For the following independent situations, assume that you are the audit partner on the engagement: 1. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business, but there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes. 2. Your client, Harrison Automotive, has changed from straight-line to sum-of-the-years' digits depreciation. The effect on this year's income is immaterial, but the effect in future years is likely to be material. The facts are adequately disclosed in footnotes. 3. Toronto Technology Corporation has prepared financial statements but has decided to exclude the statement of cash flows. Management explains to you that the users of their financial statements find this statement confusing and prefer not to have it included. 4. Marseilles Fragrance, Inc. is based in New York but has operations throughout Europe. Because users of the audited financial statement are international, your audit firm was engaged to conduct the audit in accordance with U.S. auditing standards and International Standards on Auditing (ISAs). 5. The controller of Brentwood Industries, Inc. will not allow you to confirm the receivable balance from two of its major customers. The amounts of the receivables are material in relation to Brentwood Industries' financial statements. You are unable to satisfy yourself as to the receivable balances by alternative procedures. 6. Approximately 20% of the audit of Lumberton Farms, Inc. was performed by a different CPA firm, selected by you. You have reviewed their audit files and believe they did an excellent job on their portion of the audit. Nevertheless, you are unwilling to take complete responsibility for their work. For each situation, do the following: Required a. Identify which of the conditions requiring a modification of or a deviation from an unqualified standard report is applicable. b. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision. c. Given your answers in parts a and b, state the appropriate audit report from the following alternatives (if you have not decided on one level of materiality in part b, state the appropriate report for each alternative materiality level): (1) Unqualified-standard wording (2) Unqualified-explanatory paragraph (3) Unqualified-modified wording (4) Qualified opinion only (5) Qualified scope and opinion (6) Disclaimer (7) Adverse* d. Based on your answer to part c, indicate which paragraphs, if any, should be modified in the standard audit report. Also indicate whether an additional paragraph is necessary and its location in the report.
> As a part of the audit of Ren Gold Manufacturing Company, a nonpublic company, management requests basic financial statements and separately, the same basic financial statements accompanied by additional information. Management informs you that the inten
> You are responsible for the audit of inventory for Honey Best Grocery Wholesales, Inc., a closely held grocery wholesaler that sells to independent grocery stores. Inventory is by far the largest account on their balance sheet. Honey Best operates in ten
> Leslie Morgan, CPA, has prepared a letter of representation for the president and controller to sign. It contains references to the following items: 1. Inventory is fairly stated at the lower of cost or market and includes no obsolete items. 2. All actua
> The field work for the June 30, 2011, audit of Tracy Brewing Company was finished August 19, 2011, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 2011. In each of the highly material independent
> The following unrelated events occurred after the balance sheet date but before the audit report was prepared: 1. The granting of a retroactive pay increase 2. Declaration of a stock dividend 3. Sale of a fixed asset at a substantial profit 4. Determinat
> In analyzing legal expense for the Boastman Bottle Company, Mary Little, CPA, observes that the company has paid legal fees to three different law firms during the current year. In accordance with her CPA firm's normal operating practice, Little requests
> In an audit of the Marco Corporation as of December 31, 2011, the following situations exist. No entries have been made in the accounting records in relation to these items. 1. During the year 2011, the Marco Corporation was named as a defendant in a sui
> Elizabeth Johnson, CPA, has completed the audit of notes payable and other liabilities for Valley River Electrical Services and now plans to audit contingent liabilities and commitments. Required a. Distinguish between contingent liabilities and commitm
> Explain why the emphasis in auditing property, plant, and equipment is on the current period acquisitions and disposals rather than on the balances in the account carried forward from the preceding year. Under what circumstances will the emphasis be on t
> List one possible internal control for each of the six transaction related audit objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
> The following questions concern information accompanying basic financial statements. Choose the best response. a. The Form 10-K filed by management of a public company includes a section on management's discussion and analysis (MD&A) in addition to the a
> The following questions concern communications between management, those charged with governance, and the auditor. Choose the best response. a. A principal purpose of a letter of representation from management is to (1) Serve as an introduction to compa
> The following misstatements are included in the inventory and related records of Westbox Manufacturing Company: 1. An inventory item was priced at $12 each instead of at the correct cost of $12 per dozen. 2. In taking the physical inventory, the last shi
> Describe matters that the auditor must communicate to audit committees of public companies.
> Distinguish between regular audit documentation review and independent review and state the purpose of each. Give two examples of potential findings in each of these two types of review.
> What is meant by reading other financial information in annual reports? Give an example of the type of information the auditor is examining.
> Explain what is meant by information accompanying basic financial statements. Provide two examples of such information. What levels of assurance may the CPA offer for this information?
> Distinguish between a client letter of representation and a management letter and state the primary purpose of each. List some items that might be included in each letter.
