Essay Example on According to Generally Accepted Accounting Principles GAAP

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Question 1 According to Generally Accepted Accounting Principles GAAP the expense recognition principle is defined that expense is recognized in the same period that the related revenue is recognized under the accrual basis accounting This is a matching principle that the expenses should match up with the related revenue in the correct accounting period The main purpose of the financial statements is to provide its users with accurate and complete financial data and information regarding an organization's business operation Revenue and expenses are two key operational records in alignment in income statement at the same reporting period to reflect the result of the operation within a timeline The indicators of income statements such as revenue expense gross profit would be evaluated by the financial statements users for any decision making such as investing By manipulating matching principle the expenses are not assured to match the related revenue in the same accounting period this would lead to the failure of the evaluation of the financial statements and the users would suffer from investing risks and monetary losses Question 



2 Waste Management intended to reduce the expenses from repeatedly changing the depreciation estimates and by manipulating the capitalization policies through the inappropriate accounting practices without reasonable support for the changes of the estimates in the assets useful life and salvage value This violates the expense matching principle against the related revenue The GAAP requires that depreciation allocates the cost of the asset through the useful life and or estimates the salvage value the allocation and estimation methods should be rational and systematic The fixed assets are purchased and used to generate the revenue over its useful life The matching principle requires that the depreciation expense is also recognized with the same principle and accounting periods against the revenue recognition When the depreciation expense is recognized and realized the journal entry is debit to the depreciation expense and credit to the accumulated depreciation Waste Management made the depreciation adjustment during the fourth quarter to apply cumulatively from the beginning of the year the journal entry made to reduce the depreciation expense should be debiting to the accumulated depreciation and crediting to the depreciation expense thereby they committed a fraud by neglecting the duty on obeying the GAAP expense recognition principle Question 3 I don t think that Waste Management had employed an effective internal control system over financial reporting related to the depreciation expense recorded in its financial statements In accordance with the paragraph 2 of the PCAOB Auditing Standard No 5 Effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes If one or more material weaknesses existed the company's internal control over financial reporting cannot be considered effective


The case indicates that Waste Management manipulate its internal control to commit a fraud in the depreciation expense recognition and realization The internal control system had been deteriorated over years Accordingly the serious material weaknesses had been existed in the company the Waste Management can t provide reasonable assurance on its financial statements for its users Therefore the internal control over financial reporting of the company is ineffective Question 4 As an auditor I would want to examine the sufficiency and appropriateness of audit evidence to decide if Waste Management s decision to change the useful life and salvage value of its assets was appropriate under GAAP Per Paragraphs 5 6 of PCAOB Auditing Standard No 15 sufficiency is the measure of the quantity of audit evidence and appropriateness is the measure of the quality of audit evidence The sufficient and appropriate audit evidence is needed to provide reasonable assurance on the opinion of the financial statements and the internal control over financial reporting Waste Management repeatedly changed the estimated useful life and salvage without reasonable support regarding fixed assets to deliberately reduce the expenses The risk of the material misstatement and the related internal control increase an additional amount of evidence is needed

 At the same time the evidence should be relevant and reliable to provide strong support for making the decision if Waste Management made the appropriate decision in changing the estimates related to the useful life and salvage value of the assets Question 5 Yes you can report a violation to the PCAOB anonymously Per the guidelines of the tip and referral center anonymity is permitted However when you report a violation to the PCAOB with anonymity you will be asked to contact PCAOB again within 24 hours to provide any more information by answering the questions regarding your tip or referral Yes I believe that the employee had a responsibility to report the behavior to the audit committee if the employee knew that the consolidating entries in the fourth quarter recorded by upper management were fraudulent PCAOB is established to oversee the public companies to protect massive investors from investing risks and losses by any potential violations or fraud from financial reporting If the PCAOB can obtain any tips and referrals from the public timely and actively the potential violations would be stopped and prevented from getting worse Also the whistleblower is protected by the Occupational Safety Health Administration OSHA The whistleblower is encouraged with rewards for the successful tips or referrals


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