During the Audit of a Major Division, an Auditor Interviewed

question 68

Essay

During the audit of a major division, an auditor interviewed an accounting clerk. The clerk tells the auditor that she believes that the division has been capitalizing research and development expenses (GAAP requires that all R & D costs be charged to ordinary expense in the period in which they are incurred). R & D is a significant part of the division's budget. If found to be true, the division may have to expense millions of dollars previously capitalized and significantly reduce its operating profit. The auditor has not performed any testing to determine if this problem actually exists, but has discussed the potential problem with the division controller and the Director of Internal Audit.
The following day the Director of Internal Audit received the following e-mail from the company president:
"The controller of Division B informs me that you have discovered a questionable account classification dealing with research and development expense. I am aware of the issue. You are directed to discontinue any further investigation of this matter until informed by me to proceed. Under the confidentiality standard of your profession, I also direct you not to discuss this matter with other managers, the audit committee, or the outside auditors."
You are the Director of Internal Audit. Write a short memo in response to the president's e-mail. Be sure to explain the position you are taking and why this position is appropriate.

Grasp the significance of and compute the return on assets (ROA) for company performance assessment.

Learn how to round financial ratios to a specified decimal place for reporting purposes.

Acquire skills in analyzing financial data to calculate various financial ratios.

Identify and understand dysfunctional interactions and lack of family support.

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Definitions:

Methylation

An epigenetic change that makes the expression of a gene less likely. It involves the addition of a methyl group (an organic molecule) to DNA, either to the coded gene or to regulatory DNA. Or, it can involve the addition of a methyl group to histones that bind with DNA.

Epigenetic Change

Modifications in gene expression caused by mechanisms other than changes in the underlying DNA sequence, influenced by environmental factors.

Gene Expression

The process by which the information encoded in a gene is used to direct the assembly of a protein molecule.

Synaptic Connections

The points at which neurons in the brain or nervous system communicate with one another, playing a critical role in the transmission of neural signals.