> Compare and contrast the accumulation of audit evidence and the evaluation of the adequacy of the disclosures in the financial statements. Give two examples in which adequate disclosure could depend heavily on the accumulation of evidence and two others
> Miles Lawson, CPA, believes that the final summarization is the easiest part of the audit if careful planning is followed throughout the audit. He makes sure that each segment of the audit is completed before he goes on to the next. When the last segment
> Distinguish between subsequent events occurring between the balance sheet date and the date of the auditor's report, and subsequent discovery of facts existing at the date of the auditor's report. Give two examples of each and explain the appropriate act
> Explain the relationship between substantive tests of transactions for the acquisition and payment cycle and tests of details of balances for the verification of property, plant, and equipment. Which aspects of property, plant, and equipment are directly
> Identify five audit procedures normally done as a part of the review for subsequent events.
> Following are audit procedures commonly performed in the inventory and warehousing cycle for a manufacturing company: 1. Read the client's physical inventory instructions and observe whether they are being followed by those responsible for counting the i
> The embezzlement of funds from organizations is often orchestrated through fictitious accounts payable and related cash disbursement transactions. The AuditNet online resource center for auditors includes information about typical accounts payable fraud
> The following is an auditor's report prepared in accordance with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB): INDEPENDENT AUDITOR'S REPORT To the Shareholders of Les Meridian, Inc.
> James Burrow is the loan officer for the National Bank of Dallas. National has a loan of $325,000 outstanding to Regional Delivery Service, a company specializing in delivering products of all types on behalf of smaller companies. National's collateral o
> What consulting or nonaudit services are prohibited for auditors of public companies? What other restrictions and requirements apply to auditors when providing nonaudit services to public companies?
> What are the six core ethical values described by the Josephson Institute? What are some other sources of ethical values?
> Identify the three categories of client objectives. Indicate how each objective may affect the auditor's assessment of inherent risk and need for evidence accumulation.
> Distinguish between independence of mind and independence in appearance. State three activities that may not affect independence of mind but are likely to affect independence in appearance.
> What organization is responsible for developing ethics standards at the international level? What are the fundamental principles of the international ethics standards?
> In the conduct of audits of financial statements, it would be a serious breach of responsibility if the auditor did not thoroughly understand accounting. However, many competent accountants do not have an understanding of the auditing process. What cause
> List the four parts of the Code of Professional Conduct, and state the purpose of each.
> Why is there a special need for ethical behavior by professionals? Why do the ethical requirements of the CPA profession differ from those of other professions?
> The International Ethics Standards Board for Accountants (IESBA) Handbook of the Code of Ethics for Professional Accountants is available for free download from the IFAC website (www.ifac.org). Similarly, the AICPA's Code of Professional Conduct is searc
> Summarize the restrictions on advertising by CPA firms in the rules of conduct and interpretations.
> What are the differences and similarities in audits of financial statements, compliance audits, and operational audits?
> Identify and explain factors that should keep the quality of audits high even though advertising and competitive bidding are allowed.
> The auditor's audit files usually can be provided to someone else only with the permission of the client. Give exceptions to this general rule.
> Assume that an auditor makes an agreement with a client that the audit fee will be contingent upon the number of days required to complete the engagement. Is this a violation of the Code of Professional Conduct? What is the essence of the rule of profess
> After accepting an engagement, a CPA discovers that the client's industry is more technical than he realized and that he is not competent in certain areas of the operation. What are the CPA's options?
> Many people believe that a CPA cannot be truly independent when payment of fees is dependent on the management of the client. Explain two approaches that could reduce this appearance of lack of independence.
> Explain how the rules concerning stock ownership apply to partners and professional staff. Give an example of when stock ownership would be prohibited for each.
> Describe an ethical dilemma. How does a person resolve an ethical dilemma?
> The following tentative auditor's report was drafted by a staff accountant and submitted to a partner in the accounting firm of Better & Best, CPAs: AUDIT REPORT To the Audit Committee of American Broadband, Inc. We have examined the consolidated balance
> Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report those circumstances in which such principles have not bee
> Identify two types of information in the client's minutes of the board of directors meetings that are likely to be relevant to the auditor. Explain why it is important to read the minutes early in the engagement.
> Several types of opinions are described in a. through i. below. For each opinion, select the appropriate description of that opinion from the list numbered 1 through 9 below that corresponds with the type of opinion. Types of Opinion a. Unqualified opini
> For the following independent situations, assume that you are the audit partner on the engagement: 1. During your audit of Raceway.com, Inc., you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow yo
> Describe the nature of the evidence the internal revenue agent will use in the audit of Jones Company's tax return.
> Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2011. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following rep
> A careful reading of an unqualified report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: a. "The financial statements referred to above present fairly in all materi
> Discuss why the adoption of international accounting and auditing standards might be beneficial to investors and auditors.
> The ISAs allow an auditor to include either of the following phrases in the auditor's opinion paragraph: (1) "The financial statements present fairly in all material respects . . ." (2) "The financial statements give a true and fair view of". Discuss whe
> When an auditor discovers more than one condition that requires departure from or modification of the standard unqualified report, what should the auditor's report include?
