Auditing Case Long Beach Bridge (a non-public company) operates a major bridge

Auditing CaseLong Beach Bridge (a non-public company) operates a major bridge. Vehicles are required to paya toll based on their type (e.g., passenger cars pay 5.00, commercial trucks pay $7.00). Toll revenues support the maintenance and upkeep of the bridge.There are 8 toll booths, several of which are automated for exact change while others are manuallyserviced by Long Beach Bridge employees. Each toll booth has an automated count mechanismto monitor the number of vehicles using the bridge each day. Periodically throughout each day,employees collect accumulated tolls. The funds are provided to an on-site, independent contractorhired by Long Beach Bridge to perform cash count and reconciliation functions. The funds arethen transferred daily to a local depository institution.Beginning in January, 2015, several toll collectors and their supervisors conspired to steal tollmonies and employees of the independent cash count contractor agreed to participate in thescheme. In order to “cover their tracks,” the cash count contractors altered the daily reports, including vehicle use and other cash reconciliation records. This alteration process was so effectivethat reconstruction of the original transactions was impossible.The thefts continued until November, 2015, when one toll collector felt he was not receiving his “fairshare” of the money and anonymously called the Long Beach Bridge offices and reported thescheme.In order to estimate the amount of tolls stolen, Long Beach Bridge management engaged a qualified consultant to perform a demographic study of toll bridge use over a period of time. LongBeach Bridge management used this study to arrive at their estimate of tolls lost. Theft losses for2015 were estimated to be $1.7 million. In preparing the financial statements of Long BeachBridge for 2015, Long Beach Bridge management included their estimate of stolen revenue in“revenues” and reported the same amount as “estimated losses due to theft loss” in the costs andexpenses section of the income statement. Toll revenue (including the estimate of stolen revenues) reported for 2015 was $9.2 million.There is no argument that some amount of tolls were collected and diverted to the benefit of thethieves; however, the actual amount stolen cannot be determined from the financial or otherrecords. Long Beach Bridge management believes that the stolen tolls meet the criteria for revenue recognition and that the financial statements should include an estimate of tolls stolen in revenues with an equal amount included in expenses with a note to the financial statements describing the theft and the use of an estimate to record the revenue and expense.In December, 2015, your CPA firm (XYZ Certified Public Accountants) was engaged to perform anaudit of Long Beach Bridge’s financial statements for the year ended December 3, 2015. The TollBridge’s financial statements for the year ended December 31, 2014 were audited by other auditors who expressed an unmodified opinion on 2014 financial statements.Both the Toll Bridge’s 2015 and 2014 financial statements will be included in the Toll Road’s 2015annual report. Your opinion on the 2015 financial statements will also be included in the 2015 annual report. The other auditor’s opinion on the 2014 financial statements will not be included in the2015 annual report.Business Assumptions and Other Data1013113 Acct 470 S’13 Auditing Case Long Beach Toll Road.WPdocxLong Beach Bridge had profitable operations in 2015 despite the theft loss. There appears to beno reason to question the integrity of Long Beach Bridge’s management – collusion among the tollcollectors, supervisors and cash count contractors allowed the theft to go undetected and to circumvent internal controls. Long Beach Bridge’s management has taken appropriate action to remedy the situation and has enhanced controls even further. In addition, XYZ Certified Public Accountants believe that the estimate of the theft loss for 2015 was done in a professional mannerbut understand that the estimate is only an estimate and that it might be significantly different thanthe actual theft loss. In addition, XYZ Certified Public Accountants believe the $1.7 million estimated loss is not highly material in relation to Long Beach Bridge’s 2015 financial statements.Web Page Information and Authoritative Literature:Access FASB accounting principles authoritative literature at aaahq.org/ascLogin.cfm. Log in using username(AAA51300) and password (3upX7UM), click on “FASB Accounting Standards Codification,” click on “Iaccept,” click on “Concept Statements,” click on applicable concept statements (# 5 and Chapter 3 of # 8).Access AICPA authoritative auditing literature at aicpa.org. Click on “Research – Standards,” clickon “Auditing and Attest Standards,” click on “Clarified Statements on Auditing Standards,” clickon applicable AU-C sections (700, 705, and 706).Required:1.Discuss the matters that should be considered in determining whether or not Long BeachBridge’s management is correct in its belief that the stolen tolls meet the criteria for revenuerecognition and that Long Beach Bridge’s financial statements should include an estimate oftolls stolen in revenues with an equal amount included in expenses. Do not concern yourself as to whether the expense should be classified as an extraordinary item. Indicate yourconclusion regarding this matter and discuss the bases for such conclusion.2.Indicate the type of auditors’ report that should be issued on Long Beach Bridge’s 2015 financial statements assuming an estimate of tolls stolen is included in revenue with an equalamount included in expense and a note to the financial statements discloses the underlyingassumptions and methods used in compiling the estimate. Also, assume no unusual items,other than the stolen tolls, came to the attention of the auditors. In addition, assume nothingcame to your attention during the audit of the Long Beach Bridge’s 2015 financial statementthat caused you to believe that Long Beach Bridge’s 2014 financial statements were notpresented in accordance with generally accepted accounting principles.2013113 Acct 470 S’13 Auditing Case Long Beach Toll Road.WPdocx

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