Select the best answer for each of the following. Explain the reasons for your selection. a. Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? (1) An individual assigned to the attest engagement. (2) A partner in the office of the partner in charge of the attest engagement. (3) A manager who is in charge of providing tax services to the attest client. (4) A partner in the national office of the firm that performs marketing services. b. Which of the following is not prohibited by the AICPA Code of Professional Conduct? (1) Advertising in newspapers. (2) Payment of commission to obtain an audit client. (3) Acceptance of a contingent fee for a review of financial statements. (4) Engaging in discriminatory employment practices. c. In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee? (1) A fee is based on whether or not the public accounting firm’s audit report leads to the approval of the client’s application for bank financing. (2) A fee is to be established at a later date by the Bankruptcy Court. (3) A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement. (4) A fee is based on the fee charged by the client’s former auditors. d. A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? (1) A partner’s checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. (2) A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. (3) An attest client owes the firm fees for this and last year’s annual engagements. (4) A covered member’s dependent son owns stock in an attest client. e. Which of the following is implied when a CPA signs the preparer’s declaration on a federal income tax return? (1) The return is not misleading based on all information of which the CPA has knowledge. (2) The return is prepared in accordance with generally accepted accounting principles. (3) The CPA has audited the return. (4) The CPA maintained an impartial mental attitude while preparing the return. f. The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule may preclude a CPA from responding to an inquiry made by: (1) An investigative body of a state CPA society. (2) The trial board of the AICPA. (3) A CPA-shareholder of the client corporation. (4) An AICPA quality review body. g. Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees? (1) Jones performs consulting services for a percentage of the client’s savings; these are the only services provided for the client. (2) Jones names his firm Jones and Smith, CPAs. (3) Jones advertises the services he provides in an Internet set of telephone “yellow pages.” (4) Jones, without client consent, makes available working papers for purposes of a peer review of his practice. h. Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? (1) Disclaim an opinion. (2) Issue an adverse opinion. (3) Suggest that Kelly Company engage another CPA to perform the audit. (4) Rely on the competence of client personnel. i. Which of the following nonattest services may be performed by the auditors of a public company? (1) Internal audit outsourcing. (2) Tax planning for all company officers. (3) Bookkeeping services. (4) Preparation of the company’s tax return. j. In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? (1) Maintaining custody of the client’s securities. (2) Training client employees. (3) Supervising client employees. (4) Acting as the third approver of large client expenditures. k. The Compliance with Standards Rule requires CPAs to adhere to all of the following applicable standards, except: (1) Statements on Standards for Consulting Services. (2) Statements on Auditing Standards. (3) Statements on Standards for Attestation Engagements. (4) Statements on Responsibilities for Assurance Services. l. Which of the following provisions is not included in The Institute of Internal auditors Code of Ethics? (1) Performance of work with honesty, diligence, and responsibility. (2) Prudence in the use and protection of information acquired in the course of their duties. (3) Use of appropriate sampling methods to select areas for audit. (4) Continual improvement in proficiency and effectiveness and the quality of services provided.
> How does the pretax operating cash flow for a project differ from the economic profit for that project?
> The economics break-even calculation assumes that the number of units sold is the same each year during the life of the project. It is possible for the NPV of a project to be negative if unit sakes are not the same each year and the average unit sales ar
> What is the fundamental difference between a sensitivity analysis and a scenario analysis?
> Is it possible to have a crossover point where the accounting break-even point is the same for two alternatives - that is, above the break-even point for a low-fixed-cost alternative but below the break-even point for a high-fixed-cost alternative? Expla
> Describe how the pretax operating cash flow break-even point is related to the economic break-even point?
> Explain how EBITDA differs from incremental after-tax free cash flows (FCF) and discuss the types of businesses for which this difference would be especially small or large?
> Discuss the interpretation of the degree of accounting operating leverage and degree of pretax cash flow operating leverage?
> You own a firm with a single new product that is about to be introduced to the public for the first time. Your marketing analysis suggests that the annual demand for this product could be anywhere between 500,000 units and 5,000,000 units. Given such a w
> What is the advantage of using a simulation analysis instead of a scenario analysis to assess the risk of a project?
> Why are capital investments considered the most important decisions made by a firm’s management?
> You are involved in the planning process for a firm that is expected to have a large increase in sales next year. Which type of firm would benefit the most from that sales increase: a firm with low fixed costs and high variable costs or a firm with high
> Explain the difference between marginal and average tax rates, and identify which of these rates is used in capital budgeting and why?
> How is the MACRS depreciation method under IRS rules different from the straight-line depreciation allowed under GAAP rules? What is the implication on incremental after-tax free cash flows from firms’ investments?
