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Auditing and Assurance Services A Systematic Approach 9th edition William Messier, Steven Glover, Douglas Prawitt - Solutions
How does the materiality of a departure from GAAP affect the auditor’s choice of financial statement audit reports?
In 2011, your firm issued an unmodified report on Tosi Corporation, a private company. During 2013, Tosi entered its first lease transaction, which you have determined is material but not pervasive and meets the criteria for a capitalized lease. Tosi Corporation’s management chooses to treat the
What are the auditor’s responsibilities for other information included in an entity’s annual report?
If the auditor determines that other information contained with the audited financial statements is incorrect and the client refuses to correct the other information, what actions can the auditor take?
List three examples of special reports.
List four bases for special purpose financial statements. Why is it important that the audit report clearly identify the basis of accounting used in the preparation of the financial statements?
Multiple Choice1. In which of the following situations would an auditor ordinarily issue an unqualified/ unmodified financial statement audit opinion with no explanatory ( or emphasis- of- matter/ other- matter) paragraph?a. The auditor wishes to emphasize that the entity had significant
For each of the following independent situations, indicate the type of financial statement audit report that you would issue and briefly explain your reasoning. Assume that all companies mentioned are private companies and that each item is at least material.a. Barefield Corporation, a wholly
For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue. Assume that all companies mentioned are private companies and that each item is at least material. a. Thibodeau Mines, Inc., uses LIFO for valuing
The CPA firm of May & Marty has audited the consolidated financial statements of BGFI Corporation, a private company. May & Marty examined the parent company and all subsidiaries except for BGI- Western Corporation, which was audited by the CPA firm of Dey & Dee. BGI- Western constituted
Devon, Inc., a private company, engaged Rao to examine its financial statements for the year ended December 31, 2013. The financial statements of Devon, Inc., for the year ended December 31, 2012, were examined by Jones, whose March 30, 2013, auditor’s report expressed an unqualified opinion. The
On March 12, 2014, Kristen & Valentine, CPAs, completed the audit of the financial statements of Modern Museum, Inc., for the year ended December 31, 2013. Modern is a privately held company. Modern Museum presents comparative financial statements on a modified cash basis. Assets,
For the year ended December 31, 2012, Friday & Co., CPAs (“Friday”), audited the financial statements of Kim Company and expressed an unqualified opinion on the balance sheet only. Friday did not observe the taking of the physical inventory as of December 31, 2011, because that date was
The following auditor’s report was drafted by a staff accountant of Nathan and Matthew, CPAs, at the completion of the audit of the comparative financial statements of Monterey Partnership for the years ended December 31, 2013 and 2012. Monterey is a privately held company that prepares its
You are auditing the financial statements for your new client, Paper Pack-aging Corporation, a manufacturer of paper containers, for the year ended March 31, 2014. Paper Packaging€™s previous auditors had issued a going concern opinion on the March 31, 2013, financial statements for the
Briefly describe the three theories of ethical behavior that can be used to analyze ethical issues in accounting.
Why are companies like Kmart able to continue in business after experiencing federal indictments, convictions of top executives, and bankruptcy, while accounting firms, like the once highly respected, financially strong Arthur Andersen, can be destroyed by a single federal indictment?
What entities are involved in establishing standards and rules for the professional conduct of public accountants? Who establishes such standards for auditors of public versus private companies?
What are the two major sections of the Code of Professional Conduct? What additional guidance is provided for applying the Rules of Conduct? LO
Describe the six Principles of Professional Conduct.
What are the five major sections of the Rules of Conduct?
What types of personal loans from a financial institution are allowed by the Rules of Conduct? What is meant by normal lending procedures, terms, and requirements within this context?
Summarize the major differences between the AICPA’s Code of Professional Conduct independence rules and the SEC’s independence rules for auditors of public companies. Briefly describe why the SEC’s requirements diverged from those of the AICPA in the early 2000s.
Generally, a CPA is not allowed to disclose confidential entity information without the consent of the entity. Identify four circumstances in which confidential entity information can be disclosed under the Rules of Conduct with-out the entity’s permission.
Give three examples of acts that are considered discreditable under the Rules of Conduct.
A CPA is allowed to advertise as long as the advertising is not false, misleading, or deceptive. Provide three examples of advertising that might be considered false, misleading, or deceptive. Why are such acts of concern to the profession?
What is the purpose of a CPA firm’s establishing a system of quality control? List the six elements of quality control and provide one example of a policy or procedure that can be used to fulfill each element.
How are the roles of the PCAOB inspection program and the AICPA peer review program similar, and how are they different?
Multiple Choice1. Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. b.
