On April 19, 2005, KPMG agreed to pay $22 million to the SEC to settle its lawsuit with the SEC in connection with the alleged fraud. Go to the SEC’s web site to read about the settlement of this lawsuit with the SEC (try, “http:// www.sec.gov/news/press/2005-59.htm”). Do you agree or disagree with the findings? Explain your answer.
What will be an ideal response?
The SEC litigation release regarding KPMG’s settlement of the Xerox case indicates that KPMG consented
to the entry of the order without admitting or denying the SEC’s findings. The SEC’s findings note that
KPMG failed to comply with generally accepted auditing standards (GAAS) and allowed Xerox to utilize
accounting actions that did not comply with generally accepted accounting principles (GAAP). These
accounting actions permitted Xerox to close a $3 billion “gap” between actual equipment revenues and
reported revenues during the period 1997 through 2000. The SEC further noted that KPMG did not
demand evidence sufficient to establish that the accounting actions and related assumption made by Xerox
were in fact grounded in business realities or fairly reflected the company’s performance.
Without reviewing the audit work performed by KPMG it is difficult to agree or disagree with
the SEC findings. Some students may argue that the accounting actions taken by Xerox were complex and
subjective and that the SEC findings actually highlight a difference in judgment not a violation of GAAS
or GAAP. Other students may argue that given the fraud factors present and the one sided nature of the
accounting actions taken by Xerox that KPMG should have been more skeptical and required stronger
evidence from the client to support the accounting actions taken. This question should highlight to students
the importance for auditors to take a step back from the details of the audit to question whether the
accounting actions taken by a client in combination fairly represent the economic performance of the
company. An auditor should not allow clients to employ accounting actions that technically comply with
reporting standards if the substance is misleading.
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It is necessary to post journal entries to the general ledger before preparing a trial balance
Indicate whether the statement is true or false
If the net cash inflows are unequal, how is the payback period (in years) of an investment calculated?
What will be an ideal response?
Which culture types the surnames in business letters in all capital letters?
a. French b. German c. Japanese d. Latin American
Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows: Direct materials$8.20 Direct labor 8.30 Variable manufacturing overhead 1.20 Fixed manufacturing overhead 4.30 Unit product cost$22.00 Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, time would be freed up for use on another product that requires 4 minutes on this machine and
that has a contribution margin of $7.00 per unit.When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? A. $25.50 per unit B. $22.00 per unit C. $24.21 per unit D. $20.71 per unit