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Case 1.1 Waste Management

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Danielle A. Smalls ACC 747 Advanced Topics in Auditing
July 21, 2015 Case 1.1 Waste Management

Case 1.1 Waste Management: The Expense Recognition Principle

1. The expense recognition principle also known as the “matching” principle is when expenses should be recognized in the same period as the revenues to which they relate. This principle is important to users of financial statements because if this principle is not followed stakeholders of a company can be deluded to thinking a company is earning profits when it really is not. Which would lead investors into investing in a company they normally would not.

2. Waste management violated the expense recognition principle by making numerous unsupported changes to the estimated useful lives and/or salvage values of one or more categories of vehicles, containers and equipment. Such changes reduced the amount of depreciation expense recorded in a particular period. An entry that may have been use by Waste Management for fraud would be a debit to the accumulated depreciation and a credit to the depreciation expense.

3. Paragraph 2 of PCAOB Auditing Standard No. 5 states “effective internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. 3/ If one or more material weaknesses exist, the company's internal control over financial reporting cannot be considered effective. 4/” Waste Management did not have an effective system of internal control over financial reporting related to the depreciation expense recorded in its financial statements. Reason being because thy most often made improper transactions during the fourth quarter in violation of the expense recognition rule.

4. After consulting paragraphs 5-6 of PCAOB Auditing Standard No. 15 the type of…...

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