Dean Wareham, an audit manager, is preparing a proposal for a publicly held company in the manufacturing industry. The potential client is growing rapidly and introducing many new products yet still has a manual accounting system. The company also has never undertaken any tax planning activities
Each of the following situations involves a possible violation of the AICPA’s Code of Professional Conduct, Rule 101. Indicate whether each situation violates the Code. If it violates the Code, explain why.a. Julia Roberto, a sole practitioner, has provided extensive advisory services for her
The questions that follow are based on Rule 101 of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not.Situation a. A partner’s dependent parent is a 5 percent limited partner in a firm
Each of the following situations involves a possible violation by a member in industry of the AICPA’s Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why. a. Jack Jackson is a CPA and
Perez, CPA, has been asked by a nonpublic company audit entity to perform a nonrecurring engagement involving implementing an IT information and control system. The entity requests that, in setting up the new system and during the period prior to conversion to the new system, Perez • Counsel on
Refer back to the hypothetical Sun City Savings and Loan case presented in this chapter, and consider each of the following independent situations: a. Suppose that Pina, Johnson & Associates also audited one of the entities who had received one of the large loans that are in dispute. Sam Johnson is
Schoeck, CPA, is considering leaving a position at a major public accounting firm to join the staff of a local financial institution that does write- up work, tax preparation and planning, and financial planning. Required: a. Are the Rules of Conduct applied differently to CPAs who work for a local
For each of the following scenarios, indicate whether or not independence related SEC rules are being violated, assuming that the audit entity is a public company. Briefly explain why or why not. a. Adrian Reynolds now works as a junior member of the accounting team at Swiss Precision Tooling, a
Your supervisor tells you that for the next month you will be working on an audit entity with a controller who loves to talk. She explains that the entity will want you to spend an hour or so talking about politics, sports, and life’s mysteries and you need to keep him happy. She also wants you
While completing a test of controls, you appropriately cleared two minor exceptions by examining related documents. The entity will need to do some serious digging to find the documents to resolve a third, similar, exception and wants to know if you really need the documents. You ask the in-charge
Visit the AICPA’s website (www.aicpa.org), under Research Standards. On the left side of the page click “Code of Professional Conduct.” Find Section 100 of the Code of Professional Conduct. Research the relevant rules, interpretations, and ethics rulings to answer the following questions: a.
Briefly describe the four stages of the auditor dispute process.
What is meant by proportionate liability? Contrast this legal doctrine with the doctrine of joint and several liability.
For what types of actions are auditors liable to a client under common law? Why would the client prefer to sue the auditor for a tort action rather than for a breach of contract?
Distinguish among the four standards that have evolved for defining auditors’ liability for ordinary negligence to third parties under common law. Why is this area of auditors’ liability so complex?
Distinguish between the Securities Act of 1933 and the Securities Exchange Act of 1934. Why is it easier for a plaintiff to sue an auditor under the Securities Act of 1933?
What elements must a plaintiff prove in order to win action under Rule 10b- 5 of the Securities Exchange Act of 1934?
What was the significance of the out-come of the Ernst & Ernst v. Hochfelder case for auditors’ liability?
What were the most significant components of the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998? Did the ruling in Tellabs v. Makor make it easier or harder to hold auditors liable for fraud? Why?
In what ways does the Sarbanes- Oxley Act change criminal liability for auditors of public companies?
What types of sanctions can the SEC and the PCAOB impose on auditors?
How does the Dodd- Frank Act affect the auditing profession?
What types of activities should the auditor be alert to that may violate the Foreign Corrupt Practices Act?
What actions can result in an auditor being held criminally liable under statutes and regulations?
Multiple choice1. Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to
Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements. The purpose of the audit was to determine whether the unaudited financial statements furnished to Becker fairly presented Bell’s financial
Astor Electronics, Inc., markets a wide variety of computer- related products throughout the United States. Astor’s officers decided to raise $ 1 million by selling shares of Astor’s common stock in an exempt offering under Regulation D of the Securities Act of 1933. In connection with the
Butler Manufacturing Corporation planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Meng, CPA, to audit its financial statements. Butler told Meng that the financial statements would be given to certain named banks and
Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements. Sleek needed the audit to obtain bank loans and to offer public stock so that it could expand. Before the engagement,
Conan Doyle & Associates (CD& A), CPAs, served as the auditors for Lestrad Corporation and Watson Corporation, publicly held companies traded on NASDAQ. Watson recently acquired Lestrad Corporation in a merger that involved swapping 1.75 shares of Watson for 1 share of Lestrad. In connection with
Critics of the Sarbanes-Oxley Act do not believe the Act will be effective at deterring accounting frauds because it primarily relies on specifying new crimes and higher penalties (i. e., increasing the maximum fine and prison terms). Critics argue that if corporate executives are not deterred by
Define assurance services. Discuss why the definition focuses on decision making and information.
Define an attest engagement. List the two conditions that are necessary, according to the third general standard for attestation engagements, in order to perform an attest engagement.
What types of engagements can be provided under the attestation standards? Give two examples of attestation engagements.
How can the practitioner satisfy the requirement that specified users take responsibility for the adequacy of procedures performed on an agreed- upon procedures engagement?
What kind of entity might request an attestation report on internal control, and why?
What are the two types of prospective financial statements? How do they differ from each other?
