Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Company for the year ended December 31, 2018. On April 2, 2019, an inquiry letter to J. J. Young, Consolidated’s outside attorney, was drafted to corroborate the information furnished to Cole by management concerning pending and threatened litigation, claims, and assessments, as well as un asserted claims and assessments. On May 6, 2019, C. R. Cao, Consolidated’s chief financial officer, gave Cole a draft of the inquiry letter below for Cole’s review before mailing it to Young. May 6, 2019 J. J. Young, Attorney at Law 123 Main Street Any town, USA Dear J. J. Young: In connection with an audit of our financial statements at December 31, 2018, and for the year then ended, management of the company has prepared, and furnished to our auditors, Cole & Cole, CPAs, 456 Broadway, Any town, USA, a description and evaluation of certain contingencies, including those set forth below involving matters with respect to which you have been engaged and to which you have devoted substantive attention on behalf of the company in the form of legal consultation or representation. Your response should include matters that existed at December 31, 2018. Because of the confidentiality of all these matters, your response may be limited. In November 2018, an action was brought against the company by an outside salesman alleging breach of contract for sales commissions and pleading a second cause of action for an accounting with respect to claims for fees and commissions. The salesman’s action claims damages of $300,000, but the company believes it has meritorious defenses to the claims. The possible exposure of the company to a successful judgment on behalf of the plaintiff is slight. In July 2018, an action was brought against the company by Industrial Manufacturing Company (“Industrial”) alleging patent infringement and seeking damages of $20 million. The action in U.S. District Court resulted in a decision on October 16, 2018, holding that the company had infringed seven Industrial patents and awarding damages of $14 million. The company vigorously denies these allegations and has filed an appeal with the U.S. Court of Appeals for the Federal Circuit. The appeal process is expected to take approximately two years, but there is some chance that Industrial may ultimately prevail. Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated and an identification of the omission of any pending or threatened litigation, claims, and assessments or a statement that the list of such matters is complete. Your response may be quoted or referred to in the financial statements without further correspondence with you. You also consulted on various other matters considered pending or threatened litigation. However, you may not comment on these matters because publicizing them may alert potential plaintiffs to the strengths of their cases. In addition, various other matters probable of assertion that have some chance of an unfavorable outcome, as of December 31, 2018, are un asserted claims and assessments. C. R. Cao Chief Financial Officer Required: Describe the omissions, ambiguities, and inappropriate statements and terminology in Cao’s letter.
> Estimate the unit cell composition of a Wyoming montmorillonite specimen Volclay (American Colloid Company) using the oxide mass-fraction w(ExOy) data listed in Table 3.4. Table 3.4: Oxide w(E„Oy) Oxide w(E„Oy) 1 1 g•g¯ SiO2 (s) Al2O3(s) Fe2O3(s)
> Describe the special characteristics of Tschermak cation substitution and its significance for cation substitution in layer silicates.
> Clay mineral layer charge influences a variety of chemical and physical properties: swelling behavior, surface area, and the exchangeability of interlayer ions. Explain the relationship between layer charge and the chemical and physical properties listed
> Consider a landscape underlain by granite that weathers in situ to residuum. The x-ray diffraction pattern from the silt-size fraction of the residuum collected near the contact with the underlying granite bedrock clearly shows the presence of fine-grain
> A cylindrical soil core ( L = 20 cm, r = 3 cm) was collected from a field site in Madison County, Iowa, The weight of the empty metal cylinder is: m1 = 225 g. The metal cylinder containing field-moist soil is weighed (m2 = 1217.8 g) then dried in a 10
> List the stable isotopes for all Period 3 elements (Na through Ar) and explain why some elements have more stable isotopes than others. Stable isotopes and their relative abundances are compiled by the National Institute of Standards and Technology: www.
> A cylindrical soil core ( L = 20 cm, r = 3 cm) was collected from a field site in Madison County, Iowa, The weight of the empty metal cylinder is: m1 = 225 g. The metal cylinder containing field-moist soil is weighed (m2 = 1217.8 g) then dried in a 10
> The estimated evapotranspiration water loss during June 2008 in a Dane County, Wisconsin watershed averaged 4.9 mm of water per day. The average soil depth in the watershed is 100 cm and has a total water storage capacity of: θ = 0.400 cm • cm−1. At the
> Use the Thornthwaite potential evapotranspiration model to estimate the mean evapotranspiration water loss during May 2016 in Dane County, Wisconsin. Identify the weather station you use to make your estimate.
> Use the empirical Clapp-Hornberger unsaturated hydraulic conductivity function in Appendix D to estimate the hydraulic conductvity kD of a loam- texture soil at field capacity.
> The volumetric moisture content of a fine-sand soil is θ = 0.12 m3 • m−3. Use the empirical Clapp-Hornberger water retention function in Appendix D to estimate the tension head htension at this water content.