> Identify the three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP. Under what circumstance is each appropriate?
> For the audit of Radline Manufacturing Company, the audit partner asks you to carefully read the new mortgage contract with the First National Bank and abstract all pertinent information. List the information in a mortgage that is likely to be relevant t
> Distinguish between a report qualified as to opinion only and one with both a scope and opinion qualification.
> How does the auditor's opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client's control? Under which of these two will the auditor be most likely to issue a disclaimer of opinion
> Explain how materiality differs for failure to follow GAAP and for lack of independence.
> Define materiality as it is used in audit reporting. What conditions will affect the auditor's determination of materiality?
> Explain what is meant by determining the degree of correspondence between information and established criteria. What are the information and established criteria for the audit of Jones Company's tax return by an internal revenue agent? What are they for
> Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and explain the circumstances under which each is appropriate.
> List the three conditions that require a departure from an unqualified opinion and give one specific example of each of those conditions.
> Distinguish between changes that affect consistency and those that may affect comparability but not consistency. Give an example of each.
> Explain why auditors' reports are important to users of financial statements and why it is desirable to have standard wording.
> Describe what is meant by reports involving the use of other auditors. What are the three options available to the principal auditor and when should each be used?
> In recent years the stock market experienced significant declines, unprecedented since the Great Depression. Why might it be important for you to consider current economic events as part of planning an audit?
> Distinguish between an unqualified report with an explanatory paragraph or modified wording and a qualified report. Give examples when an explanatory paragraph or modified wording should be used in an unqualified opinion.
> What type of opinion should an auditor issue when the financial statements are not in accordance with GAAP because such adherence would result in misleading statements?
> Describe the information included in the introductory, scope, and opinion paragraphs in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature of the additional paragraphs in the audit report?
> What five circumstances are required for a standard unqualified report to be issued?
> What are the purposes of the opinion paragraph in the auditor's report? Identify the most important information included in the opinion paragraph.
> Explain the relationships among audit services, attestation services, and assurance services, and give examples of each.
> What are the purposes of the scope paragraph in the auditor's report? Identify the most important information included in the scope paragraph.
> List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do the parts compare with those found in a qualified report?
> The U.S. Securities and Exchange Commission (SEC) is an independent, nonpartisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. Publicly traded companies must electronically file a variety of forms or
> For each engagement described below, indicate whether the engagement is likely to be conducted under international auditing standards, U.S. generally accepted auditing standards, or PCAOB auditing standards. a. An audit of a U.S. private company with no
> Which types of loans to executives are permitted by the Sarbanes- Oxley Act?
> Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company's records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immedia
> The Howard Mobile Home Manufacturing Company is audited by Olson and Riley, CPAs. Howard Mobile Home has decided to issue stock to the public and wants Olson and Riley to perform all the audit work necessary to satisfy the requirements for filing with th
> For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4. .:. a. Appropriate accounting and auditing research requires adequate technical reference materi
> The following questions concern quality control standards. Choose the best response. a. A CPA firm is reasonably assured of meeting its responsibility to provide services that conform with professional standards by (1) Adhering to generally accepted aud
> State what is meant by the term peer review. What are the implications of peer review for the profession?
> Describe the role of International Standards on Auditing. What is the relationship between International Standards on Auditing and U.S. Generally Accepted Auditing Standards?
> Distinguish among the following three risks: risk-free interest rate, business risk, and information risk. Which one or ones does the auditor reduce by per-forming an audit?
> Generally accepted auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable practitioners to improve the quality of
> The first standard of field work requires the performance of the audit by a person or persons having adequate technical training and proficiency as an auditor. What are the various ways in which auditors can fulfill the requirement of the standard?
> Distinguish between generally accepted auditing standards and generally accepted accounting principles, and give two examples of each.
> Define what is meant by a related party. What are the auditor's responsibilities for related parties and related party transactions?
> Who is responsible for establishing auditing standards for audits of U.S. public companies? Who is responsible for establishing auditing standards for U.S. private companies? Explain.
> What roles are played by the American Institute of Certified Public Accountants for its members?
> Describe the role of the SEC in society and discuss its relationship with and influence on the practice of auditing.
> State the four major types of services CPAs perform, and explain each.
> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix. You should read all of the reference material preceding instruc
> Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend James Foley asks him, "Doesn't it bother you that your clients don't look forward to seei
> Winston Black was an audit partner in the firm of Henson, Davis & Company. He was in the process of reviewing the audit files for the audit of a new client, McMullan Resources. McMullan was in the business of heavy construction. Black was conducting his
> The Internet has dramatically increased global e-commerce activities. Both traditional "brick and mortar" businesses and new dot-com businesses use the Internet to meet business objectives. For example, eBay successfully offers online auctions as well as
> Following are the auditor's calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client's business and assess the risk of financial failure, but any other relevant conclusions are als
