For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic over the past several months that has caused you to have substantial doubt about YogurtLand’s ability to continue as a going concern. 2. Intelligis Electronics is a manufacturer of advanced electrical components. During the year, changes in the market resulted in a significant decrease in the demand for their products, which are now being sold significantly below cost. Management refuses to write off the products or to increase the reserve for obsolescence. 3. 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. 4. 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 may be highly material. The change is not disclosed in the footnotes. 5. Circumstances prevent you from being able to observe the counting of inventory at Brentwood Industries. The inventory amount is material in relation to Brentwood Industries’ financial statements. But, you were able to perform alternative procedures to support the existence and valuation of the inventory at year-end. 6. Approximately 20 percent 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. Required: For each situation, do the following: a. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any. 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) Unmodified opinion—standard wording (2) Unmodified opinion—explanatory paragraph (3) Unmodified opinion—nonstandard report wording (4) Qualified opinion only—GAAP departure (5) Qualified opinion—scope limitation (6) Disclaimer (7) Adverse*
> What is meant by the control environment? What is the relationship between the control environment and the other four components of internal control?
> Describe the types of procedures auditors perform as part of their risk assessment procedures.
> What two aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?
> Provide two examples of factors that might increase the risk of material misstatement at the overall financial statement level.
> Define misappropriation of assets and give two examples of misappropriation of assets.
> Describe the following documents and records and explain their use in the sales and collection cycle: bill of lading, credit memo, remittance advice, and accounts receivable trial balance.
> In Part I of the case, you performed preliminary analytical procedures for Pinnacle (pp. 267–269). The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. During the planning phase of the audit, yo
> In Parts I (pp. 267–269) and II (pp. 302–303) of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. The auditor also assesses fraud risk as part of risk assessment p
> Following are descriptions of 10 internal controls. 1. The company has an organizational chart that establishes the formal lines of reporting and authorization protocols. 2. Before a cash disbursement can be processed, all payee information must be verif
> During audit planning, an auditor obtained the following information: 1. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist. 2. There are recurring attem
> Define what is meant by a tick mark. What is its purpose?
> Newspaper headlines frequently highlight instances where business professionals, politicians, and others are accused of engaging in unethical behavior. In response, there have been numerous attempts to reduce their occurrence. For example, some have argu
> The list below indicates various audit, attestation, and other engagements involving auditors. 1. A report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes–Oxley Act. 2. An examination report on
> Each year near the balance sheet date, when the president of Bargon Construction, Inc., takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent. Jack Morgan, head bookkeeper for the company, uses thi
> The following audit procedures are included in the audit program of Holland Equipment, Inc. 1. Use audit software to examine journal entries in the sales, cash receipts, purchases, cash disbursements, payroll, and general journals for any amounts exceedi
> Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. There
> The following misstatements are included in the accounting records of the Dillon Manufacturing Company: 1. Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened. 2. A sales invoice was miscalculated by $1,000 as a result
> Public companies are required to file restated financial statements with the SEC when they discover after the audited financial statements have been issued that the financial statements are materially misstated. The misstatements may have been the result
> Each of the following situations involves possible violations of the AICPA Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and t
> Each of the following situations involves a possible violation of the AICPA Code of Professional Conduct. For each situation, state the applicable rule of conduct and whether it is a violation. a. Stefan, CPA, provides tax services, management advisory s
> Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. Required: a. Explain what low, medium, and high mean for each of the four risks and planned evidence. b. Fi
> What are the purposes of the AICPA Statements on Standards for Attestation Engagements?
> Target and Kohl’s are chains of stores that cater to customers who desire name-brand goods at lower prices. The Securities and Exchange Commission (SEC) Form 10-K filing rules require management of U.S. public companies to include background information
> Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks. 1. Fernandez Wholesalers sells energy drinks to various distributors. As they have expanded sales to additi
> Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedur
> This problem requires you to access PCAOB Auditing Standard AS 2110, Identifying and Assessing Risks of Material Misstatements (pcaobus.org). Use this standard to answer each of the questions below. For each answer, document the paragraph(s) in AS 2110 s
> The following are concepts discussed in Chapter 8 and this chapter: 1. Preliminary judgment about materiality 7. Estimated total misstatement in a segment 2. Control risk 8. Planned detection risk 3. Risk of fraud 9. Estimate of the combined misstatement
> The following are various activities an auditor does during audit planning. 1. Review accounting principles unique to the client’s industry 2. Determine the likely users of the financial statements 3. Evaluate the appropriate financial statement measures
> Gordon & Groton, CPAs, were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
> Taylor Bean & Whitaker Mortgage Corp. (Taylor Bean) was a Florida mortgage lender. Once one of the nation’s largest privately held mortgage companies, the company collapsed in 2009 after a multibillion dollar mortgage fraud unraveled. The downfall of Tay
> Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20 copies of the audited financial statements. The firm knew
> As the in-charge senior auditor on the audit engagement for JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for performing risk assessment procedures related to the sales cycle. JA Tire has four sales divisions within the
> Identify the management assertion and general balance-related audit objective for the specific balance-related audit objective: All recorded fixed assets exist at the balance sheet date.
