ACT 560 Portfolio Project


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Case Study: Auditor at SM&A

Here’s the role you are playing in this Case Study:

You graduated from CSU Global with a Master of Professional Accounting degree.

You earned your CPA credential from the state of Oklahoma; you applied and were accepted by the AICPA. After working in the field for years, you are now a qualified auditor and you recently joined Skylar, Morgan and Anderson Accounting Firm (SM&A).

First review the case study, and then answer the questions that follow.

Here’s an outline of this Case Study:

This year, Oklahoma Natural Solutions (ONS) was preparing for the end-of-year audit plan, procedures, and opinion for the annual 10-K report. SM&A was selected as the public audit firm that will prepare the annual audit plan, assessment, audit procedures and opinion.

ONS is trading on NASDAQ for $9.00 per share. Two years ago, ONS had a $25.00 per share value. ONS has a market float value of $100 million. The main stockholders are pension funds, state retirement funds, hedge funds in the oil sector, and thousands of individual stockholders. Last year, ONS had earnings per share (EPS) of $2.00 and paid cash dividends of $1.50 per share. The company has been under tremendous pressure to raise the stock price. However, the oil and gas marketplace has been very difficult with West Tennessee Intermediate (WTI) at $47.00 per barrel and the natural gas well price at $3.05 cubic foot at Henry Hub in Kansas. Henry Hub has nine major gas pipelines converging to supply gas at the location in Oklahoma. Most of this natural gas product is shipped by ONS to the northeast. ONS mostly has gas wells in the Lakeland Shale play area of Oklahoma.

Background of ONS top Leadership:

  • Chairman of the Board: Alexander Fred, age 65. He has been with the company for 40 years and was part of original group of individuals that started the company.
  • CEO: Patrick Fred, age 42, son of the chairman. Family owns 36% of all common stocks and 90% of preferred Stock A.
  • CFO: Melinda Jones, age 38, a CPA who has been with the company since she was 22 years old. Ms. Jones worked her way up through the organization. She is well liked by the chairman, Alexander Fred. Ms. Jones is a member of the AICPA and the State of Oklahoma CPA organization.
  • VP Production: Roger Rock, age 44, a petroleum production person; oil is in his veins. Received his Petroleum Engineering Degree from Texas A &M. Has been with the company just one year. Prior to joining ONS, he worked for Chevron for over 20 years.
  • Treasurer: Mrs. Hanna Hemp, age 36. She joined the firm just six months ago. Worked for a hedge fund in the Boston area for 15 years. Considered a team player by the chairman, Alexander Fred.

Audit subcommittee from Board of Directors:

  • James Fernandez, 63. He is on the BOD. College roommate of Alexander Fred. Mr. Fernandez has a CPA from Northern Kentucky.
  • Bill Fideo, financial expert on the committee, age 27. Just joined the board less than six months. He has never before been a member of the Board of Director (BOD) or been on the audit committee with any company. He is currently on the BOD. He earned his CPA from Southern Oklahoma Tech.

Public Audit firm: Skylar, Maryland, & Anderson

Location of office: Swayzee, Oklahoma.

Partner in Charge, Ms. Loise Maryland. Partner with 25 years’ of experience in the oil and gas industry.

Accounting Audit Supervisor assigned to ONS, Ms. Sarah Diamond. She has audit experiences with 15 years in the petroleum marketplace.

Audit accountants assigned to the client, ONS: Ms. Lisa Lang, two years’ experience; Mr. Andy Anderson, 18 months of experiences; Mr. Arnold Hernandez, one year of experiences.

SM&A won the bid process to perform the audit of ONS. The bidding was extremely competitive among five firms. The partners with the public accounting firm are hoping to have ONS as a client for the next five years. The public accounting firm has been losing customers to regional accounting firms in the last three years.

Ms. Maryland lives in a 5,000-sq. foot home in Oak Hill Country Club. Her husband loves to play golf. He does not have employment with any firm. Ms. Diamond loves working for Ms. Maryland and she would do anything for her. They are extremely close.


This year’s audit plan started out fine with cooperation between management and the audit firm. However, during the first quarter review, revenue numbers appeared to be higher in the vertical and horizontal analytics on previous quarters and the annual financial statement. The audit team meet to discuss the impact but could not find any negative or accounting entries earnings management numbers. Ms. Maryland and Ms. Diamond requested a meeting with Ms. Jones, CFO. In the meeting, Mrs. Jones informed the audit team that everything was fine. They booked some good sales in the quarter.

ONS management behind the scenes:

Sales have been flat for this year compared to last year. Natural gas well prices are trending downward at Henry Hub. The average revenue gas well per cubic foot price in the last year was $3.50. In this year, the Henry Hub gas well price is around $3.05. Gas volume is only 5% higher.

In a recent closed meeting, Patrick Fred and Alexander Fred suggested that Ms. Jones be creative and aggressive in booking revenue. No record was kept of the conversation. Ms. Jones said she knew what to do. Mr. Alexander Fred said having positive revenue would create a positive environment for the ONS stock versus other companies of similar size in the marketplace. In the meeting, Ms. Jones said nothing about integrity or the duty to stockholders. She simply kept quiet on the issue.


  • Using the AICPA Code of Professional Conduct describe how this was either applied, misapplied, or completely ignored.
  • Using the COSO Internal Control—Integrated Framework Executive Summary, describe the internal control weaknesses. Provide your recommendation for how to tighten up the controls for ONS based on the COSO summary.
  • Explain some of the actions of ONS leadership and the audit team based on the Fraud Triangle.
  • Using a virtue ethics approach, explain the shortcomings and describe how these principles could have benefited SM&A?
  • How would the duty-based concepts of deontology have been applied to this situation from both ONS and SM&A?
  • Describe how ONS and SM&A might have altered their choices if they would have been operating in the mode of transparency and in the best interest of various stakeholders (stockholders, community, employees, creditors)?
  • How might the consequentialism ethical theory have been expressed and practiced by Patrick and Alexander Fred?
  • What could be the quantitative and qualitative benefits and costs for Mrs. Melinda Jones to follow the request?
  • What might be the criminal and punitive damages under SOX to upper management if they certify this year’s financial statements?
  • As the auditor, what are your final recommendations or conclusion?


  • Your written paper should be 8 pages in length not counting the title and reference pages, which you must include.
  • You need to cite at least 5 sources for this portfolio project.
  • The sources must include the AICPA Code of Professional Conduct and COSO Internal Control Framework which are required for the project. Three of the remaining sources must come from academic journals.
  • Your paper must be formatted according to APA guidelines.
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