Question 1
Tires for You, Inc. Tires for You, Inc. (TFY), founded in 1987, is an automotive repair shop specializing in replacement tires. Located in Altoona, Pennsylvania, TFY has grown successfully over the past few years because of the addition of a new general manager, Katie McMullen. Since tire replacement is a major portion of TFYs business (it also performs oil changes, small mechanical repairs, etc.), Katie was surprised at the lack of forecasts for tire consumption for the company. Her senior mechanic, Skip Grenoble, told her that they usually stocked for this year what they sold last year. He readily admitted that several times throughout the season stock outs occurred and customers had to go elsewhere for tires. Although many tire replacements were for defective or destroyed tires, most tires were installed on cars whose original tires had worn out. Most often, four tires were installed at the same time. Katie was determined to get a better idea of how many tires to hold in stock during the various months of the year. Listed below is a summary of last years individual tire sales by month: MonthTires Used January510 February383 March1,403 April1,913 May1,148 June893 July829 August638 September2,168 October1,530 November701 December636 Total12,752 Case Questions: Katie has hired you to determine the best technique for forecasting TFY demand based on the given data. 1.Calculate a forecast using a three-period weighted moving average. Use weights of 0.60, 0.25, and 0.15 for the most recent period, the second most recent period, and the third most recent period, respectively.
Question 2
The Problem at Perck Pharmaceutical George LaRoche is a research scientist at Perck Pharmaceutical, which is a company headquartered in New Jersey and that develops and manufacturers therapeutic drugs. LaRoche holds a medical degree and started employment at Perck about ten years ago. Two years ago, LaRoche was promoted to Director of Medical Research. His primary responsibility in this position was overseeing the research and development of an allergy and asthma drug. During clinical trials, the drug was given to large groups of people (Patients between 18 and 90 years old who were referred to cough outpatient clinics with chronic cough and enhanced bronchial hyperreactivity) to confirm its effectiveness, monitor side effects, compare it to commonly used treatments, and collect information that would allow the drug to be used safely. More than 11,000 patients were given the drug in 40 clinical trials. During the trials, some patients experienced mood swings and depression, which went away when the drug was discontinued. Some patients exhibited even more extreme behaviors while taking the drug, including suicidal thoughts. In total, about one-tenth of one percent of patients experienced some degree of side effects. These results were discussed fully by LaRoche?s research team, which split the opinion of the group. Half the group wanted to conduct a more detailed trial run to focus exclusively on these reactions. The other half thought that the apparent side effects were so statistically insignificant that further trials were unnecessary. LaRoche was undecided but generally was more sympathetic to the researchers that wanted to conduct further trials. During these discussions among the research team, LaRoche was called to a meeting attended by the marketing and sales team. When asked for his opinion on whether Perck should proceed with its application to the Food and Drug Administration (FDA) for approval, LaRoche hesitated and expressed misgivings. At the meeting, Mike Meyers, the director of marketing interrupted and told the group that he had heard from several researchers on LaRoche?s team who had told him that LaRoche was being overly cautious, had mismanaged the team and couldn?t make a decision. After a heated exchange, a decision was made to seek FDA approval based on the existing trial data. Over the objections of Myers, LaRoche was left in charge of the application process, which would have to be approved by Susan Smith, Perck?s general counsel in charge of FDA approvals. A draft application was presented to Smith for review. The draft noted that one-tenth of one percent of patients experienced some degree of side affects and concluded: ?due to this result, Perck recommends that the warning label include information on mood changes, anxiety and depression.? Smith instructed LaRoche to revise the application to read: ?due to the statistically insignificant amount of patients who may have possibly experienced side effects from the drug, it is Perck?s expert opinion that no warning label addressed mood changes, anxiety and depression is necessary.? Outraged with this instruction, LaRoche refused to sign off on the application. In an email to Smith he wrote: ?I am appalled by your suggestion that an FDA lawyer knows more about drug research than a trained doctor. I am insulted professionally and personally. What you are doing is more than a discourtesy; it is undermining the integrity of our governance structure, which requires the Director of Medical Research to have the final sign off on all FDA applications. Let me be clear, I refuse to sign the FDA application with the language you are suggesting.? Attempts at convincing LaRoche to sign the application fail. Instead, Amy Lateef, the Associate Director Medical Research signs the application containing Smith?s revisions. When LaRoche yells at her in front of the team for ?selling