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1. Evaluate the current financial condition of Eastman Kodak based on its most recent quarterly report, which can be located at http://www.Kodak.com. Based on your evaluation, discuss the most significant red flags for its public accounting firm to consider. Evaluating the current financial condition of Eastman Kodak we can evaluate that Eastman Kodak Company is not exactly a high flying stock over the last few years. It is evident that Eastman Kodak Company is experiencing large financial difficulties. In last one year the stock was down by 40% while S&P was up by 10%.Another red flag for the company was a rigid business model which did not change even when the world entered into digitalization. It is important to point out that Kodak operates in the highly competitive industry, such as the one where less and less people buying digital cameras and replacing them with digital cameras in cell phones, iPods, and I Pad and various other electronic devices equipped with cameras. The company had huge amount of liabilities which could lead the company to bankruptcy and send the stock to lower level. The management of fund was also very poor as they had enough time to pay the dues but they wont be able to do so. In the footnotes of the companys recently published 10-K, we found that EKs pension obligations are underfunded by $2.6 billion, about 3 times the companys market value. At present the outstanding salary has reached to $2.6 billion which the company wont be able to pay. Thus we can say that Eastman Kodak Company has huge amounts payable to the stake holders. To improve its financial performance and add competitive challenges the company is developing a strategic plan, whose successful implementation can be subject to numerous risks and uncertainties. Eastman Kodak reported that its strategy of focusing on its most profitable business and strengthened cost controls resulted in profitability.

2. Assume that you are the PricewaterhouseCoopers audit engagement partner and have assessed Kodak as a high-risk client. Explain the modification you would make to the audit engagement procedures to minimize any potential liability of the firm. The pricewaterhousecoopers audit engagement partner assessed Kodak as a high risk client and according to me some of the modifications needed to minimize potential liability of the firm are: Proper management of funds should be done. Risk-assessment and mitigation. Establishing and maintaining boundaries. Appropriate control and restraint techniques. Identification and responding to abuse of a client. Proper feedback. Contingency plans. Change with the change in technology. Proper budgeting.

3. Create an argument to the Kodak shareholders that, despite the long relationship between Kodak and PricewaterhouseCoopers, the public accounting firm maintains its professional independence. When companies go bust, the customers or shareholders, rarely pay much heed. It's all about judges, restructuring and then, if they are lucky, their re-emerging in some shrunken form to carry on as if nothing had happened. Not so in the case of Kodak, which is now taking the walk of ignominy to the bankruptcy courts.

The trouble began 20 years ago, with the decline of film photography. In the 1990s, Kodak poured billions into developing technology for taking pictures using mobile phones and other digital devices. But it held back from developing digital cameras for the mass market for fear of killing its all-important film business. Others, such as the Japanese firm Canon, rushed in. So who invented the digital camera? Ironically, Kodak did or, rather, a company engineer called Steve Sasson, who put together a toaster-sized contraption that could save images using electronic circuits. The images were transferred onto a tape cassette and were viewable by attaching the camera to a TV screen, a process that took 23 seconds.It was an astonishing achievement.

Thus the company proves out to be the rising star of photographic world and eventually regained the confidence of its shareholders as well as management itself. 4. In audits of high-risk clients, determine which requirements in the AICPAs Code of Professional conduct are most likely to be breached by the auditors. Provide your rationale.

Auditing is a riskier profession than people realize. Audit risk is defined as the risk you'll make a mistake, such as failing to catch a significant error or misstatement on a balance sheet or other document. Possible signs of a high-risk engagement include a company with lots of year-end transactions; extremely complex transactions; a lack of internal controls; and executive compensation based on reported earnings. Management's reputation also plays a role: If the bosses have a history of dishonesty and shady dealing, there's a greater risk of fraud.

General Standards by AICPA:

1. The auditor must have adequate technical training and prociency to perform the audit: In huge investment projects there is a need of highly trained and proficient auditor. But there are chances to hire a less efficient and proficient auditor. 2. The auditor must exercise due professional care in the performance of the audit and the preparation of the report: Many times auditor tries to cover up the company image because of informal relations with the client. This would not include his professional duties and he would more likely prepare a bias statement of company. 3. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the nancial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures: Its the duty of the auditor to review the true financial statement of the company which helps the company as well as the customers to know about the company. They have to verify all the evidences properly i.e. timely. But to avoid such long procedure auditors does not cross checks the evidences and declares the statement. 4. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit: The auditor should collect all the information of the auditing client. Knowing the client's situation will anticipate the types of fraud or misstatement. On the basis of which he can declare the firms financial position. But due to reasons like greed, formal relations, long procedure, etc. the auditor and his assistants may not study all the evidences then also review to the public. This is a breach of the standards laid down by the AICPA.

5. Analyze the risk of financial fraud at Kodak and how it is most likely to be committed. Analysis of Risk of financial fraud: Businesses are becoming increasingly exposed to fraud: according to an ACFE survey, a typical Canadian organization loses 5% of its annual revenues to fraud every year. Occupational fraud is present in any industry be it small scale or large scale and could lead to reputation damage and even bankruptcy. Under the right circumstances, even the most loyal employees might commit fraud if given the motive and opportunity to do so. The current economic climate is likely to raise the risk of fraud. As individually and companies suffer financially more people may be tempted to cross the line of legality and engage in fraud to maintain their lifestyles they had enjoyed during better times. Same with the case of Kodak, Kodak began to struggle financially in the late 1990s as a result of the decline in sales of photographic film and its slowness in transitioning to digital photography, despite having invented the core technology used in current digital cameras. 2007 was the most recent year in which the company made a profit. In January 2012, Kodak filed for Chapter 11 bankruptcy protection. These may give rise to increase in frauds by the company employees and even managers to get rid of such situations. Think of current pressures that may be on individuals-stagnant earnings, no bonuses, the possibility of job losses all of these and more increase the likelihood of committing financial fraud with the company. Every employee would like more money, but most people do not steal. Some people may be tempted to take advantage of weakness which they have identified in the financial structure of company to help them deal with those pressures.

