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auditing

Contemporary Auditing 8th edition Michael C. Knapp - Solutions

Identify the advantages and disadvantages of mandatory audit firm rotation. What, if any, auditor rotation rules are in effect in the United States?
What is the formal definition of a “material weakness” in internal control? How do material weaknesses in internal control differ from “significant deficiencies” in internal control? Identify the three material weaknesses in Exhibit 1 that you believe were most critical. Defend your
Is it appropriate for an audit firm “to function as a de facto adjunct” to a client’s accounting department? Why or why not? Which party or parties were primarily responsible for Deloitte being dismissed as Navistar’s independent auditor in April 2006? Defend your answer.
Define what is meant by the phrase “planning materiality threshold”? What factors should be considered in establishing such thresholds? Are there any conditions under which it is appropriate for auditors to change a planning materiality threshold after the given audit has begun?
This case includes the following quote from a former PCAOB official: “The [audit] firm tends to be the subject of disciplinary action when there is a failure of oversight or supervision. Where a particular partner simply makes an error but the firm was not negligent, only the party may get named
What professional standards require accounting firms to develop quality controls for their audit practices? What key issues should such quality controls address? In commenting on Deloitte’s quality controls, the PCAOB referred to the “culture” of that firm. What are the key factors or
Do you believe that the PCAOB overstepped its regulatory role and responsibilities by beginning a dialogue regarding the possible need for mandatory audit firm rotation? Why or why not? Do you agree with U.S. Representative Garrett that the PCAOB is not a policy-making body? Explain.
Deloitte maintained that it was not appropriate for PCAOB inspection teams to “second-guess” the “reasonable judgments” of skilled professionals. Do you agree? Defend your answer.
Identify common inherent risk factors that companies involved in the entertainment industry pose for their independent auditors. List and briefly describe specific audit procedures that would not be used on “typical” audit engagements but would be required for audits of companies involved in
Compare and contrast the responsibilities of an audit partner of a major accounting firm with those of a large public company’s CFO. Which work role do you believe is more important? Which is more stressful? Which role would you prefer and why?
Explain why some corporate executives may perceive that their independent auditors are a “necessary evil.” How can auditors combat or change that attitude?
When auditor–client disputes arise during an audit engagement, another accounting firm is sometimes retained by the client and/or the existing auditor to provide an objective report on the issue at the center of the dispute as happened during Deloitte’s 1997 audit of Livent. Discuss an
Do you believe Deloitte & Touche should have approved Livent’s decision to record the $12.5 million “naming rights” payment as revenue during the third quarter of 1997? Defend your answer. What broad accounting concepts should be considered in determining the proper accounting treatment for
Maria Messina testified that when she learned of the accounting irregularities at Livent shortly after becoming the company’s CFO she felt “guilty by association,” which prevented her from revealing the fraud to regulatory or law enforcement authorities. Explain what you believe she meant by
What professional standards apply to “due diligence” investigations performed by accounting firms?
Identify important audit risk factors common to family- owned businesses. How should auditors address these risk factors?
In your opinion, what primary audit objectives should Grant Thornton have established for JGI’s (a) Prepaid Inventory account (b) Merchandise Inventory account?
Assess Grant Thornton’s decision to rely heavily on JGI’s delivery receipts when auditing the company’s prepaid inventory. More generally, compare and contrast the validity of audit evidence yielded by internally prepared versus externally prepared client documents.
Describe the general nature and purpose of a “walk- through” audit procedure. Are such tests required by professional auditing standards?
Identify audit procedures, other than a walk- through test that might have resulted in Grant Thornton discovering that Fred Greenberg was tampering with JGI’s delivery receipts.
Once an audit firm has informed client management of important internal control weaknesses, what further responsibility, if any, does the audit firm have regarding those items? For example, does the audit firm have a responsibility to insist that client management correct the deficiencies or
Professional auditing standards identify the “management assertions” that commonly underlie a set of financial statements. Which of these assertions were relevant to Paragon’s construction projects? For each of the assertions that you listed, describe an audit procedure that Arthur Andersen
The SEC referred to several “audit failures” that were allegedly the responsibility of Michael Sullivan. Define what you believe the SEC meant by the phrase “audit failure.” Do you believe that Sullivan, alone, was responsible for the deficiencies that the SEC noted in Andersen’s 1997
Sullivan identified the 1997 Golden Bear audit as a “high- risk” engagement. How do an audit engagement team’s responsibilities differ, if at all, on a high- risk engagement compared with a “normal” engagement? Explain.