The accounting profession is concerned about whether companies are in compliance with various federal and state environmental laws and regulations and whether they have reported environmental liabilities in their financial statements. Environmental auditing typically refers to the process of
The IIA maintains its own website containing useful information about the Institute and the internal auditing profession in general. Visit the IIA’s home page (www.theiia. org). Required: a. Under the tab “Periodicals,” follow the link to the official magazine of the IIA (Internal Auditor).
The AICPA has developed an assurance service related to electronic commerce called WebTrust. Visit the WebTrust home page (www.webtrust. org) and examine the WebTrust seal.Required:a. Under the overview of Trust Services section, find and list the four broad areas that the Trust Service principles
EarthWear has a number of competitors that sell goods over the Internet. Visit the home page for any two of EarthWear’s competitors. For example, visit the home page for Timberland (www. timberland. com), L. L. Bean (www.llbean. com), or Lands’ End (www.landsend. com). Required: a. Determine if
Using an Internet search engine, find the web page on PrimePlus services created by the AICPA. On the website, find the PrimePlus / ElderCare glossary.Required:Describe the “funeral rule” defined in the glossary.
Identify two substantive analytical procedures that can be used to audit prepaid insurance.
Confirmation is a useful audit procedure for verifying information related to prepaid insurance. What type of information would be requested from an entity’s insurance broker in such a confirmation?
List four categories of intangible assets and four types of property, plant, and equipment transactions.
Describe two or more factors that the auditor should consider in assessing the inherent risk for (a) Intangible assets and (b) The property management process.
What is a typical control over authorization of capital asset transactions?
What is one of the key segregation of duties for the property management process? What errors or fraud can occur if such segregation is not present?
Identify three substantive analytical procedures that can be used to audit property, plant, and equipment.
What procedures would an auditor use to verify the completeness, rights and obligations, and valuation assertions for property, plant, and equipment?
1. When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not avail-able for inspection. The policy’s absence most likely indicates the possibility of a(n)a. Insurance premium due but not recorded.b. Fictitious piece
Natherson, CPA, is engaged to audit the financial statements of Lewis Lumber for the year ended December 31. Natherson obtained and documented an understanding of internal control relating to the purchasing process and set control risk at the maximum level. Natherson requested and obtained from
Taylor, CPA, has been engaged to audit the financial statements of Palmer Company, a continuing audit client. Taylor is about to perform substantive audit procedures on Palmer’s goodwill (excess of cost over fair value of net assets purchased) and trademark assets that were acquired in prior
Nakamura, CPA, has accepted an engagement to audit the financial statements of Grant Manufacturing Company, a new client. Grant has an adequate control environment and a reasonable segregation of duties. Nakamura is about to set the control risk for the assertions related to Grant’s property and
Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry “Property, plant, and equipment.†Gonzales has been asked by the company’s management if audit adjustments or reclassifications are required for the following material items
To support financial statement assertions, an auditor develops specific sub-stantive procedures to satisfy or address each assertion. Required: Items (a) through (c) represent assertions for the property and equipment accounts. Select the most appropriate audit procedure from the following list and
Pierce, an independent auditor, was engaged to examine the financial statements of Wong Construction, Inc., for the year ended December 31. Wong’s financial statements reflect a substantial amount of mobile construction equipment used in the firm’s operations. The equipment is accounted for
On January 15, 2013, Leno, Inc., which has a March 31 year- end, entered into a transaction to sell the land and building that contained its manufacturing operations for a total selling price of $ 19,750,000. The book value of the land and the building was $ 3,420,000. The final closing was not
Visit the website of another catalog retailer similar to EarthWear Clothiers, and determine what useful lives and depreciation methods are used for property, plant, and equipment. Compare those methods to EarthWear, and, if different, consider the implications for using competitor data for
Visit the SEC’s website ( www. sec.gov), and identify a company that has been recently cited for problems related to property, plant, and equipment or lease accounting ( e. g., in years past, many retail companies had to restate earnings to comply with the SEC’s clarification of lease
Why does the auditor generally follow a substantive strategy when auditing long-term debt and capital accounts? Under what conditions might the auditor follow a reliance strategy?
What are the most important assertions for long- term debt? What documents would normally contain the authorization to issue long-term debt?
What types of services can be performed under Statements on Standards for Accounting and Review Services?
What type of knowledge must an accountant possess about the entity in order to perform a compilation engagement? A review engagement?
Define corporate governance. Why do you think an effective internal audit function is referred to as one of the cornerstones of corporate governance?
Explain how internal auditors play a role in helping management comply with the requirements of the Sarbanes- Oxley Act of 2002.
The Elliott Committee developed six assurance services with significant market potential for CPA firms. What are these six services?
What are the risks of electronic commerce? What are the Trust Services Principles?
What is the main difference between WebTrust and SysTrust Services?
Why is PrimePlus potentially a major service for CPA firms? What types of PrimePlus services can a practitioner offer?
Multiple Choice1. An assurance report on information can provide assurance about the information’s a. Reliability. b. Relevance. c. Timeliness. d. All of the above. 2. Which of the following professional services would be considered an attest engagement? a. A management consulting engagement to
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