Case 6.2
Waste Management
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Waste Management Case
Relevant Technical Knowledge
PCAOB QC #20 - Paragraph #3
 “A firm has a responsibility to ensure that
its personnel comply with the professional
standards applicable to its accounting and
auditing practice. A system of quality
control is broadly defined as a process to
provide the firm with reasonable
assurance that its personnel comply with
applicable professional standards and the
firm's standards of quality.”
2
Waste Management Case
Relevant Technical Knowledge
PCAOB AS #13 - Paragraph #7
 “auditor's responses to the assessed risks
of material misstatement, particularly
fraud risks, should involve the application
of professional skepticism in gathering
and evaluating audit evidence.”
3
Waste Management Case
Relevant Technical Knowledge
SARBOX Section 203
 the lead audit or coordinating partner and
the reviewing partner must rotate off of
the audit every 5 years
SARBOX Section 206
 requires a “one year cooling off period”
before an audit firm employee accept a
position as CEO, CFO, Controller, or Chief
Accounting Officer of a former client
4
Waste Management Case
Relevant Technical Knowledge
Matching Principle
 Costs need to be matched to the
revenues that they helped to generate. A
key point is that expenses should not
necessarily be recognized when the work
is completed or a product is produced.
Rather, the costs should be recognized
when the costs can be matched to
revenue that has been recorded.
5
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 5 – Paragraph 2

“Effective internal control over financial
reporting provides reasonable assurance
regarding the reliability of financial
reporting and the preparation of financial
statements for external purposes.”
6
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 15 – Paragraphs 5-6

Sufficiency “is the measure of the
quantity of evidence” needed. This will
depend upon the risk of material
misstatement and the quality of evidence
obtained. The appropriateness of
evidence refers to whether the evidence
is both relevant and reliable “in providing
support for the conclusions on which the
auditor's opinion is based.”
7
Waste Management Case
Relevant Technical Knowledge
Definition of an Asset
 According to GAAP, an asset must provide
an organization with a right to enjoy
future benefits (e.g., by providing future
cash flows for the organization). The
organization must have control of this
future benefit and the transaction that
allowed this future benefit to exist for the
organization must have occurred for an
asset to exist.
8
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 13 – Paragraph 6 & 7


“The auditor also should determine whether it is necessary
to make pervasive changes to the nature, timing, or
extent of audit procedures to adequately address the
assessed risks of material misstatement.”
“Professional skepticism is an attitude that includes a
questioning mind and a critical assessment of the
appropriateness and sufficiency of audit evidence. The
auditor's responses to the assessed risks of material
misstatement, particularly fraud risks, should involve the
application of professional skepticism in gathering and
evaluating audit evidence.”
9
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 15 – Paragraph 10

“The auditor also should determine
whether it is necessary to make pervasive
changes to the nature, timing, or extent
of audit procedures to adequately address
the assessed risks of material
misstatement.”
10
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 13 – Paragraph 15
 “auditor should perform audit procedures
to specifically address the risk of
management override of controls
including: a) examining journal entries
and other adjustments for evidence of
possible material misstatement due to
fraud.”
11
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 5 – Paragraph #14
 “the auditor should evaluate whether the
company's controls sufficiently address
identified risks of material misstatement
due to fraud and controls intended to
address the risk of management override
of other controls.”
 Auditors must always be aware of the
danger of unusual journal entries.
12
Waste Management Case
Relevant Technical Knowledge
PCAOB AS #5 – Paragraphs #26-27

highlight the importance for auditors to
understand and evaluate the period-end
financial reporting process at a detailed level.
Indeed, according to AS #5, “because of its
importance to financial reporting and to the
auditor's opinions on internal control over
financial reporting and the financial statements,
the auditor must evaluate the period-end
financial reporting process.
13
Waste Management Case
Relevant Technical Knowledge
PCAOB AS No. 12 – Paragraph #72
 “When the auditor has determined that a
significant risk, including a fraud risk,
exists, the auditor should evaluate the
design of the company's controls that are
intended to address fraud risks and other
significant risks and determine whether
those controls have been implemented.”
14
Waste Management Case
Relevant Technical Knowledge
PCAOB AS #12 - Paragraph # 65

“The auditor should evaluate whether the
information gathered from the risk assessment
procedures indicates that one or more fraud risk
factors are present and should be taken into account
in identifying and assessing fraud risks. Fraud risk
factors are events or conditions that indicate (1) an
incentive or pressure to perpetrate fraud, (2) an
opportunity to carry out the fraud, or (3) an attitude
or rationalization that justifies the fraudulent action.
Fraud risk factors do not necessarily indicate the
existence of fraud; however, they often are present
in circumstances in which fraud exists.”
15
Waste Management Case
Relevant Technical Knowledge
SARBOX Section 301
 requires that the “audit committee of an
issuer shall be directly responsible for the
appointment, compensation, and
oversight of the work of any registered
public accounting firm employed by that
issuer.”
16
Waste Management Case
Relevant Technical Knowledge
SARBOX Section 302
 The CEO and CFO must “sign off” on the
correctness of the financial statements
SARBOX Section 305
 there must be “equitable relief for securities
crimes committed will be sought to compensate
investors.”
SARBOX Title IX
 dictates that “penalties for white collar crime will
be more severe with increased fines and jail
time.”
17
Epilogue – Waste Management


Arthur Andersen and WMI paid $220
million to settle shareholder suits
WMI restated earnings, which
caused a $6 billion decline in the
value of the company shares
18
Epilogue – Waste Management


Top WMI executives were barred from
acting as directors of public companies
ranging from a few years to indefinitely
Arthur Andersen partners related to the
engagement were barred from auditing
public companies ranging from 1 to 5
years
19