out to the marketing sons of bitches? he is fired for unprofessional conduct and for violating Perck?s harassment policy. Eventually, the FDA approved the drug on the strength of the application, and Perck began to market the drug under the name Singular for the relief of symptoms of seasonal allergic rhinitis (also known as hay fever). A convenient once-a-day tablet, Singular was sold to help relieve a broad range of seasonal allergy symptoms for 24 hours. It was made available to treat seasonal allergic rhinitis in adults and children as young as 2 years of age. The drug became immediately popular as doctors perscribed Singular to hundreds of thousands within the first six months alone. Over the next 12 months, during the post-approval phase of new drug launch, the FDA observed a spike in suicides nationally. When reviewing the cases, 12% of the people who had commiteed suicide were also taking Singular for at least three weeks. It has initiated an investigation. However, the FDA has suggested that no one should go off of their medication before first talking to their doctor. The FDA suggests that doctors should more closely monitor patients on one of these drugs for changes in mood or behavior, especially related to suicidal thoughts (especially in people who have no prior history of having any). Within the last month the FDA and Perck have been discussing how best to inform patients and doctors about possible side affects. Perck said it is planning face-to-face meetings with doctors to tell them about possible changes on the warning label and to give them patient leaflets so they can inform their patients about the risks of taking Singular. Because of the complexity of the investigation, the FDA does not anticipate reaching a conclusion earlier than 9 months' time, when it will publicly announce the findings. In the meantime, in addition to its outreach to doctors, Perck has voluntary issued the following warning: ?Please consult with your doctor if after taking Singular, you experience mood swings, depression or suicidal thoughts.? Because of all the negative attention that Singular is getting, a class action lawsuit comprised of the families of suicide victims has already filed against Perck. None of this has been lost on LaRoche, who feels that he was unfairly discharged from his high paying job. He is still unemployed and seeks out the advice of a lawyer. Assignment: Read Pierce v. Ortho Pharmaceutical and the essay on Professional Loyalty. In no more than three pages, discuss whether LaRoche has: Objected to, or refused to participate in any activity, policy or practice which he reasonably believes 1) is in violation of a law, rule or regulation, 2) is fraudulent or criminal; or 3) is incompatible with a clear mandate of public policy concerning the public health, safety or welfare.,Additional Atatchment for this Case,4 to 5 pages
Question 3
Each question is worth 10 Points. Place your final answers on the first worksheet, then show your work to each problem on a separate worksheet. 1) The Webster Corp. is planning construction of a new shipping depot for its single manufacturing plant. The initial cost of the investment is $1 million. Efficiencies from the new depot are expected to reduce costs by $100,000 forever. The corporation has a total value of $60 million and has outstanding debt of $40 million. What is the NPV of the project if the firm has an after tax cost of debt of 6% and a cost equity of 9%? . 2) The Tip-Top Paving Co. has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of .6. The current risk free rate is 9% and the market rate of return is 16.18%. What is the company's cost of equity capital? 3) The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share? 4) The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is: 5) Your firm is considering leasing a new laser light. The lease lasts for 3 years. The lease calls for 4 payments of $10,000 per year with the first payment occurring immediately. The computer would cost $45,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 10%. The corporate tax rate is 35%. a) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3? b) What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0? c) What is the NPV of the lease relative to the purchase? 6) a) What is the cost of five November 25 call option contracts on KNJ stock given the following price quotes? b) What is the value of one November 35 put contract? c) What is the intrinsic value of the August 25 call? 7) You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment? 8) On March 1, you contract to take delivery of 1 ounce of gold for $415. The agreement is good for any day up to April 1. Throughout March, the price of gold hit a low of $385 and hit a high of $435. The price settled on March 31 at $420, and on April 1st you settle your futures agreement at that price. Your net cash flow is: 9) The duration of a 2 year annual 10% bond that is selling for par is: 10) Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock account, and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock dividend. a) What will the balance in the retained earnings account be after the dividend? b) What will the market price per share be after the dividend? 11) Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt. Sally's is acquiring Jennifer's for $58,000 in cash. a) What is the merger premium per share? b) If the incremental value of the acquisition is $2,500. What is the value of Jennifer's Boutique to Sally's?