> The Antigo soil (Langlade County, Wisconsin) has a retardation coefficient of Rf = 3.90 for the organophosphate insecticide Phosmet (CAS Registry Number 732-11-6). The Antigo soil has a field capacity water content of θfc = 0.37 cm cm−1. Estimate how dee
> The Macksburg soil (Madison County, Iowa) has a retardation coefficient of Rf = 42.2 for the herbicide Atrazine (CAS Registry Number 1912-24-9). In early spring the Macksburg soil is at field capacity and the depth to water table is 45 cm. Estimate how d
> The Robbs soil from Johnson County, Illinois has a moist bulk density of ρt = 1.34 M g • m−3 and a field-capacity volumetric water content of θfc = 0.38 cm•cm−1. The solids-water partition coefficient for the herbicide Cyanazine (CAS Registry Number 2172
> Table 2.1 lists the physical and water retention data for the Macksburg soil series from Madison County Iowa. The Macksburg soil is located on nearly level (0-2% slopes) upland sites, has moderately high permeability and is considered well drained. Det
> For six years, a child has been drinking water containing 0.05 mg dm−3 benzene (CAS Registry Number 71-43-2). Estimate the average daily dose ADD for a child in this case, taking into account the nature of the toxicant (carcinogen or non-carcinogen).
> The following dose-response curve plots the central estimate of the adverse (toxic) response from a series of doses. The dose (i.e., body burden) is plotted on a base-10 logarithmic scale (dose units: [mg • kg−1 ]) and
> The data below is the nitrogen content of soil specimens collected in Black Hawk County, Iowa (Professor M. E. Thompson, Iowa State University). Determine the arithmetic mean and geometric mean soil nitrogen content of this data set. Bulk Density Or
> Calculate the binding energy per nucleon Eb/A in MeV for the carbon isotope 6 12
> List the four overall steps in the auditor’s going concern evaluation process.
> Describe the purposes of an independent engagement quality review by a quality review partner.
> Are analytical procedures required as part of the final overall review of the financial statements? What is the purpose of such analytical procedures?
> Under what circumstances would the auditor dual date an audit report?
> What are the types of subsequent events relevant to financial statement audits? Give one example of each type of subsequent event that might materially affect the financial statements.
> Provide two examples of commitments. Under what conditions do such commitments result in a decrease in Other Comprehensive Income?
> What information does the auditor ask the attorney to provide on pending or threatened litigation?
> What types of events would generally require restatement of the issued financial statements? What procedures should the auditor follow when the entity refuses to cooperate and make the necessary disclosures?
> What items should be included in the auditor’s communication with those charged with governance (i.e., the audit committee or similar group)?
> What four major categories of events or conditions may indicate going concern problems? Give two examples for each category.
> What is one of the key segregation of duties for the property management process? What errors or fraud can occur if such segregation is not present?
> Define what is meant by contingent liability. What three categories are used to classify a contingent liability? Give four distinct examples of contingent liabilities.
> Briefly describe the classification and valuation issues related to investments in debt and equity securities.
> What are the main transaction-related assertions for investments? Identify the key segregation of investment-related duties and possible errors or fraud that can occur if this segregation is not present.
> List three fraud-related audit procedures for cash.
> Why are analytical procedures of limited use in the audit of the cash balance?
> Briefly describe each type of bank account. How does an imprest account help to improve control over cash?
> Dean Wareham, an audit manager, is preparing a proposal to provide additional services for an audit client that is a publicly held company in the manufacturing industry. The company is growing rapidly and introducing many new products yet has an outdated
> The following auditor’s report was drafted by a staff accountant of Nathan and Matthew, CPAs, at the completion of the audit of the comparative financial statements of Monterey for the years ended December 31, 2018 and 2017. The report was submitted to t
> For the year ended December 31, 2017, Friday & Co., CPAs (“Friday”), audited the financial statements of Kim Company and expressed an unqualified opinion on the balance sheet only. Friday did not observe the count of the physical inventory as of December
> On March 12, 2019, Kristen & Valentine, CPAs, completed the audit of the financial statements of Modern Museum, Inc., for the year ended December 31, 2018. Modern is a privately held company. Modern Museum presents comparative financial statements on a m
> What is a typical control over authorization of capital asset transactions?
