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Golden Bear Golf, Inc Golden Bear Golf, Inc. The assertions that were relevant to Paragon’s construction projects are: existence and occurrence, completeness, valuation or allocation, and presentation and disclosure. Existence and occurrence: should have been used to test the revenue and gross profit on its construction projects. By testing to see if the assertion is appropriate to make sure that all revenue and gross profit exist would have brought the attention to the $4 million of un-invoiced construction costs that materialized at the end of fiscal 1997. This assertion test also would have revealed that the earned value method in practice was allowing Paragon to book much larger amounts of revenue and gross profit on its construction projects than it would have under the cost-to-cost method. Completeness: the SEC said that Sullivan and his subordinates should have rigorously tested Paragon’s large amounts of unbilled revenues at the end of 1997. A significant amount of unbilled revenue that is reported as complete should be tested to determine the reason no billing has been posted for the work that was done. We will write a custom essay sample on Study Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page It also should be determined the reason income is being recognized for jobs that have not been identified as works in progress to determine the exact completion date of the project. By testing this assertion it would have been discovered that $4 million of work was fictitious. Valuation or allocation: Paragon overstated its revenue and profits by using the earned value method which caused a huge increase in unbilled revenue by the end of 1997. Approximately 30 percent of the 1997 income statement had not been billed to its customers. Paragon also overstated the revenue to be earned on its individual construction projects, and during the 1997 audit, Andersen personnel used thirteen of Paragon’s construction projects to corroborate the total revenue figures the company was using in applying the percentage-of-completion accounting method to its unfinished projects. If the valuation and allocation test would have been applied, the overstatement of revenue and gross profit could have been detected and prevented.Presentation and disclosure: if Andersen had used the recommendation from the AICPA Audit and Accounting GuideConstruction Contracts, he would have found out that some of the Paragon’s projects did not exist and he possibly would have determined that Paragon was overstating the completing stages of most of its existing projects. My belief of what the SEC meant by the phrase â€Å"audit failure† is that Sullivan did not practice his knowledge to make sure that Paragon accounting system was i n compliance with General Accepted Accounting Principles (GAAP) and General Accepted Auditing Standards (GAAS).One reason that Sullivan was at fault for the allege audit failures is he did not test the large amounts of unbilled revenue and relied â€Å"excessively† on oral representation from Paragon management to confirm the unbilled revenue and corresponding receivables. Another reason is that Andersen auditors discovered that the total revenue being used in the percentage-of-completion exceeded the revenue figure documented, and although no documents were recorded for these oral representations, Sullivan accepted that the revenue amounts given were valid.Yes, I do believe that Sullivan was responsible for the final outcome of the deficiencies that the SEC noted in Andersen’s 1997 audit of Golden Bear. My reason for saying he should accept full responsibility is because he was a partner in Andersen and he as the leader of the audit had the final say so about what was accepted from the company and what was not.When the information about the unbilled revenue, overestimate of the project’s stage of completion, and the total revenue being used in the percentage-of-completion computations exceeded the revenue documented, he should have stopped doing the processing of the audit at that particular moment and required for more assertion test to be performed or he could have refused to continue the process of the audit if Paragon would have refused to comply to the additional test.The audit engagement team’s responsibilities to determine if an engagement is a high-risk or normal-risk engagement are the same. They both use the audit risk model to determine the inherent and control risk to detect if the account contains errors that could be material when combined with errors in other accounts and detection risk that the auditor will not detect material errors. By using the audit risk model, it would help in determining the substantive audit procedures needed for testing.The factors that prompted Sullivan to designate 1997 audit a high-risk engagement are the subjective nature of the earned value method; Paragon’s large unbilled revenues; the aggressive revenue recognition practices advocated by Golden Bear management; severe weaknesses in Paragon’s cost accounting system. These factors should have alerted Sullivan and his subordinates to be particularly cautious. No it is not required for auditors to refer to the Audit and Accounting Guides provided by the AICPA for specialized industries.Although it is not a requirement, it is a great reference on how to perform and handle an audit related to the particular industry that is being audit if it is provided. If you use the guide that is available it will help on giving you an idea about the possible procedures and testing that may be required to perform a successful audit. It is also helpful in case a question arises that may have been of the same nature in the recommended guide. The guides do not override or replace the authoritative guidance included in Statements on Auditing Standards, but it does help support the standards.