Northern Frontier Park

Northern Frontier Park

In 1998, Northern Frontier Park (NFP) sought the services of my accounting company to audit their finances and declare that their annual statements were both reliable and representative of their efficiency. By analyzing NFP’s business, this article aims to examine the misstatements risks that occur in financial reports and analytical procedures.

The auditing process in this case involves three major parties. These include Mr. Kramer, who is the Chief Executive Officer of NFP, Mr. Kramer’s family, and Newman, the Chief Financial Officer of the corporation. After Mr. Kramer’s death in 1997, his family sold the remaining shares of the business to Mr. Newman, allowing him majority control of the company. The problem arises from the fact that the purchase cost was based on multiple net income from the operation at the end of the fiscal year, the summer (May) of 1998. While the family of Mr. Kramer hoped, the income would exceed real net income, Mr. Newman expected it would be lower. Nonetheless, as the Chief Financial Officer, Mr. Newman is entitled more influence affect over the financial statements.

Internal factors within the company can also account for inaccuracy in the financial reports. For instance, the purchased cost was calculated taking into account net earnings from proceedings with the operations. The computing sale price approach allowed Mr. Newman, as CFO, to tamper with the financial reports. Additionally, in the past, the company failed to review and their financial statements and this absence of previously audited financial statements, which led that previous financial statements were not reliable and added to the risk of inaccuracy and misstatements.

However, there are two companywide factors, which reduce the misstatements. Mr. Kramer’s management style reduced risk aversions. Kramer made sure to abide by federal regulations regarding the control and operations of his company, and had an accounting system based on recorded transactions and receipts. Similarly, the company, in 1997, performed a perpetual inventory system that sought the increase the quality of internal control in animal stock, thus decreasing the risk of frauds in their financial statements and accounting.  

The three accounts that possess the most risk should be paid more attention to by the auditors. They are the interest expense account, restoration, and the animal stocks account. Although these accounts missed one monthly data in 1998, they were still unusual. For example, one red flag is the fact that interest expenses in 1998 increased by over 106 percent compared to the year before, raising questions regarding whether or not the company abided by regulations regarding expense recognition. Furthermore, restoration costs and other cost increased by over 100 percent, from $10,000 in 1998 to $162,000 the year after. Auditors should get evidence to examine whether those costs occurred and there are some frauds in the account.  In regards to the animal stock account, the company, under Mr. Newman, shifted to an average cost method, so it is unclear whether these were adequately and appropriately recorded or if they caused misstatements in the accounting system.