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Capstone Research Project: Audit Findings and Discrepancies: Inventory Write-downs and Share-Based Compensation

A capstone research project addressing audit discrepancies in financial reporting.

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    Capstone Research Project 1 Capstone Research Project Name of the Student Student ID Name of the University Name of the Lecturer In your role as an auditor, you have discovered several discrepancies regarding inventory write - downs and the handling of share - based compensation in a company's financial statements. Based on your evaluation, explain how these discrepancies could lead to material misstatements in the financial statements. Discuss the relevant accounting standards (such as FAS No. 151, FAS 123, and SAS 99) that apply to these issues, and provide recommendations to the CFO on how to rectify these discrepancies. Additionally, analyze the potential implications of such discrepancies, including the impact on the company's reputation, shareholder confidence, and tax obligations, and suggest appropriate actions to mitigate these risks. Word Count Requirement: 1,200 to 1,500 words

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    Capstone Research Project 2 1) As per provision of SAS 99 “Consideration of Fraud in a Financial Statement Audit” it is the responsibility of the auditor to plan and perform the audit to obtain reasonable assurance that the financial statements prepared by the company are free from any material misstatement caused by wither error or fraud. The auditor should also ensure that the financial statements prepared by the management are prepared in accordance with the generally accepted accounting principles (GAAP) ( Fasb.org, 2015) . Inventory write down by the management can be result of a genuine error or a deliberate fraud by the management of the company. If the inventory had become obsolete or damaged, then writing down the value of inventory is justified, however the management have to support the market value taken to write down the value of inventory with sufficient evidence. Other inventory write down are the deliberate write down of inventory made by management to reduce the profits of the company and tax payable thereon. As in this case the profit in financial statements id different from the profit in the tax returns, this write down looks like a deliberate misstatement by management to reduce the tax liabilities of the company. As per FAS No. 151 , if loss on write - down of inventory is insignificant, it can be reported as part of cost of goods sold whereas if this amount is large, then it becomes necessary to report it as a separate line item in the income statement. If the company fails to record inventory write downs in the financial statements, it may actually be inflating earnings thus defrauding its investors who may have invested in the company based on such over estimated earnings. Apart from this, it can also lead to numero us financial and ethical issues such as imposition

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    Capstone Research Project 3 of penalties, loss of faith of the shareholders and consumer faith in integrity of the management along with erosion of brand value and goodwill ( Fasb.org, 2015) . The Internal Revenue Service (IRS) is currently auditing the last three (3) years income tax returns of the company involving the deliberate inventory write down by the management to reduce the taxable income. This may be harmful for the reputation and brand name of the company and adversely impact its goodwill. Also, it may pull the company in the vicious circle of litigations consuming significant time and money of the top - management. To prevent happening of such events in future, the management should implement efficient internal control system to monitor the inventory valuation. Appointing different persons for physical verification of inventory, inventory valuation and inventory accounting would reduce the possibility of collusion among employees to commit fraud and also ensures authenticity of the financial statements. Internal audit is also an efficient tool which can be used to evaluate the efficiency of internal control system and deter fraud ( Ifrs.org, 2015) . 2) At the conclusion of audit by IRS, if the company is found guilty of the deliberate write down of inventory resulting to misstatement of financial statements, IRS can levy additional tax and penalties on company which may be equal to 75% of the tax payable and subject the company to further audits and also impose civil penalties on the management. Also, if the IRS is of the opinion that further audit of the company records can provide additional information to help its case, it can order further audit of the accounts of the company. IRS audit of any company is generally considered as a negative impact on the market reputation, brand value and market value of the shares of the company. It also highlights the incompetency of the management of the company and sends a message to the stakeholders that the management is not interested in running the company ethically. It also affects the sales revenue of the company. Banks and financial institutions are reluctant to finance

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