> High-End Fashions, Inc., bought a production line of ankle-length skirts last year at a cost of $500,000. This year, however, miniskirts are in and ankle-length skirts are completely out of fashion. High-End has the option to rebuild the production line
> QualityLiving Trust is a real estate investment company that builds and remodels apartment buildings in northern California. It is currently considering remodeling a few idle buildings that it owns in San Jose into luxury apartment buildings. The company
> MusicHeaven, Inc., is a producer of media players which currently have either 20 gigabytes or 30 gigabytes of storage. Now the company is considering launching a new production line making mini media players with 5 gigabytes of storage. Analysts forecast
> Suppose that FRA Corporation already has divisions in both Dallas and Houston. FRA is now considering setting up a third division in Austin. This expansion will require that one senior manager from Dallas and one from Houston relocate to Austin. Ignore r
> You are providing financial advice to a shrimp farmer who will be harvesting his last crop of farm-raised shrimp. His current shrimp crop is very young and will, therefore, grow and become more valuable as their weight increases. Describe how you would d
> What is the opportunity cost of using an existing asset? Give an example of the opportunity cost of using the excess capacity of a machine?
> When two mutually exclusive projects have different lives, how can an analyst determine which is better? What is the underlying assumption in this method?
> Describe the process of capital rationing?
> Do you agree or disagree with the following statement given the discussion in this chapter? We can calculate future cash flows precisely and obtain an exact value for the NPV of an investment?
> Under what circumstances might the IRR and NPV approaches produce conflicting results?
> What are the strengths and weaknesses of the accounting rate of return approach?
> Identify the weaknesses of the payback period method?
> a. A firm invests in a project that is expected to earn a return of 12 percent. If the appropriate cost of capital is also 12 percent, did the firm make the right decision. Explain. b. What is the impact on the firm if it accepts a project with a negati
> In the context of capital budgeting, what is “capital rationing”?
> a. Sykes, Inc. management is considering two projects: a plant expansion and a new computer system for the firm’s production department. Classify these projects as independent, mutually exclusive, or contingent projects and explain your reasoning. b. A c
> Elkridge Construction Company has an overall (composite) cost of capital of 12 percent. This cost of capital reflects the cost of capital for an Elkridge Construction project with average risk. However, the firm takes on projects of various risk levels.
> Explain why the cost of capital is referred to as the “hurdle” rate in capital budgeting?
> The profitability index is a tool for measuring a project’s benefits relative to its costs. How might this help to eliminate bias in project selection?
> What is the cost of capital?
> What is the general formula used to calculate the price of a share of a stock? What does it mean?
> Select the best answer for each of the following questions. Explain the reasons for your selection. a. Which of the following is not a financial statement assertion made by management? (1) Existence of recorded assets and liabilities. (2) Completeness of
> For each definition (or portion of a definition) in the first column, select the term that most closely applies. Each term may be used only once or not at all. Partial (or Complete) Definition Term a. A federal securities statute covering registrat
> Items (a) through ( f ) relate to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. For each item, determine whether it must be proved assuming application of the following acts: 1. Only applies to Section 11 o
> Match the important cases listed below with the appropriate legal precedent or implication. Case: a. Hochfelder v. Ernst b. Escott v. BarChris Construction Corp. c. Credit Alliance v. Arthur Andersen & Co. d. Ultramares v. Touche & Co. e. Rosenblum v. A
> Assume that in a particular audit the CPAs were negligent but not grossly negligent. Indicate whether they would be “liable” or “not liable” for the following losses proximately caused by their negligence and determine that liability under the various th
> Dandy Container Corporation engaged the accounting firm of Adams and Adams to audit financial statements to be used in connection with an interstate public offering of securities. The audit was completed, and an unqualified opinion was expressed on the f
> Gloria and Deloria, CPAs, have recently started their public accounting firm and intend to provide attestation and a variety of consulting services for their clients, which are all nonpublic. Both Ms. Gloria and Mr. Deloria have particular expertise in d
> The firm of Schilling & Co., CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge
> The firm of Bell & Greer, CPAs, has been asked to perform attest services for Trek Corporation (a nonpublic company) for the year ended December 31, Year 5. Bell & Greer has two offices: one in Los Angeles and the other in Newport Beach. Trek Corporation
> Describe briefly the function of the GAO.