At hard times even the well-developed companies like Kodak experience financial risk. 6. Based on your analysis of the financial fraud risk areas, discuss the internal controls that should be implemented.

Internal controls:

1. Use a system of checks and balances to ensure no one person has control over all parts of a financial transaction.
o

Require purchases, payroll, and disbursements to be authorized by a designated person.

Separate handling (receipt and deposit) functions from record keeping functions (recording transactions and reconciling accounts).

o o o

Separate purchasing functions from payables functions. Ensure that the same person isnt authorized to write and sign a check. Require supervisors to approve employees time sheets before payroll is prepared.

2. Reconcile agency bank accounts every month.

o o

Require the reconciliation to be completed by an independent person. Examine canceled checks to make sure vendors are recognized, expenditures are related to agency business, signatures are by authorized signers, and endorsements are appropriate.

Examine bank statements and cancelled checks to make sure checks are not issued out of sequence.

3. Provide Board of Directors oversight of agency operations and management.

o o o o o

Monitor the agency's financial activity on a regular basis. Comparing actual to budgeted revenues and expenses. Require an explanation of any significant variations from budgeted amounts. Periodically review the check register or general ledger. Document approval of financial procedures and policies and major expenditures in the board meeting minutes.

Evaluate the Executive Director's performance annually against a written job description.

Participate in the hiring/approval to hire consultants including the independent auditors.

4. Prepare all fiscal policies and procedures in writing and obtain Board of Directors approval. Include policies and/or procedures for the following:

o o o o o o o

cash disbursements attendance and leave expense and travel reimbursements use of agency assets purchasing guidelines petty cash conflicts of interest

5. Protect petty cash funds and other cash funds.

Limit access to petty cash funds. Keep funds in a locked box or drawer and restrict the number of employees who have access to the key.

o o o

Require receipts for all petty cash disbursements with the date and other details. Reconcile the petty cash fund before replenishing it. Limit the petty cash replenishment amount to a total that will require replenishment at least monthly.

Keep patient funds separate from petty cash funds.

6. Protect checks against fraudulent use.

o o o o

Prohibit writing checks payable to cash. Deface and retain voided checks. Store blank checks in a locked drawer or cabinet, and limit access to the checks. Require that checks are to be signed only when all required information is entered on them and the documents to support them (invoices, approval) are attached.

o o

Mark invoices Paid with the check number when checks are issued. Enable hidden flags or audit trails on accounting software.

7. Protect cash and check collections.

Ensure that all cash and checks received are promptly recorded and deposited in the form originally received.

o o

Issue receipts for cash, using a pre-numbered receipt book. Conduct unannounced cash counts.

Reconcile cash receipts daily with appropriate documentation (cash reports, receipt books, mail tabulations, etc.)

Centralize cash receipts whenever possible.

7. given Kodak filing for bankruptcy, discuss the fiduciary responsibility of the audit committee and board of directors.

The fiduciary responsibility of the audit committee and board of directors for bankruptcy is as under: The internal audit function is responsible for providing an independent, objective appraisal of Kodaks business activities to support management in its responsibilities to conduct operations in an environment of effective internal control, and in its assertion of the effectiveness of these internal controls for regulatory reporting purposes. The Committees responsibility shall be to oversee these activities and the other matters outlined in the Charter. The board of directors role with respect to independent accountant is they meet regularly with independent accountant and meet separately on a periodic basis with management, the internal auditors and the independent accountant. Provide an opportunity for the independent accountant to meet with the Board when necessary and appropriate. Reviewing the independent accountants annual written statement delineating all relationships between the independent accountant and Kodak. Review and approve the annual audit plan and the audit reports of the independent accountant.

Confirm and assure the independence of the internal auditors, and that no attempts have been made to improperly influence the performance of their audit functions

Make recommendations to the Board regarding dividends; and Review the results of Kodak sponsored and funded pension plans and the activities of the Kodak Retirement Income Plan Committee.

Perform an annual Committee self assessment. Ensure Kodak submits an annual written affirmation to the NYSE. Review its charter annually and recommend changes, as necessary, to the Board.

Thus the fiduciary responsibility of the audit committee and board of directors over filing a bankruptcy is as above.

Reference:
Financial Statements for Eastman Kodak Company - Google Finance. 2013.Financial Statements for Eastman Kodak Company Google Finance. [ONLINE] Available

at: http://www.google.com/finance?fstype=ii&q=NYSE:EK. [Accessed 08 June 2013].

GET SAFE - Managing High Risk Clients. 2013. GET SAFE - Managing High Risk Clients. [ONLINE] Available at: http://www.getsafeusa.com/managing-high-risk-clients/. [Accessed 08 June 2013]

Top Ten Internal Controls to Prevent And Detect Fraud!. 2013. Top Ten Internal Controls to Prevent And Detect Fraud!. [ONLINE] [Accessed Available 08 June

at:http://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html. 2013].

In Sharp Focus: Red Flags at Eastman Kodak - Seeking Alpha. 2013. In Sharp Focus: Red Flags at Eastman Kodak Seeking Alpha. [ONLINE] Available 08

at: http://seekingalpha.com/article/259593-in-sharp-focus-red-flags-at-eastman-kodak. June 2013].

[Accessed

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