> Following are statements of earnings and financial position for Wexler Industries. // Required: a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total asset
> Ling, an audit manager, is planning the audit of Modern Technologies, Inc. (MT, Inc.), a manufacturer of electronic components. This is the first year that Ling’s audit firm has performed the audit for MT, Inc. Ling set the preliminary
> Analytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a
> The following are specific balance-related audit objectives applied to the audit of accounts receivable (a. through i.) and management assertions about account balances (1 through 6). The list referred to in the specific balance-related audit objectives
> Your comparison of the gross margin percent for Jones Drugs for the years 2016 through 2019 indicates a significant decline. This is shown by the following information: A discussion with Tanvi Anand, the controller, brings to light two possible explana
> The minutes of the board of directors of the Tetonic Metals Company for the year ended December 31, 2019, were provided to you. Meeting of March 5, 2019 The meeting of the board of directors of Tetonic Metals was called to order by James Cook, the chairm
> Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the engagement, you are performing initial audit planning and
> You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2019. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year. You have obt
> 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 an
> This problem requires the use of ACL software, which can be accessed by following the instructions available on the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook webs
> 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 the audit of Jones Company’s financial statements by a CPA firm?
> The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a. through f.), management assertions about classes of transactions and events and related disclosures (1 through 6), and general tran
> The following audit procedures were performed in the audit of inventor to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the clie
> The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included. Audit Procedures 1. Trace from re
> As auditor of the Star Manufacturing Company, you have obtained a trial balance taken from the books of Star one month before year end: There are no inventories consigned either in or out. All notes receivable are due from outsiders and held by Star.
> The following are examples of documentation typically obtained by auditors: 1. Duplicate sales invoices 2. Receiving reports 3. Minutes of the board of directors 4. Signed W-4s 5. Subsidiary accounts receivable records 6. Vendors’ invoices 7. General led
> Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2019. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following rep
> A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: a. “The accompanying financial statements present fairly, in a
> The following questions require you to access AICPA standards (www.aicpa.org), PCAOB auditing standards (pcaobus.org), and IAASB auditing standards (www.iaasb.org). a. Your audit supervisor stated it was important for you to understand AU-C 315. Which or
> In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following: 1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accou
> Identify some of the most important ways that the profession and society encourage CPAs to conduct themselves at a high level.
> The following (1 through 16) are the balance-related and transaction related audit objectives. Identify the specific audit objective (1 through 16) that each of the following specific audit procedures (a. through l.) satisfies in the audit of sales, ac
> There are many types of information that require assurance. Individually or in groups, identify the following types of assurance services. a. Identify three or more assurance services that are likely to be provided only by public accounting firms. b. Ide
> Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via
> The following independent scenarios describe auditor decisions made during an audit engagement. 1. Chen Li worked on the audit of American Healthcare Associations (AHA), which operates hospitals and outpatient centers in Texas and Oklahoma. Chen was assi
> The following information was obtained from several accounting and auditing enforcement releases issued by the SEC after its investigation of fraudulent financial reporting involving Just for Feet, Inc.: Just for Feet, Inc., was a national retailer of at
> The SEC Enforcement Division investigates possible violations of securities laws; recommends SEC action when appropriate, either in a federal court or before an administrative law judge; and negotiates settlements. Litigation Releases, which are descript
> 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
> Monterrey Corporation has an existing loan in the amount of $7 million with an annual interest rate of 6.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to r
> As discussed in the chapter opening vignette and on page 9, companies are increasingly issuing reports on corporate social responsibility. Visit the Global Reporting Initiative website (www.globalreporting.org) and answer the following questions. a. What
> Visit the PCAOB’s website (www.pcaobus.org) and locate the PCAOB’s Settled Disciplinary Order against David M. Burns issued on December 19, 2017, to answer the following questions: a. What position did Burns hold within the audit firm and how long had he
> Explain how the increased use of fair value accounting might increase information risk.