The AICPA has issued several Audit and Accounting Guides for specialized industries. Do auditors have a responsibility to refer to these guides when auditing clients in those industries? Do these guides override or replace the authoritative guidance included in the professional auditing standards?
Was the change that Paragon made in applying the percentage- of- completion accounting method a “change in accounting principle” or a “change in accounting estimate”? Briefly describe the accounting and financial reporting treatment that must be applied to each type of change.
Analyze Take- Two’s 1998-2000 financial data included in Exhibit 1. Compute the following financial ratios for each of those years: age of accounts receivable, age of inventory, gross profit percentage, profit margin percentage, return on assets, return on equity, current ratio, debt- to- equity
Identify the primary audit objectives that auditors hope to accomplish by confirming a client’s year-end accounts receivable. Explain the difference between “positive” and “negative” confirmation requests and discuss the quality of audit evidence yielded by each.
Identify audit tests that may be used as alternative audit procedures when a response is not received for a positive confirmation request. Compare and contrast the quality of audit evidence yielded by these procedures with that produced by audit confirmation procedures.
In your opinion, did the apparent mistakes made by the PwC auditors in auditing Take- Two’s receivables and reserve for sales returns involve “negligence” on their part? Would you characterize the mistakes or errors as “reckless” or “fraudulent”? Justify your answers.
Is it appropriate for audit firms to sharply discount their professional fees for developmental stage companies? Why or why not? What problems, if any, may this practice pose for audit firms?
Do you believe that the relationship between Robert Fish and Ryan Brant was inappropriate? Explain.
Should audit firms accept “ethically challenged” companies and organizations as audit clients? Defend your answer.
Auditing standards don’t specifically discuss the audit procedures that should be applied to a client’s pension-related financial statement amounts. Identify five audit procedures that would be relevant to those items. For each audit procedure that you list, identify the related audit objective.
Under what general circumstances should auditors retain outside experts to assist them in completing an audit? How could an expert be useful in auditing a client’s pension-related financial statement items?
Do you believe that Deloitte behaved properly by accepting GM’s decision to apply a 6.75 percent discount rate to its pension liabilities? What, if any, other steps or measures should Deloitte have taken under the circumstances?
Did the choice of the 6.75 percent discount rate in 2002 have a material impact on GM’s financial statements? Defend your answer.
Provide examples of important audit objectives for complex financial instruments and transactions. For each audit objective that you identify, list one or more audit procedures that could be used to accomplish that objective.
Visit the websites of the major international accounting firms. Identify nontraditional services currently marketed by these firms. List several of these services and briefly describe their nature. Of the services you identified, are there any that you believe accounting firms should not provide?
Identify specific fraud risk factors present during PwC’s audits of the Lipper hedge funds. Explain how PwC should have responded to the fraud risk factors that you identified.
Identify the factors that may have contributed to the alleged flaws in the audit procedures that PwC applied in testing the year-end market values of the Lipper hedge funds’ investments. Discuss specific measures that audit firms can employ to reduce the likelihood that such factors will undercut
Most of Judge Lifland’s criticism of E&Y focused on the firm’s audit procedures for CBI’s accounts payable. Generally, what is the primary audit objective for accounts payable? Do you believe that E&Y’s two principal audit tests for CBI’s accounts payable would have accomplished that
Do you believe that the E&Y auditors should have used confirmations in auditing CBI’s year-end accounts payable? Defend your answer. Briefly explain the differing audit objectives related to accounts receivable and accounts payable confirmation procedures and the key differences in how these
In early 1994, E&Y officials discovered that the CBI auditors had failed to determine the true nature of the “advances” they had uncovered during the 1992 and 1993 audits. In your view, did E&Y have an obligation to inform CBI management of this oversight prior to seeking the “reaudit”
Under what circumstances, if any, should an audit engagement partner acquiesce to a client’s request to remove a member of the audit engagement team?
