The Implications of Inventory Write-Downs, Financial Reporting Compliance, and Lease Classifications: A Comprehensive Analysis

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Capstone ResearchProject1Capstone Research ProjectName of the StudentStudent IDName of the UniversityName of the Lecturer03/19/2015Analyze the potential implications of inventory write-downs on financial statements, focusingon the distinction between genuine errors and deliberate fraud. Discuss the role of auditors indetecting such misstatements, and the impact on a company’s financial reputation and legalstanding. Additionally, evaluate the differences in lease classifications under IFRS and USGAAP, and provide recommendations for a CFO considering lease options. Your responseshould be 1000-1200 words.

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Capstone ResearchProject21)As per provision of SAS 99 “Consideration of Fraud in a Financial Statement Audit”it is the responsibility of the auditor to plan and perform the audit to obtain reasonableassurance that the financial statements prepared by the company are free from any materialmisstatement caused by wither error or fraud. The auditor should also ensure that thefinancial statements prepared by the management are prepared in accordance with thegenerally accepted accounting principles (GAAP)(Fasb.org, 2015).Inventory write down by the management can be result of a genuine error or a deliberatefraud by the management of the company. If the inventory had become obsolete or damaged,then writing down the value of inventory is justified, however the management have tosupport the market value taken to write down the value of inventory with sufficient evidence.Other inventory write down are the deliberate write down of inventory made by managementto reduce the profits of the company and tax payable thereon. As in this case the profit infinancial statements id different from the profit in the tax returns, this write down looks like adeliberate misstatement by management to reduce the tax liabilities of the company.As perFAS No. 151, if loss on write-down of inventory is insignificant, it can be reported aspart of cost of goods sold whereas if this amount is large, then it becomes necessary to reportit as a separate line item in the income statement. If the company fails to record inventorywrite downs in the financial statements, it may actually be inflating earnings thus defraudingits investors who may have invested in the company based on such over estimated earnings.Apart from this, it can also lead to numerous financial and ethical issues such as imposition

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Capstone ResearchProject3of penalties, loss of faith of the shareholdersand consumer faith in integrity of themanagement along with erosion of brand value andgoodwill (Fasb.org, 2015).The Internal Revenue Service (IRS) is currently auditing the last three (3) years income taxreturns of the company involving the deliberate inventory write down by the management toreduce the taxable income. This may be harmful for the reputation and brand name of thecompany and adversely impact its goodwill. Also, it may pull the company in the viciouscircle of litigations consuming significant time and money of the top-management. Toprevent happening of such events in future, the management should implement efficientinternal control system to monitor the inventory valuation. Appointing different persons forphysical verification of inventory, inventory valuation and inventory accounting wouldreduce the possibility of collusion among employees to commit fraud and also ensuresauthenticity of the financial statements. Internal audit is also an efficient tool which can beused to evaluate the efficiency of internal control system and deter fraud(Ifrs.org, 2015).2) At the conclusion of audit by IRS, if the company is found guilty of the deliberate writedown of inventory resulting to misstatement of financial statements, IRS can levy additionaltax and penalties on company which may be equal to 75% of the tax payable and subject thecompany to further audits and also impose civil penalties on the management. Also, if theIRS is of the opinion that further audit of the company records can provide additionalinformation to help its case, it can order further audit of the accounts of the company.IRS audit of any company is generally considered as a negative impact on the marketreputation, brand value and market value of the shares of the company. It also highlights theincompetency of the management of the company and sends a message to the stakeholdersthat the management is not interested in running the company ethically. It also affects thesales revenue of the company. Banks and financial institutions are reluctant to finance

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