> Devon, Inc., engaged Rao to examine its financial statements for the year ended December 31, 2018. The financial statements of Devon, Inc., for the year ended December 31, 2017, were examined by Jones, whose March 30, 2018, auditor’s report expressed an
> The CPA firm of May & Marty has audited the consolidated financial statements of BGI Corporation. May & Marty examined the parent company and all subsidiaries except for BGI-Western Corporation, which was audited by the CPA firm of Dey & Dee. BGI-Western
> For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue. Assume that each item is at least material. a. Thibodeau Mines, Inc., uses LIFO for valuing inventories held
> For each of the following independent situations, indicate the type of financial statement audit report that you would issue and briefly explain your reasoning. Assume that each item is at least material. a. Barefield Corporation, a wholly owned subsidia
> During the examination of the annual financial statements of Amis Manufacturing, Inc., a nonpublic company, the company’s president, R. Heinrich, and Luddy, the auditor, reviewed the matters that were to be included in a written representation letter. Up
> Arenas, an assistant accountant with the firm of Gonzales & Ramirez, CPAs, is auditing the financial statements of Tech Consolidated Industries, Inc. The firm’s audit program calls for the preparation of a written management representation letter. Requi
> For each of the following items, assume that Josh Feldstein, CPA, is expressing an opinion on Scornick Company’s financial statements for the year ended December 31, 2018; that he completed fieldwork on January 21, 2019; and that he now is preparing his
> Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2018. Namiki plans to complete the fieldwork and sign the auditor’s report about March 10, 2019. Namiki is concerned about events and transactions occ
> During an audit engagement, Harper, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments. Required:
> Describe two or more factors that the auditor should consider in assessing the inherent risk for (a) intangible assets and (b) the property management process.
> Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of Vernon’s internal control system, Phung set con
> The schedule on the following page was prepared by the controller of World Manufacturing, Inc., for use by the independent auditors during their examination of World’s year-end financial statements. All procedures performed by the audit assistant were no
> Sevcik Company’s auditor received, directly from the banks, confirmations and cutoff statements with related checks and deposit tickets for Sevcik’s three general-purpose bank accounts. The auditor determined that the controls over cash are satisfactory
> Cassandra Corporation, a manufacturing company, periodically invests large sums in investment (debt and equity) securities. The investment policy is established by the investment committee of the board of directors, and the treasurer is responsible for c
> Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son, a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two a
> Lee, CPA, the continuing auditor of Wu, Inc., is beginning to audit the common stock and treasury stock accounts. Lee has decided to design substantive procedures without relying on the company’s internal control system. Wu has no par and no stated-value
> Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry “Property, plant, and equipment.” Gonzales has been asked by the company’s management if audit ad
> Nakamura, CPA, has accepted an engagement to audit the financial statements of Grant Manufacturing Company, a new client. Grant has an adequate control environment and a reasonable segregation of duties. Nakamura is about to set the control risk for the
> Park Corporation, a local sporting goods company, has asked your firm for assistance in setting up its website. HeeSoo Park, the CEO, is concerned that potential customers will be reluctant to place orders over the Internet to a relatively unknown entity
> This question consists of 13 items pertaining to possible deficiencies in an accountant’s review report. Indicate whether each statement about a possible deficiency is correct (C) or incorrect (I) in the space provided. Jordan & Stone, CPAs, audited the
> List four categories of intangible assets and four types of property, plant, and equipment transactions.
> The following report was drafted on October 25, 2018, by Major, CPA, at the completion of an engagement to compile the financial statements of Ajax Company for the fiscal year ended September 30, 2018. Ajax is a non-public entity in which Major’s child h
> You are the manager of the examination engagement of the financial projection of Honey’s Health Foods as of December 31, 2018, and for the year then ended. The audit senior, Currie, has prepared the following draft of the examination report: To the Board
> Your client, Cheaney Rental Properties, has engaged you to perform a compilation of its forecasted financial statements for a loan with the National Bank of Rockwood. Required: a. Describe the steps an accountant should complete when conducting a compil
> Orange Grove Farms has approached your CPA firm with some questions. Orange Grove’s management has spoken with a bank about obtaining a loan to expand its operations. The bank has informed Orange Grove that the bank will not make the requested loan unles
> Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements. Sleek needed the audit to obtain bank loans and to offer public stock so that i
> Butler Manufacturing Corporation planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Meng, CPA, to audit its financial statements. Butler told Meng that the financial statements would
> Astor Electronics, Inc., markets a wide variety of computer-related products throughout the United States. Astor’s officers decided to raise $1 million by selling shares of Astor’s common stock in an exempt offering under Regulation D of the Securities A
> Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements. The purpose of the audit was to determine whether the unaudited financial statements furnished to
> Perez, CPA, has been asked by a nonpublic company, for which Perez provides audit services, to perform a nonrecurring engagement involving implementation of an IT information and control system. The entity requests that, in setting up the new system and
> Each of the following situations involves a possible violation by a member in industry of the AICPA’s Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and ex
> What are the functions of the registrar, the transfer agent, and the dividend-disbursing agent?