E&Y officials believed that the CBI audits were high-risk engagements. Under what general circumstances should an audit firm choose not to accept a high-risk engagement?
When auditing contingent liabilities, which of the management assertions discussed in professional auditing standards are of primary concern to an auditor? Explain.
The SEC criticized Frank Sinopoli for not sending an “audit inquiry letter” to Geo Securities’ external legal counsel. Describe the nature and purpose of such a letter. Do you agree with the SEC that Sinopoli should have contacted Geo Securities’ external legal counsel?
Under what circumstances must audit procedures be applied to supplemental information accompanying a client’s financial statements? Describe the responsibilities auditors have when auditing such information.
Under what circumstances, if any, are auditors required to assess the going-concern status of an audit client? What procedures should auditors apply when performing such an assessment?
Is David Robinson’s suggested compromise appropriate? Why or why not?
Do you believe that Zachariah Crabtree is a person of integrity? What about David Robinson? Defend both of your answers. Does Robinson have an inappropriate relationship with Crabtree? Explain.
Identify the primary audit objectives for a client’s year-end discretionary expense accruals. Is it permissible for companies to overstate period-ending expense accruals to make their financial statements more “conservative”?
Discuss the scope and nature of an auditor’s responsibilities during a review of a client’s quarterly financial statements.
Identify the primary audit risk factors that were evident within Powder River’s operations. Briefly explain the significance of each.
How should Powder River have recorded the sales of the working interests and the guaranteed payments made to the purchasers of those working interests in its accounting records?
U.S. auditing standards identify the principal “management assertions” that underlie a set of financial statements. What management assertions were particularly relevant to? (a) The “sales” of working interests and(b) The guaranteed payments made annually by Powder River to the purchasers
The SEC and PCAOB criticized CBN for failing to discover that Powder River did not own certain assets included in its reported oil and gas properties. How would you characterize that oversight? That is, did this oversight constitute negligence, recklessness, or fraud on the part of those auditors
Powder River relied on the expertise of a “specialist” in arriving at the estimates of its proved reserves. What responsibilities, if any, do U.S. auditing standards impose on auditors when a client has used the services of a “specialist” for accounting or financial reporting purposes?
The PCAOB criticized Todd Chisholm for failing to establish a proper “quality control” system for CBN. What are the primary issues that should be addressed by the quality control system of an audit firm that has public company clients? Provide examples of circumstances in which Chisholm and/or
The PCAOB’s Interim Standards identify auditors’ responsibilities when addressing the possibility that fraud has materially impacted a public company’s financial statements. Identify in a bullet format the key instances in which the L & H auditors apparently failed to comply with these
What is the purpose of predecessor–successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating those communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.
What are the primary responsibilities of a “concurring partner” under current U.S. auditing standards?
What is the nature and purpose of a “letter of representations”? Comment on the quality or strength of the audit evidence yielded by a letter of representations.
Identify the key audit objectives for a client’s payroll function. Comment on objectives related to tests of controls and substantive audit procedures.
What internal control weaknesses were evident in the Dodgers’ payroll system?
Identify audit procedures that might have led to the discovery of the fraudulent scheme masterminded by Campos.
Identify the internal control concepts that the Levis overlooked or ignored.
When Lore Levi informed the CPA of her suspicions regarding Betty, what responsibilities, if any, did the CPA have to pursue this matter? Alternately, assume that, in addition to preparing tax returns for Howard Street Jewelers, the CPA(a) Audited the business’s annual financial statements,(b)
Assume that you have a small CPA firm and have been contacted by a husband and wife, Chris and Brooke Arbeitman, who are in the final stages of negotiating to purchase a local jewelry store. Chris will prepare jewelry settings, size jewelry for customers, and perform related tasks, while Brooke
Identify and briefly describe fundamental and cost-effective internal controls that charitable organizations could implement to reduce their exposure to theft losses.
Do CPA firms have a responsibility to perform audits of charitable organizations for reduced or lower-than-normal audit fees? Defend your answer. Other than audit fees, what other benefits do accounting firms accrue by auditing a charity?
Identify unique or uncommon audit risk factors posed by a charity. How should accounting firms modify their audits to address these risk factors?