> The cost of an audit might be significantly reduced if the auditors relied upon a representation letter from the client instead of observing the physical counting of inventory. Would this use of a representation letter be an acceptable means of reducing
> James Daleiden, CPA, is interested in expanding his practice through acquisition of new clients. For each of the following independent cases, indicate whether Daleiden would violate the AICPA Code of Professional Conduct by engaging in the suggested prac
> The firm of Harwood & Toole, CPAs, has been the auditor and tax return preparer for Tucker, Inc., a nonpublic company, for several years. In the current year, the management of Tucker discharged Harwood & Toole from the audit and tax engagement because o
> The firm of McGraw and West, CPAs, has two offices, one in Phoenix and one in San Diego. The firm has audited the Cameron Corporation out of its Phoenix office for the past five years. For each of the following independent cases, which occurred during th
> Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that
> The firm of Wilson and Wiener (WW), CPAs, has had requests from a number of clients and prospective clients to perform various types of services. Please reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engag
> For each term in the first column, select the partial (or complete) definition or illustration. Each partial (or complete) definition or illustration may be used only once. Term Partial (or Complete) Definition or Illustration a. A report providing
> State whether each of the following is or is not a principle (or a portion of a principle) underlying an audit conducted in accordance with generally accepted auditing standards. Principles Yes (Y) or No (N) 1. The purpose of an audit Is to provide
> Match each the following statements with the appropriate type of auditors’ report (each auditors’ report may be used once, more than once, or not at all): A. Adverse. D. Disclaimer. Q. Qualified. S. Standard unmodified
> State whether you agree (A) or disagree (D) with each of the following statements concerning the auditors’ unqualified report of a public company. Agree (A) or Disagree (D) Statement a. The report should begln with "CPA's Report"
> What are the major purposes of obtaining representation letters from audit clients?
> Spacecraft, Inc., is a large corporation that is audited regularly by a public accounting firm but also maintains an internal auditing staff. Explain briefly how the relationship of the public accounting firm to Spacecraft differs from the relationship o
> Casa Royale, Inc., a public company, retains Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report: Respond as to the accuracy of the fo
> Select the best answer for each of the following items and give reasons for your choice. a. Which of the following organizations can revoke the right of an individual to practice as a CPA? (1) The Public Company Accounting Oversight Board. (2) The Americ
> For the purposes of this problem, assume the existence of five types of auditors: CPA, GAO, IRS, bank examiner, and internal auditor. Also assume that the work of these various auditors can be grouped into five classifications: audits of financial statem
> Susan Harris is a new assistant auditor with the public accounting firm of Sparks, Watts, and Wilcox, CPAs. On her third audit assignment, Harris examined the documentation underlying 60 disbursements as a test of controls over purchasing, receiving, vou
> Wanda Young, doing business as Wanda Young Fashions, engaged the CPA partnership of Scott & Green to audit her financial statements. During the audit, Scott & Green discovered certain irregularities that would have indicated to a reasonably prudent audit
> The public accounting firm of Hanson and Brown was expanding very rapidly. Consequently, it hired several staff assistants, including James Small. Subsequently, the partners of the firm became dissatisfied with Small’s production and warned him that they
> Jensen, Inc., filed suit against a public accounting firm, alleging that the auditors’ negligence\ was responsible for failure to disclose a large defalcation that had been in process for several years. The public accounting firm responded that it may ha
> Glover, Inc., engaged Herd & Irwin, CPAs, to assist in the installation of a new computerized production system. Because the firm did not have experienced staff available for the engagement, Herd & Irwin assigned several newly hired staff assistants with
> What would you accept as satisfactory documentary evidence in support of entries in the following? a. Sales journal. b. Sales returns journal. c. Voucher or invoice register. d. Payroll journal. e. Check register.
> Provide at least four examples of specialists whose findings might provide appropriate evidence for the independent auditors.
> Auditors are required on every engagement to obtain a representation letter from the client. Required: a. What are the objectives of the client’s representation letter? b. Who should prepare and sign the client’s representation letter? c. When should th
> Is an independent status possible or desirable for internal auditors as compared with the independence of a public accounting firm? Explain.
> When analytical procedures disclose unexpected changes in financial relationships relative to prior years, the auditors consider the possible reasons for the changes. Give several possible reasons for the following significant changes in relationships: a
> Analytical procedures are extremely useful throughout the audit. Required: a. Explain how analytical procedures are useful in (1) The risk assessment stage of the audit. (2) The substantive procedures stage of the audit. (3) Near the end of the audit. b
> Comment on the reliability of each of the following examples of audit evidence. Arrange your answer in the form of a separate paragraph for each item. Explain fully the reasoning employed in judging the reliability of each item. a. Copies of client’s sal
> In an audit of financial statements, the auditors gather various types of audit evidence. List seven major types of evidence and provide a procedural example of each.
> Marion Watson & Co., CPAs, is planning its audit procedures for its tests of the valuation of inventories of East Coast Manufacturing Co. The auditors on the engagement have assessed inherent risk and control risk for valuation of inventories at 100 perc
> Financial statements contain a number of assertions about account balances, classes of transactions, and disclosures. a. Identify who makes these assertions. b. List and describe each of the assertions regarding each financial statement component.