Question 4
Date: Thu, 17 JAN 2008 7:42:53 +0000 From: "Darlene Wardlaw" Subject: Understanding the Revenue Cycle Attachment: I?ve attached a Sales internal control questionnaire from another engagement that I think you can use for Apollo. You may want to talk to Karina Ramirez to get answers to the questions. 1. Complete the ICQ for Apollo. For ?yes? answers, add a comment stating which department and clerk performs the function. For ?no? answers, describe the possible ?errors? or ?frauds? that could occur because of the control weakness. 2. I?ve started a flowchart and listed some strengths and weaknesses, but had to leave before I could finish it. See if you need to add any more strengths and/or weaknesses that you find from the ICQ and narrative descriptions of the revenue cycle. DW Internal Control Questionnaire?Sales Transaction Processing Assertions and Questions Yes, No, N/A Comments Occurrence assertion: 1. Is the credit department independent of the sales department? 2. Are sales of the following types controlled by the same procedures described below? Sales to employees, COD sales, disposals of property, cash sales, and scrap sales. 3. Is access to sales invoice blanks restricted? 4. Are pre-numbered bills of lading or other shipping documents prepared or completed in the shipping department? Completeness assertion: 5. Are sales invoice blanks pre-numbered? 6. Is the sequence checked for missing invoices? 7. Is the shipping document numerical sequence checked for missing bills of lading numbers? Accuracy assertion: 8. Are all credit sales approved by the credit department prior to shipment? 9. Are sales prices and terms based on approved standards? 10. Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity, and approved by a responsible officer? 11. Are shipped quantities compared to invoice quantities? 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances, and checked with customers? orders? 13. Is there an overall check on arithmetic accuracy of period sales data by a statistical or product-line analysis? 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting? Classification objective: 15. Does the accounting manual contain instructions for classifying sales? Cutoff objective: 16. Does the accounting manual contain instructions to date sales invoices on the shipment date? Date: Thu, 17 JAN 2008 13:02:47 +0000 From: "Karina Ramirez" Subject: Revenue and Collection Cycle Documentation I have excerpted from our workpapers a description of Apollo?s Accounting and Control Systems over the Revenue/Collection Cycle and Purchasing/Cash Disbursements. I?ve also gave a copy of a flowchart of sales transaction processing to Darlene. We have not developed one for the purchasing cycle yet, but we plan to do so once your audit is ended and our assistance is no longer necessary. Hope you find the info useful. Let me know if you have any questions. Karina Karina Ramirez Director, Internal Audit Apollo Shoes, Inc. This Apollo message (including any attachments) contains confidential information intended for a specific individual and purpose, and is protected by law. If you are not the intended recipient, you should delete this message and are hereby notified that any disclosure, copying, or distribution of this message, or the taking of any action based on it, is strictly prohibited. Apollo Accounting and Control Systems: Revenue and Collection Cycle As evident in the company organization chart, Apollo has several departments and offices concerned with management, accounting, and control. The company also has an abbreviated accounting and control manual, although the manual has not been kept up to date. Officers and employees have described accounting and control procedures informally under the heading of several transaction cycles. Their descriptions of the company's current revenue cycle activities appear below. Credit Approval and Sales Processing Customer orders are received in the mail, over the telephone, and over the counter by salesclerks in the marketing department. The clerks prepare written sales orders for telephone and counter customers, signing each one and asking the counter customers to sign in person. The sales orders contain the customer name, a customer number (assigned immediately for new customers), customer address, identification of products, and the quantity ordered. The sales order forms are kept in the salesclerks? working area through which many people pass during the day. The sales order documents used in the offices are not prenumbered. The salesclerks prepare an estimate of the dollar amount of the order and write it on the form. The sales orders are then hand-carried to the credit manager, who is in the treasurer?s department. The credit manager checks the customers? accounts receivable balances and other credit file information using a computer-based inquiry system. If credit is approved, the credit manager signs the sales order. If credit is not approved, the customer is asked to pay in advance, and the sales order is held until notification of payment is received from the cashier. The sales order is stamped ?paid? and sent to the billing department. Likewise, when customers pay cash over the counter, the money is taken by the cashier, and the sales order is stamped ?paid? and sent to the billing department. For