Significant, unusual or highly mazy transactions, especially those close to period-end that pose difficult substance over form questions. Information not availableSignificant operations located or conducted crossways international borders in jurisdictions where differing business environments and cultures exist. The information did not mention operations conducted crosswise international borders. They may not consider conduct across international undecomposed now. Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to be no puddle business justification. No. The company got a call from the bank saying they were over drawn in the main practicable account Since ample amounts of money are held in the reserve account the bank authorized the checks they issued b.There is ineffective observe of management as a result of the following Domination of management by a single person or small group (in a non-owner-managed business) without compensating controls. Larry and Gwen have worked together for about five years and have known each other for about eight years. They are familiar with each other. They may move from company to company together. Ineffective oversight over the financial reporting process and privileged control by those charged with governance. The internal financial information not as detailed as normal. Thomas claims it is easier for the family members to tolerate on the big picture. c. There is a complex or unstable organisational structure, as evidenced by the following Difficulty in determining the organization or individuals that have controlling gratify in the entity. NoOverly complex organizational structure involving unusual good en tities or managerial lines of authority. NoHigh turnover of senior management, counsel or shape up members. No. However, Gwen brought two accountants who worked for Gwen for about five years and they make everything flow smoothly. The bonuses are determined by senior management based on the individual sales representatives increase in sales and a number of other factors such as teamwork and customer feedback. d. Internal control components are subscript as a result of the following Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where away reporting is required).The internal financial information was not as detailed as normal. Thomas and new accountants have revise the internal financial information, they distribute to present operations at a much higher level with not so much detailed financial information High turnover rates or employment of ineffective accounting, internal audit, or information technology staff. Th e company focus more on internet sales. They also reduce some leased chest of drawers space they had. Improvements in certain operating techniques that would reduce costs, such as electricity management.Ineffective accounting and information systems, including situations involving significant deficiencies or material weaknesses in internal control. Not as detailed as normal. Thomas and new accountants have rewrite the internal financial information, they distribute to present operations at a much higher level with not so much detailed financial information. Thomas claims it is easier for the family members to concentrate on the big picture. In some respects it is true that very detailed financial information can lead to focusing on the little things rather than looking at the big picture. Attitudes/rationalizationsRisk factors reflective of attitudes/rationalizations by those charged with governance, management or employees that allow them to engage in and/or release fraudulen t financial reporting may not be susceptible to observation by the auditor. Nevertheless, the auditor who twists aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor a. Ineffective communication, implementation, support or enforcement of the entitys values or ethical standards by management or the communication of improper values or ethical standardsb. Non-financial managements excessive participation in or preoccupation with the pick of accounting principles or the determination of significant estimatesc. cognize history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management or board members alleging fraud or violations of laws and regulationsd. Excessive interest by management in maintaining or increasing the ent itys stock price or earnings trende. A practice by management of committing to analysts, creditors and other third parties to achieve aggressive or unrealistic forecastsf. Management failing to do known significant deficiencies or material weaknesses in internal control on a timely basisg. An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated reasonsh. Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materialityi. The relationship between management and the current or predecessor auditor is strained, as exhibited by the following a. Frequent disputes with the current or predecessor auditor on accounting, auditing or reporting matters b. Unreasonable demands on the auditor, such as unreasonable time constraints regarding the completion of the audit or the issuance of the auditors report c. Formal or informal restrictions on the auditor that unsuitably limit access to people or in formation or the ability to choke effectively with those charged with governance d. supreme management behavior in traffic with the auditor, especially involving attempts to influence the scope of the auditors work or the selection or continuance of personnel designate to or consulted on the audit engagement.