Capitalization of line capacity per CFO, amounts were originally incorrectly recorded as an expense

13-35 (WorldCom Fraud) The WorldCom bankruptcy is one of the largest in
U.S. economic history. Much of the fraud was carried out by capitalizing
operating expenses such as payments to other companies for line rental,
as fixed assets. Adjusting journal entries were made at the company’s
headquarters in Mississippi even though property accounting records were
located in Dallas.
Required:
1. Would it be considered
unusual to find debits to fixed assets coming from a journal entry
source rather than a purchase journal? Explain.
2. Would it be
considered unusual to find entries to accumulated depreciation and
depreciation expense to come from a journal entry source rather than
another source?
3. Assume you were auditing WorldCom and in your
sample of debits to fixed assets, you find an entry for $500,000 with
the following notation:
“Capitalization of line capacity per CFO, amounts were originally incorrectly recorded as an expense.”
Explain
what you would do to complete the audit of this item. What evidence
would you need to see to either corroborate or question the entry?

 

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