> The following questions relate to the AICPA Code of Professional Conduct, which can be viewed online or downloaded in pdf format at www.aicpa.org: a. When should a member apply the conceptual framework for members in public practice? Which rule or rules
> The following questions deal with tests of controls. Choose the best response. a. To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Wh
> The following questions concern types of audit tests. Choose the best response. a. An auditor’s deci0sion either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determine
> The following are general questions about internal control. Choose the best response. a. Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure? (1) Mistakes in judgm
> The following questions concern the planning of the engagement. Select the best response. a. Analytical procedures used in planning an audit should focus on identifying (1) material weaknesses in internal control. (2) the predictability of financial dat
> The following are general questions about internal control. Choose the best response. a. Which of the following situations is not an example of an inherent limitation of internal control? (1) A programming error in the design of an automated control allo
> The following questions concern the characteristics of IT systems and their impact on internal controls. Choose the best response. a. Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A com
> The following questions address fraud risk factors and the assessment of fraud risk. a. Which action regarding fraud is an activity related to performance of risk assessment procedures? (1) Document the results of procedures used to address the risk of f
> The following questions concern quality control standards. Choose the best response. a. The nature and extent of a CPA firm’s quality control policies and procedures depend on b. Which of the following is an element of a CPA firm&acir
> The following questions deal with types of audits and auditors. Choose the best response. a. Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A pri
> Identify the three main ways information risk can be reduced. What arethe advantages and disadvantages of each?
> The following questions deal with errors and fraud. Choose the best response. a. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the fina
> The following questions concern the reasons auditors do audits. Choose the best response. a. The major reason an independent auditor gathers audit evidence is to (1) form an opinion on the financial statements. (2) detect fraud. (3) evaluate management.
> The following questions concern unmodified opinion audit reports. Choose the best response. a. Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards? (1) A title
> The following questions concern possible violations of the AICPA Code of Professional Conduct. Choose the best response. a. In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the
> The following questions concern auditor independence. Choose the best response. a. What is the meaning of the rule that requires the auditor be independent? (1) The auditor must adopt a critical attitude during the audit. (2) The auditor’s sole obligatio
> The following questions concern unmodified opinion audit reports with an emphasis-of-matter explanatory paragraph or nonstandard wording in report paragraphs. Choose the best response. a. An entity changed from the straight-line method to the declining-b
> The following questions deal with management assertions. Choose the best response. a. An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of (1) existence. (2) completene
> The following questions deal with materiality. Choose the best response. a. Which one of the following statements is correct concerning the concept of materiality? (1) Materiality is determined by reference to guidelines established by the AICPA. (2) Mat
> The following questions concern audit documentation. Choose the best response. a. Which of the following is not a primary purpose of audit documentation? (1) To coordinate the audit (2) To assist in preparation of the audit report (3) To support the fina
> The following questions concern the use of analytical procedures during an audit. Select the best response. a. For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent
> Describe management’s responsibility for the financial statements. Do you believe the CEO and CFO of a public company perceive an even greater responsibility as a result of the Sarbanes–Oxley Act requirement to certify the financial statements submitted
> What is the rationale for the PCAOB’s requirement to include a discussion of critical audit matters in the audit report? Provide two examples of areas that might be considered critical audit matters in the audit of a public company in the hotel and lodgi
> The following questions concern persuasiveness of evidence. Choose the best response. a. Which of the following types of documentary evidence should the auditor consider to be the most reliable? (1) Confirmation of an account payable balance mailed by an
> The following questions deal with audits by CPA firms. Choose the best response. a. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? (1) The opinion of an in
> The following questions deal with audit risk and evidence. Choose the best response. a. Which of the following does not increase the need for sufficient appropriate audit evidence? (1) A lower acceptable level of detection risk (2) An increase in the ass
> The following questions concern the audit risk model. Choose the best response. a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accoun
> The following questions concern the assessment of the risk of material misstatements. Choose the best response. a. Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s f
> The following questions pertain to client acceptance. Choose the best response. a. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may
> The following questions concern the overall audit strategy and audit program, including selection of the type of test to perform. Choose the best response. a. In the financial statement audit of a nonpublic company, the auditor decides to perform tests o
> The following questions deal with audit evidence for the sales and collection cycle. Choose the best response. a. To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failu
> For each of the following types of misstatements (parts a. through c.), select the control that should have prevented the misstatement: a. Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maxi
> The following questions deal with internal controls in the sales and collection cycle. Choose the best response. a. Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their acco
> What types of disciplinary action may be taken if a member has violated the AICPA Code of Professional Conduct?
> The following questions concern the auditor’s responses to the possibility of fraud. When fraud risk factors are identified during an audit, the auditor’s documentation should include b. If an independent audit leadi
