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 company personnel and an authorization to examine the records. (2) Discharge the auditor from legal liability for the audit. (3) Confirm in writing management's approval of limitations on the scope of the audit. (4) Remind management of its primary responsibility for financial statements. b. The date of the management representation letter should coincide with the (1) Balance sheet date. (2) Date of the auditor's report. (3) Date of the latest subsequent event referred to in the notes to the financial statements. (4) Date of the engagement agreement. c. Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance? (1) Information about the auditor's responsibility in an audit of financial statements. (2) Information about the overall scope and timing of the audit. (3) Recommendations for improving the client's business. (4) Significant findings arising from the audit. d. A management letter (1) Is the auditor's report on significant deficiencies and material weaknesses in internal control. (2) Contains management's representations to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements. (3) Is mandatory in all audits and must be dated the same date as the audit report. (4) Contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business.
> Bengston, CPA, is conducting the audit of Pollution Control Devices, Inc. In addition, a supplemental negative assurance report is required to a major mortgage holder. The supplemental report concerns indenture agreements to keep the client from defaulti
> You have been requested by the management of J. L. Lockwood Co. to issue a debt compliance letter as a part of the audit of Taylor Fruit Farms, Inc. J. L. Lockwood Co. is a supplier of irrigation equipment. Much of the equipment, including that supplied
> Carl Monson, the owner of Major Products Manufacturing Company, a small, successful, longtime audit client of your firm, has requested you to work with his company in preparing 3-year forecasted information for the year ending December 31, 2012, and two
> Each of the following represents different client requests for engagements related to WebTrust and SysTrust assurance services. a. Ware Hospital Systems, Inc. is in the process of developing a new patient records system. Management has approached a licen
> Lucia Johnson, of Johnson and Lecy, CPAs, has completed the first-year audit of Tidwell Publishing Co., a publicly held company, for the year ended December 31, 2011. She is now working on a review of interim financial statements for the quarter ended Ma
> In an engagement to review the financial statements of a nonpublic company, SSARS require the accountant to obtain review evidence that is primarily based on inquiries and analytical procedures. The nature of the accountant's inquiries is a matter of jud
> You encountered the following situations during the December 31, 2011, physical inventory of Latner Shoe Distributor Company: Required a. Latner maintains a large portion of the shoe merchandise in 10 warehouses through-out the eastern United States. Th
> SSARS contain several procedures that are required when engaged to perform a compilation or review engagement. Below are ten statements that may or may not be relevant to a compilation or review engagement. For each of the ten statements, indicate whethe
> You are doing a review services and related tax work engagement for Murphy Construction Company. You have made extensive inquiries of management about their financial statements and have concluded that management has an excellent understanding of its bus
> Evaluate the following comments about compiled financial statements: "When CPAs associate their name with compiled financial statements, their only responsibility is to the client and that is limited to the proper summarization and presentation on the fi
> Donnen Designs, Inc. is a small manufacturer of women’s casual-wear jewelry, including bracelets, necklaces, earrings, and other moderately priced accessory items. Most of their products are made from silver, various low-cost stones, beads, and other dec
> The following questions concern reports issued by auditors, other than those on historical financial statements. Choose the best response. a. An auditor is reporting on cash basis financial statements. These statements are best referred to in the opinion
> The following questions concern attestation engagements. Choose the best response. a. Which of the following professional services is considered an attestation engagement? (1) A management consulting engagement to provide IT advice to a client. (2) An in
> The following are miscellaneous questions about compilation and review services. Choose the best response. a. It is acceptable for a CPA to be associated with financial statements when not independent with respect to the client and still issue a substant
> The Absco Corporation has requested that Herb Germany, CPA, provide a report to the Northern State Bank as to the existence or nonexistence of certain loan conditions. The conditions to be reported on are the working capital ratio, dividends paid on pref
> State the reporting requirements for statements prepared on a basis other than GAAP.
> Explain what is meant by prospective financial statements and distinguish between forecasts and projections. What four things are involved in an examination of prospective financial statements?
> Your client, Ridgewood Heating and Cooling, specializes in residential air conditioning and heating installations. The company maintains an inventory of air conditioning units, furnaces, and air handling ductwork. The client has provided the following se
> An audit client has engaged a third party service organization to host its payroll software package on servers located at the service organization. What options do you have to obtain assurance about the controls embedded in the payroll application?
> Describe the purpose of a SysTrust assurance services engagement.
> List the five Trust Services principles and explain whether a WebTrust licensed CPA can report on an entity's compliance with those principles individually or in combination.
> Define what is meant by attestation standards. Distinguish between attestation standards and auditing standards.
> Following are some of the tests of controls and substantive tests of transactions procedures commonly performed in the acquisition and payment cycle. Each is to be done on a sample basis. 1. Trace transactions recorded in the acquisitions journal to supp
> Explain why a review of interim financial statements for a public company may provide a greater level of assurance than an SSARS review.
> What are the differences between the review reports for a private company under SSARS and for the interim financial statements of a public company?
> What should auditors do if during a review of financial statements they discover that applicable accounting standards are not being followed?
> What procedures should the auditor use to obtain the information necessary to give the level of assurance required of reviews of financial statements?
> What steps should auditors take if during a compilation engagement they become aware that the financial statements are misleading?
> Explain the relationship between tests of the acquisition and payment cycle and tests of accounts payable. Give specific examples of how these two types of tests affect each other
> List five things that are required of an auditor by SSARS for a compilation.
> Distinguish the three forms of compilation reports that a CPA can provide to clients.
> Distinguish between compilation and review of financial statements. What is the level of assurance for each?
> What is negative assurance? Why is it used in a review engagement report?
> What is meant by the term level of assurance? How does the level of assurance differ for an audit of historical financial statements, a review, and a compilation?
> Questions 1 through 8 are typically found in questionnaires used by auditors to obtain an understanding of internal control in the acquisition and payment cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible
> The Accounting and Review Services Committee (ARSC) is responsible for issuing standards for compilations and reviews of financial statement issued by nonpublic companies. Visit the AICPA website (www.aicpa.org) and answer the following questions about t
> In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwartz, CPA, informed them of material weaknesses in the control of inventory. In a separate letter to senior management, he elaborated on how the material weaknesses could result
> The following items were discovered during the December 31, 2011 audit of the financial statements of Westmoreland Corporation: 1. The company's financial statements did not include an accrual for bonuses earned by senior management in 2011 but payable i
> 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 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. In the last 3 months of the current year, Oil Refining Company decided to change direction and go significantly into the oil drilling business. Manageme
> 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?