bookkeeping convenience, these ?cash? sales are treated the same as credit sales, with the invoice amount being charged to an account receivable set up for the customer, and the customer?s payment being applied immediately to the same account. After credit has been approved, or a payment received, the sales orders are sent to the billing department in the controller?s office. The billing clerks produce a four-copy sales invoice on a prenumbered invoice form. Using a screen facsimile on a personal computer, they insert the customer and product information from the customer order, the date, and the product unit prices from an approved price list. Sales taxes, delivery charges, and the invoice total are computed and put on the invoice. The sales invoice forms are kept in a locked closet in the billing department, and sheets in the numerical sequence are removed only for billing clerks? immediate loading onto the computer printer. Copy 1 and copy 2 of the sales invoice, the customer order, and the sales order are sent to the accounts receivable accounting department, which is also in the controller?s office. These documents are held in invoice numerical order in a ?pending shipment? file, awaiting matching with copy 4 of the invoice, which was first sent to the inventory stores department as authority for the storeskeeper to put the order together and move it to the shipping department. Copy 3 of the invoice is sent to the shipping department, where it is initially held in a ?pending release? file. Shipment and Delivery Upon receipt of an invoice copy 4, which serves as the authorization to move goods to the shipping area, the inventory storeskeeper supervises removal of shoe products from shelves and bins. Copy 4 is sent to the shipping area with the products. In the shipping area, shipping employees remove copy 3 from the ?pending release? file. They check both copy 3 and copy 4 for the correct quantity of each product, then pack the order in suitable boxes. Copy 3 is sent to the inventory records department in the controller?s office, where it serves as the source of entries to reduce the perpetual inventory records. If any items shown on the invoice are not shipped, the handlers are supposed to alter the invoice copies to show the correct quantity. When customers are on the premises, they can pick up their own orders at the shipping area, where they are asked to sign copy 4 as acknowledgment of receipt. Otherwise, a prenumbered bill of lading is filled out in two copies for shipments by contract truckers. Copy 1 of the bill of lading is attached to the shipment. Copy 2 of the bill of lading is sent with invoice copy 4 to the accounts receivable accounting department. Apollo Revenue Cycle Flowchart Apollo Accounting and Control Systems: Purchasing and Expenditure Cycle The employee prepares a purchase requisition and has a supervisor approve it. The supervisor retains Copy 2 of the pre-numbered purchase requisition for the department, sends Copy 1 to the Purchasing Department and Copy 3 to Accounts Payable. When the Purchase Department receives the purchase requisition, they search the approved vendor list and consult the listed prices for the goods desired for each vendor. Once a vendor has been selected, five copies of a pre-numbered purchase order are prepared. Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition. Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together. Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out. Copy 4 is sent to Accounts Payable. Copy 1 of the purchase order is sent to the selected vendor. When the goods are received, the invoice is sent to Accounts Payable and the packing slip is retained in Receiving. The Receiving department verifies the order by comparing the external packing slip with the internal purchase order. Then they count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report. Once the manual process is complete, the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared. Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order. The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order. Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor?s invoice for accuracy. The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered. When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department. Upon receipt of the disbursement voucher, the cashier will review, sign and cancel the disbursement voucher and prepare a check. The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy. The VP of Finance cancels the voucher package and sends it to A/P. The canceled disbursement voucher is sent to A/P from the cashier, where it is matched and filed with the accompanying canceled voucher package. The VP of Finance sends a copy of each signed check to A/P. The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid. A journal entry is recorded to show the payment of the payable. Date: Fri, 18 JAN 2008 08:13:24 +0000 From: "Darlene Wardlaw" Subject: Revenue Cycle Bridge Working Paper We need to make sure that we address the fraud auditing standard (SAS 99) in the workpapers, specifically the identification of potential for fraud (and errors for that matter) in the revenue cycle. I need you to prepare a bridge working paper (ICC-1) for the audit of Apollo Shoes as of December 31, 2007, addressing this issue. This is what I need you to do: 1. In the first column, use an index number (S-# or W-#) cross-referenced to your flowchart to indicate potential strength or weakness. