Share
Explore BrainMass

Better Auditing Controls to Prevent or Detect a Bankruptcy

100 words-Read "Sometimes the Most Important Evidence is Not Found in the Accounting Records" at the beginning of Ch. 7 of Auditing and Assurance Services. Discuss the steps that Ralph Smalley could have taken to prevent the bankruptcy of Crenshaw. Do you believe these steps would have been reasonable and logical to take at that time? Why or why not?

Sometimes The Most Important Evidence Is Not Found In The Accounting Records
Crenshaw Properties was a real estate developer that specialized in apartment buildings that it sold to limited partner investors. Crenshaw's role was to identify projects, serve as general partner with a small investment, and raise capital from pension funds. Crenshaw had an extensive network of people who marketed these investments on a commission basis. As general partner, Crenshaw earned significant fees for related activities, including promotional fees, investment management fees, and real estate commissions.
As long as the investments were successful, Crenshaw prospered. Because the investments were reasonably long-term, the underlying investors did not pay careful attention to them. However, in the late-2000s, the market for real estate in many parts of the country became oversaturated. Occupancy rates, rental rates, and market values declined.
Ralph Smalley, of Hambusch, Robinson & Co., did the annual audit of Crenshaw. As part of the audit, Smalley obtained financial statements for all of the partnerships in which Crenshaw was the general partner. He traced amounts back to the original partnership documents and determined that amounts agreed with partnership records. Smalley also determined that they were mathematically accurate. The purpose of doing these tests was to determine that the partnership assets, at original cost, exceeded liabilities, including the mortgage on the property and loans from investors. Under the law, Crenshaw, as general partner, was liable for any deficiency.
Every year, Smalley concluded that there were no significant deficiencies in partnership net assets for which Crenshaw would be liable. What Smalley failed to recognize, however, was that current market prices had declined significantly because cash flows were lower than those projected in the original partnership offering documents. As a result, he failed to perform tests of the impairment of the asset values. In fact, Crenshaw went bankrupt in 2010, and Hambusch, Robinson & Co. was named in a suit to recover damages filed by the bankruptcy trustee.

Solution Preview

Accounting records
100 words-Read "Sometimes the Most Important Evidence is Not Found in the Accounting Records" at the beginning of Ch. 7 of Auditing and Assurance Services. Discuss the steps that Ralph Smalley could have taken to prevent the bankruptcy of Crenshaw. Do you believe these steps would have been reasonable and logical to take at that time? Why or why not?
Sometimes The Most Important Evidence Is Not Found In The Accounting Records
Crenshaw Properties was a real estate developer that specialized in apartment buildings that it sold to limited partner investors. Crenshaw's role was to identify projects, serve as general partner with a small investment, and raise capital from pension funds. Crenshaw had an extensive network of people who marketed these investments on a commission basis. As general partner, Crenshaw earned significant fees for related activities, including promotional fees, investment management fees, and real estate commissions.
As long as the investments were successful, Crenshaw prospered. Because the investments were ...

Solution Summary

The external auditor has a responsibility to detect and report accounting inaccuracies, underlying financial stability issues and lack of internal controls. There is a new technique that can be implemented that will detect potential issues and signify a need to perform additional testing.

$2.19