Prepare a list of internal control procedures that banks and other financial institutions have implemented, or should implement, for their ATM operations.
What general conditions or factors influence the audit approach or strategy applied to a bank client’s ATM operations by its independent auditors?
Identify specific audit procedures that may be applied to ATM operations. Which, if any, of these procedures might have resulted in the discovery of the embezzlement scheme at First Keystone’s Swarthmore branch? Explain.
List what you believe should have been the three to five key internal control objectives of Goodner’s Huntington sales office.
Develop one or more control policies or procedures to alleviate the control weaknesses you identified in responding to Question 2.Data from Question 2List the key internal control weaknesses that were evident in the Huntington unit's operations.
Besides Woody Robinson, what other parties were at least partially responsible for the inventory losses Goodner suffered? Defend your answer.
List the key internal control weaknesses that were evident in the Huntington unit’s operations.
Identify internal control weaknesses evident in Buranello’s operations. What risks are posed by these internal control problems?
For each internal control weakness you listed in responding to the previous question, identify a measure that Buranello’s could implement to remedy that weakness. Indicate whether these measures would be cost-effective.
Prepare a list of internal control procedures for a restaurant other than the controls referred to in this case. For each control that you list, identify its underlying objective.
Do you believe that Barnes’ plan to test Aaron O’Neil’s honesty was appropriate? Was it ethical? What ethical responsibilities does a business’s senior management or owner have when an employee is suspected of theft?
Who has the final responsibility for the integrity of an SEC registrant’s internal controls: its audit committee, its management team, or its independent auditors? Explain.
Under the professional standards currently in effect, what responsibility do auditors have to identify internal control problems within their clients’ accounting systems? To whom must auditors communicate such problems? In responding to these questions, indicate how auditors’ responsibilities
Under what conditions is a public company allowed to dismiss its independent audit firm? Under what conditions is an independent audit firm allowed to resign as the auditor of a public company? What disclosures, if any, does the SEC mandate when a public company experiences a change in its
Should the SEC selectively prosecute companies, organizations, or individuals to encourage compliance with legal or professional standards? Defend your answer
The COSO internal control framework identifies five internal control components. Which of those components is most relevant to the procedures that SOX mandates public companies establish to enable, if not encourage, whistle blowing by corporate employees?
Explain the difference between a “significant deficiency” and “material weakness” in internal control. Provide an example of each.
Assume that the PwC contract auditors did, in fact, exert “managerial authority” over Boeing employees? What internal control problems or issues would that have posed for Boeing?
Would it have been unethical or otherwise inappropriate for Neumann and Tides to have directly communicated their concerns regarding Boeing’s IT controls to the company’s Deloitte auditors? Explain. Assuming that Neumann and Tides had done just that, how should the Deloitte auditors have
Why do you believe that SOX does not provide legal remedies for corporate whistleblowers who are punished by their employers after communicating with members of the news media?
Was it ethical for Boeing to monitor the computers and e-mail of Neumann and Tides during the investigation to determine whether one or more employees were communicating with members of the news media? Defend your answer.
Identify control activities that Wal-Mart could have implemented for Wal-Mart de Mexico and its other foreign subsidiaries to minimize the likelihood of illegal payments to government officials. Would these control activities have been cost-effective?
What responsibility, if any, does an accountant of a public company have when he or she discovers that the client has violated a law? How does the accountant’s position on the company’s employment hierarchy affect that responsibility, if at all? What responsibility does an auditor of a public
Does an audit firm of an SEC registrant have a responsibility to apply audit procedures intended to determine whether the client has complied with the FCPA? Defend your answer.
If the citizens of certain foreign countries believe that the payment of bribes is an acceptable business practice, is it appropriate for U.S. companies to challenge that belief when doing business in those countries? Defend your answer.
Do CPAs who provide accounting, taxation, and related services to small businesses have a responsibility to serve as the “moral conscience” of those clients? Explain.
In a 1984 opinion handed down by the U.S. Supreme Court, Chief Justice Warren Burger noted that “the independent auditor assumes a public responsibility transcending any employment relationship with the client.” If this is true, do auditors have a moral or professional responsibility to turn in

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