> At 12 o’clock, when the plant whistle sounded, George Jones, an assistant auditor, had been working on his laptop computer. Jones stopped work immediately, but not wanting to waste a lot of time, he simply closed his laptop. He then departed for lunch. T
> Working papers should contain facts and nothing but facts,” said student A. “Not at all,” replied student B. “The audit working papers also may include expressions of opinion. Facts are not always available to settle all issues.” “In my opinion,” said st
> Use of data analytics is likely to increase the use of sampling and eliminate the audit of all items in a population.” Comment on the accuracy of this quotation.
> Gordon & Moore, CPAs, were the auditors of Fox & Company, a brokerage firm. Gordon & Moore examined and reported on the financial statements of Fox, which were filed with the Securities and Exchange Commission. Several of Fox’s customers were swindled by
> The international CPA firm of Arthur Andersen faced significant liability in conjunction with its audits of Enron Corporation. Required: a. From a legal liability perspective, describe the unique features of this audit case. b. Describe the important im
> Distinguish between a compliance audit and an operational audit.
> Sawyer and Sawyer, CPAs, audited the financial statements of Rattler Corporation that were included in Rattler’s Form 10-K, which was filed with the SEC. Subsequently, Rattler Corporation went bankrupt and the stockholders of the corporation brought a cl
> Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a publicly held company. During the course of the audit, Barber discovered that DGF has been making illegal bribes to foreign government officials to obtain business, and he reported the
> Tracy Smith, CPA, is in charge of the audit of Olympic Fashions, Inc. Seven young members of the public accounting firm’s professional staff are working with Smith on this engagement, and several of the young auditors are avid skiers. Olympic Fashions ow
> The firm of Williams, Kline & Chow, CPAs, is the auditor of Yuker Corporation, a nonpublic company. The president of Yuker, Karen Lester, has been putting pressure on Chee Chow, the audit partner, to accept a questionable accounting principle. She has ev
> Jenko Corp. is an audit client of the Phoenix office of Williams and Co., CPAs. Williams and Co. has offices in Arizona, including ones in Phoenix, Tucson, and Tombstone. For purposes of independence, the AICPA requires that no “covered member” may have
> Roger Royce, CPA, has encountered a situation that he thinks may pose a threat to his independence with respect to Watson, Inc., an audit client. The situation is not addressed by an independence rule or regulation. Using the AICPA Conceptual Framework f
> Sally Adams is an audit manager for the firm of Jones & Smith, CPAs, and is assigned to the audit of Libra Fashions, Inc. Near the middle of the audit, Sally was offered the job of Libra’s chief financial officer. Required: a. Discuss the implications o
> Provide an example in which a data analytics technique applied in financial statement auditing could serve as both a test of a control and a substantive procedure.
> Reed, CPA, accepted an engagement to audit the financial statements of Smith Company. Reed’s discussions with Smith’s new management and the predecessor auditor indicated the possibility that Smith’s financial statements may be misstated due to the possi
> Jane Lee, a director of a nonpublic corporation with a number of stockholders and lines of credit with several banks, suggested that the corporation appoint as controller John Madison, a certified public accountant on the staff of the auditing firm that
> An attitude of independence is a most essential element of an audit by a firm of certified public accountants. Describe several situations in which the CPA firm might find it somewhat difficult to maintain this independent point of view.
> What does an operational audit attempt to measure? Does an operational audit involve more or fewer subjective judgments than a compliance audit or an audit of financial statements? Explain. To whom is the report usually directed after completion of an op
> Various organizations develop standards for audits and regulate CPA firms. Compare and contrast the roles of the AICPA, the PCAOB, and the state boards of accountancy along the following dimensions: Required: a. Standard setting. b. Regulation of CPA fi
> While the AICPA administers a peer review program for CPA firms, the PCAOB staff performs practice inspections. Required: a. Identify the two basic types of peer review. b. On what part of a firm’s practice does the PCAOB staff focus its inspections? c.
> The self-interest of the provider of financial information (whether an individual or a business entity) often runs directly counter to the interests of the user of the information. Required: a. Give an example of such opposing interests. b. What may be
> The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board. Explain the major responsibilities of this board.
> A corporation is contemplating issuing debenture bonds to a group of investors. Required: a. Explain how independent audits of the corporation’s financial statements facilitate this transaction. b. Describe the likely effects on the transaction if the c
> As a result of a number of events that caused Congress to doubt the ability of the accounting profession to regulate itself, a number of reforms were made to the accounting profession’s system of self-regulation. Required: a. Provide a brief overview of
> When in the course of an audit might the auditors find it useful to apply analytical procedures?
> Evaluate the following statement: A canceled check is not considered particularly reliable evidence because the check was prepared within the client’s organization.
> As part of the verification of accounts receivable as of the balance sheet date, the auditors might inspect copies of sales invoices. Similarly, as part of the verification of accounts payable, the auditors might inspect purchase invoices. Which of these
