Accounting Analysis

Assignment 3: Capstone Research Project

Overview of the Capstone Research Project

In this project the focus would be on analyzing accounting situations using accounting standards along with applying advanced federal taxation concept, issues that might take place in using accounting standards.

1. Damaging Financial and Ethical Repercussions of Failure to include the inventory write-downs in the financial statements. Prepare a recommendation to the CFO, evaluating the negative impact of a civil fraud penalty on the corporation as a result of the IRS audit. In the recommendation, include essential internal control procedures to prevent fraudulent financial reporting from occurring, as well as the major obligation of the CEO and CFO to ensure compliance.

The concept behind write down inventory is that the value of inventory can still be appear in financial statement only if inventory still has some value. This value is equal to difference between the original cost of inventory and current market replacement value. According to IAS 2, if Loss on Write-Down of Inventory is small this can be reported as part of cost of goods sold while if this amount is huge then it is necessary to report in separate line on the income statement (Hopkins, 2012). Furthermore, such things usually turn out to be a violation, examples such as Enron case, WorldCom case etc. IAS 1 covers Presentation of Financial Statement and according to this it is necessary for companies to disclose separately in the income statement for the write-down of the inventories that has been low persistence item. Furthermore, this standard also demands for ample information that impacts the significant events along with those information that can further support in understanding a scenario. The risk of excluding inventory write-downs is due to the fact that investors perhaps over-estimate earnings persistence and this give rise to strong ethical concern. Beside this, such situation could direct towards numerous financial and ethical issues such as concealment fraud penalties, excessive managers compensations, losing shareholders confidence in management along with loosing value of brand as well as goodwill (Greuning, Scott, Terblanche, 2012).

Accountant not considering full according standards when formulating financial statement, they does not only violating according standards but also they are violating ethics as well trust in the professional behavior of people.

As being part of Practicing Firm, it is recommended to CEO and CFO of the company to consider such impact of the Internal Revenue Service Negative Assessments. It has been observed during practice of Internal Revenue Service examination that companies have been using Inventory write downs to reduce their taxable income. Inventory that was write-down were not actual and was just used for tax purposes. Furthermore, they were not part of income statement as well. Hence, Internal Revenue Service has right to consult their front line manager and also their Fraud Technical Advisor in order to determine any such activity has been going on. If such activity highlighted then Fraud Penalty that is equal to 75% of the tax payable and attributed to fraud will be levied on the ...