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don?t, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a credit check ensures that sales are only made to creditworthy customers; a lack of a credit check would allow sales to customers unable to pay, and therefore ultimately increase bad debt expense). 4. In the fourth column, describe specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can?t rely on the client?s controls.) I suggest that you get Bradley to audit a sample of sales transactions for compliance with these control procedures. The objectives of his work will be to (1) obtain control evidence about the validity, authorization, accuracy, and proper period recording of recorded sales, and (2) obtain control evidence about the accuracy and classification of sales postings to individual customer accounts receivable. If we don?t find any problems, maybe we won?t have to send out as many positive confirmations. DW Date: Mon, 21 JAN 2008 11:04:37 +0000 From: "Darlene Wardlaw" Subject: FW: Revenue Cycle Problems Bradley sent me a copy of his test of controls work that he did on sales transactions. (Please tell him to send his work to you, rather than me.) Based on what Bradley found, there looks to be some serious problems in Sales and A/R. You need to write a memo identifying and explaining the significance of the qualitative features indicated by these deviations. Some things you may want to think about: 1. If the control performance were uniform for the year, the deviations would be evenly distributed by month. 2. Apollo Shoes faced financial problems in the fourth quarter of the year. 3. Sales transactions with missing bills of lading suggest improperly recorded sales. 4. December is the month when deviations overstating sales can have the most effect on the financial statements. 5. The company reports financial results each calendar quarter ending in March, June, September, and December. 6. Lack of credit approval for sales generally suggests the company might experience collection problems. 7. Errors in billing customers generally might be expected to be a mixture of overcharges and undercharges to the customers. 8. For customer overcharges, what was the average delay between the invoice date and the date a credit memo was entered giving the customer credit to correct the mistake? 9. Can you find any qualitative characteristics not signaled by these indicators? Because of the problems noted, I don?t think we can rely on Apollo?s controls over revenue and accounts receivable. We will need to confirm most, if not all, of the accounts receivable balances. I suggest that you mail positive confirmations to those customers with accounts greater than $1,000,000 and negative confirmations to those with balances less than $1,000,000. Also, I suggest that you ask Apollo?s customers to verify total sales during the year. Normally, you wouldn?t do this because it is difficult for the customers to confirm a year?s worth of transactions. However, since there is a relatively small amount of sales transactions during the year, they should be able to confirm without a problem. I?ll talk to you about it more later. I don?t think you need to worry about customers with current zero balances. For now, just write the memo to be placed in the accounts receivable workpapers (C-series) about the problems that Bradley found and their affect on our audit procedures (more extensive testing, positive confirmations, etc.). DW Date: Mon, 21 JAN 2008 10:32:16 +0000 From: "Bradley Crumpler" Subject: Test of Controls Attachment: Of the 120 sales transactions you asked me to look at, I found 51 ?deviations.? I have attached a list. These were the procedures that I used: 1. I randomly chose the sample of 120 transactions across the year with 10 from each calendar month. 2. I found all the invoices in the sample. None were missing. 3. All the invoices were properly posted to the general ledger sales and accounts receivable control accounts, and each was posted to the right customer?s individual account. 4. The invoices not listed had no deviations related to other documents, recalculations, or comparisons. 5. ?No credit approval? means that the expected credit approval notation could not be found in the documents. 6. When ?Wrong quantity billed? appears, a description of the effect follows. 7. ?CM (date)? means the customer notified Apollo of an error and a credit memo was issued on the subsequent date. All credit memos generate debits to a sales returns account and credits to accounts receivable. 8. ?Paid in full on time? means the customer paid the invoice when it was due. 9. ?Missing BL?means the bill of lading (shipping document) could not be found. 10. ?Wrong price? means the clerks put the wrong unit price on the invoice and billed the customer incorrectly. 11. ?Arithmetic error? means I found the invoice multiplied and added to show an incorrect total. 12. . I found purchase orders from each customer except for the December shipment to Mall-Warts. Because there was no purchase order, I looked at the sales and shipping documents. The cost of the inventory shipped was $3,169,145.10.
