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Case 2.2 (Golden Bear Golf) Content Case summary Summary: A. In the mid-1980’s,
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Case 2.2 (Golden Bear Golf)
A. In the mid-1980’s, Jack Nicklaus,famous professional golfer, was CEO of Golden Bear International (GBI), private company.
B. In 1996, Nicklaus decided to spin off a part of GBI to create a publicly owned company, Golden Bear Golf, Inc., whose primary line of business would be the construction of golf courses.
C. Paragon International, the Golden Bear subsidiary responsible for the company’s golf course construction business, quickly signed more than one dozen contracts to build golf courses across the US.
D. Paragon incurred large losses on many of the golf course construction projects because the subsidiary’s management team underestimated the cost of completing the projects.
E. Rather than admit their mistakes, Paragon’s top executives chose to misrepresent the subsidiary’s operating results by misapplying the percentage-of-completion accounting method.
F. In 1988, the fraudulent scheme was discovered, which resulted in a restatement of Golden Bear’s financial statements, a class-action lawsuit filed by the company’s stockholders, and SEC sanctions imposed on several parties, including Arthur Andersen, Golden Bear’s audit firm.
G The SEC charged the Andersen auditors with committing several audit failures, primary among them was relying on oral representations by client management for several suspicious transactions and events discovered during the Golden Bear audit.
H. The Andersen partner who served on Golden Bear’s audit engagement partner was suspended from practicing before the SEC for one year.
Answer the following Questions:
1. Professional auditing standards identify the “management assertions” that commonly underlie a set of financial statements. Which of these assertions were relevant to Paragon’s construction projects? For each of the assertions that you listed, describe an audit procedure that Arthur Andersen could have employed to corroborate that assertion.
2. The SEC referred to several “audit failures” that were allegedly the responsibility of Michael Sullivan. Define what you believe the SEC meant by the phrase “audit failure.” Do you believe that Sullivan, alone, was responsible for the deficiencies that the SEC noted in Andersen’s 1997 audit of Golden Bear? Defend your answer.
3. Sullivan identified the 1997 Golden Bear audit as a “high-risk” engagement. How do an audit engagement team’s responsibilities differ, if at all, on a high-risk engagement compared with a “normal” engagement? Explain.
4. The AICPA has issued several Audit and Accounting Guides for specialized industries. Do auditors have a responsibility to refer to these guides when auditing clients in those industries? Do these guides override or replace the authoritative guidance included in the professional auditing standards?
5. Was the change that Paragon made in applying the percentage-of-completion accounting method a “change in accounting principle” or a “change in accounting estimate”? Briefly describe the accounting and financial reporting treatment that must be applied to each type of change.
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