> Each of the following situations involves a possible violation of the Independence Rule of the AICPA’s Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why. a. Julia Roberto, a sole practit
> Do an Internet search to find the SOC 3 report for Google’s Cloud Platform System for the latest period available. Required: a. Read the report. Identify the accounting firm that performed the SOC 3 attestation engagement. Which of the Trust Services Cr
> The AICPA has developed assurance services related to electronic commerce called Trust Services. Do an online search for Trust Services on the AICPA website (www. aicpa.org). Required: a. Find and list the five broad areas into which the Trust Services
> The IIA maintains its own website containing useful information about the Institute and the internal auditing profession in general. Visit the IIA’s home page (www. theiia.org). Required: a. Under the tab “Bookstore & Publications,” click on “Internal A
> A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements. Required: a. Search the EDGAR database found at http://www.sec.gov/edgar/searchedgar/companysearch.html to find a company’s 10-K that r
> Visit the AICPA’s website (www.aicpa.org), under “Research,” and then “Standards.” Click on “Code of Professional Conduct.” Find the Independence Rule and its related interpretations in Part 1 of the Code of Professional Conduct. Research the relevant ru
> Both Intel (www.intel.com) and Microsoft (www.microsoft.com) have large amounts of investment securities. Visit their home pages, and review their financial statements for information on how they account for investment securities and the amounts of those
> Visit the website of another catalog retailer similar to Earth Wear Clothiers, and determine what useful lives and depreciation methods are used for property, plant, and equipment. Compare those methods to Earth Wear, and, if different, consider the impl
> AT-C Section 315, “Compliance Attestation,” allows a practitioner to perform agreed-upon procedures to assist users in evaluating management’s written assertions about (1) the entity’s compliance with specified requirements, (2) the effectiveness of the
> Critics of the Sarbanes-Oxley Act do not believe the Act will be effective at deterring accounting frauds because it primarily relies on specifying new crimes and higher penalties (i.e., increasing the maximum fine and prison terms). Critics argue that i
> Identify two substantive analytical procedures that can be used to audit prepaid insurance.
> oration and Watson Corporation, publicly held companies traded on NASDAQ. Watson recently acquired Lestrad Corporation in a merger that involved swapping 1.75 shares of Watson for 1 share of Lestrad. In connection with that merger, CD&A issued an unquali
> Schoeck, CPA, is considering leaving a position at a major public accounting firm to join the staff of a local bookkeeping and advisory firm that does write-up work, tax preparation and planning, and financial planning. The local firm is not owned by CPA
> Refer back to the hypothetical Sun City Savings and Loan case presented toward the beginning of this chapter, and consider each of the following independent situations: a. Suppose that Pina, Johnson & Associates also audited one of the entities who had r
> While completing a test of controls, you appropriately cleared two minor exceptions by examining related documents. The entity will need to do some serious digging to find the documents to resolve a third, similar, exception and wants to know if you real
> Your supervisor tells you that for the next month you will be working on an audit entity with a controller who loves to talk. She explains that the entity will want you to spend an hour or so talking about politics, sports, and life’s mysteries and you n
> For each of the following scenarios, indicate whether or not independence-related SEC rules are being violated, assuming that the audit entity is a public company. Briefly explain why or why not. a. Adrian Reynolds now works as a junior member of the acc
> You are auditing the financial statements for your new client, Paper Packaging Corporation, a manufacturer of paper containers, for the year ended March 31, 2019. Paper Packaging is a public company. Paper Packaging’s previous auditors
> In February 2019, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company’s Durango facility to determine if there were any violations of federal or state environmental laws. In formulating your opi
> Wyly Waste Management (“WWM”) is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $100,000. Shortly after the end of the year, WWM’s CFO is meeting with your audit partner to review the preliminary results of the audit
> Medical Products, Inc. (MPI) was created in 2016 and entered the optical equipment industry. Its made-to-order optical equipment requires large investments in research and development. To fund these needs, MPI made a public stock offering, which was comp
> How does the purchasing process affect prepaid insurance and property, plant, and equipment transactions?
> On January 15, 2018, Leno, Inc., which has a March 31 year-end, entered into a transaction to sell the land and building that contained its manufacturing operations for a total selling price of $19,750,000. The book value of the land and the building was
> Pierce, an independent auditor, was engaged to examine the financial statements of Wong Construction, Inc., for the year ended December 31. Wong’s financial statements reflect a substantial amount of mobile construction equipment used in the firm’s opera
> The long-term debt working paper shown below was prepared by entity personnel and audited by Andy Fogelman, an audit assistant, during the calendar year 2018 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewi
> The FASB’s revised standard on leases, ASC 842, was effective for public companies beginning 2018. One significant implication of this standard is that operating leases that were previously kept off the balance sheet are now required to be recorded on th
> What types of services can be performed under Statements on Standards for Accounting and Review Services?
