Accounting Essay. Accounting Essay. for Week 5 and select “Case Study #1” Follow the instructions on that site to submit your paper.
Details of Your Case Study #1 Assignment
Your Case Study is Major Case 6, Waste Management, starting on page 579 in your text. Use the facts
of the case as presented in your textbook. However, do not use the questions at the end of the case on
page 587. Instead, use the following questions to guide your discussion:
1. From the modern moral philosophies in Chapter 1, as summarized in Exhibit 1.3, which ethical
judgment did Waste Management’s management follow and which ethical judgement did Arthur
Andersen follow in the decisions they made in this case? Discuss.
2. From Chapter 2, which Stage (not level, but Stage) of Kohlberg’s Stages of Moral Development
did Waste Management’s management act and which Stage did Arthur Andersen act in the
decisions they made in this case? Discuss.
3. From Chapter 3, what type of fraud was this? Occupational fraud or financial statement fraud?
Discuss the aspects of corporate governance that were missing in the Waste Management Case.
4. From Chapter 4, which Sections of the AICPA Code of Professional Conduct (the Code) did the
auditors not follow in the Waste Management case? Specify the Section Numbers of the
Sections that were not followed. Discuss how each of these Section were not followed and what
the auditors should have done to be in compliance with the Code.
5. In the Lectures for the first four weeks I have noted in brackets [ ] words that I identified as key
words or phrases that would be used repeatedly throughout this course. Identify at least four of
those key words or phrases that are especially relevant to the Waste Management case and
discuss why and how these words or phrases are important in this case.
Background on Adjusting Journal Entries (AJEs) and Passed Adjusting Journal Entries (PAJEs)
A common practice in auditing is to propose adjusting journal entries (AJEs) to clients, adjusting entries
to be made to the financial records in order for the financial statements to be in conformity with
generally accepted accounting principles (GAAP).
Many students who do not have audit experience are confused as to why recommending AJEs does not
violate one of the threats to independence in the AICPA Code of Professional Conduct. The key
element here is that auditors recommend AJEs to correct errors in accounting or to take a different
position that auditors can accept as being conformity with GAAP than a position management has taken
that the auditors believe is not in conformity with GAAP. The auditors do not make the decision to
record or to not record the AJEs. The company’s management makes the decision to record or to not
record the AJE. Once management has made their decision, it is then the auditors’ role to decide
whether the auditors should give a “clean” or unqualified opinion on the fair presentation of the financial
statements in conformity with GAAP.
Auditors may suggest to management AJEs that are not material to the financial statements but are
required to be technically in conformity with GAAP. Auditors may even believe these AJEs do not need
to be made but do need to be brought to managements’ attention. In the case where management
“passes” on making the suggested recommendations that auditors really do not believe need to be made
for the financial statements to be fairly presented, the AJEs are recorded as “Passed AJEs” (PAJEs) and
are brought to the attention of the audit committee of the board of directors.
In the case of PAJEs that auditors feel are material and do need to be made, management may disagree
and not make the entries. In that case the auditors should qualify their opinion to reflect that the
financial statements are not fairly presented in conformity with GAAP. The PAJEs described in the
Waste Management Case are of this type, AJEs that should have been made and when they were not,
should have resulted in a qualified auditors’ opinion.
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