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Contemporary Auditing 8th edition Michael C. Knapp - Solutions

Assume that you were Jess in the second hypothetical scenario presented in this case. How would you respond to your friend’s suggestion that you become a controlled informant for the IRS? Identify the parties that would be affected by your decision and the obligations you would have to each.
Jon Fries (CEO), Fletcher Anderson (COO), Craig Schuster (CFO), and Catherine Sprauer (division controller) were the four central figures in this case. Identify the key responsibilities associated with the professional roles these individuals occupied. Briefly describe the type and extent of
Using the scale shown below, evaluate the conduct of the four key individuals discussed in this case. Be prepared to defend your answers−100 . . . . . . . . . 0 . . . . . . . . . 100Highly………………………. HighlyUnethical……………………..
For a moment, step into the shoes of Catherine Sprauer. What would you have done during and following each of the confrontations she had with the two employees who insisted that F&C executives were involved in a fraudulent scheme to misrepresent the company’s financial statements?
Craig Schuster resigned as F&C’s CFO on 1 January 1993. Apparently, Schuster did not reveal to any third parties the concerns he had regarding F&C’s accounting records and previous financial statements. In your opinion, did Schuster have a responsibility to inform someone of those concerns
Assume that you, rather than Fletcher Anderson, were F&C’s COO in December 1992. What would you have done upon receiving the list of Warehouse Q inventory from Craig Schuster?
What would you do if you found yourself in a situation similar to that faced by Suzette in this case?
Do you believe that it was appropriate for Suzette to report the alleged theft ring to a store manager? Would it have been unethical for Suzette not to report the rumored theft ring?
Accounting majors are preparing to enter a profession recognized as having one of the strongest and most rigorously enforced ethical codes. Given this fact, do you believe that accounting majors have a greater responsibility than other business majors to behave ethically?
Briefly discuss internal control activities that might have prevented the theft losses suffered by Bertolini’s.
Identify the specific circumstances under which auditors are allowed to provide confidential client information to third parties.
Suppose that you and a close friend are employed by the same accounting firm. You are assigned to the firm’s audit staff, while your friend is a consultant who works on M&A engagements. What would you do under the following circumstances? (1) Your friend discloses to you highly confidential
E&Y was providing a consulting service to The Blackstone Group in connection with its planned acquisition of Freescale Semiconductor. Explain how a CPA’s professional responsibilities differ between consulting engagements and audit engagements.
Place yourself in Wiley’s position. How would you respond to the “Arrests and Convictions” question? Before responding, identify the decision alternatives available to you.
Suppose that Wiley does not disclose the citation he received. A few weeks after going to work for his new employer, Wiley is called into the OMP’s office. The OMP tells Wiley that he recently learned of the minor-in-possession citation that Wiley had been given. The OMP then hands Wiley a copy
Assume that Sally Jones was the individual who told the OMP that Wiley had been given a police citation at the graduation party. Do you believe Sally had a moral or ethical responsibility to inform the OMP of that matter? Why or why not?
Before interviewing with the two St. Louis accounting firms, did Arvel have an obligation to inform them that he had an outstanding job offer from a Big Four practice office in Kansas City? Why or why not?
Did Arvel Smart behave unethically by accepting the internship with the St. Louis accounting firm when he intended to accept the outstanding job offer from the Big Four accounting firm at the completion of that internship? Defend your answer.
Explain the meaning of the phrase “client confidentiality” in the context of a CPA’s ethical responsibilities. In your opinion, did David Quinn violate the accounting profession’s client confidentiality rule?
Assume the role of Debbie Woodruff. How would you have handled the situation that arose in the restaurant?
Did Debbie have a responsibility to report David’s behavior to a superior in her practice office or to anyone else? Why or why not? Did Debbie have a responsibility to determine whether her firm’s tax department was providing appropriate professional advice regarding the deductibility of the
Define the phrase “earnings management.” Under what conditions, if any, is earnings management acceptable? Do auditors’ responsibilities include actively searching for instances of earnings management by clients? Defend your answers.
Dell recorded the exclusivity payments as an offset or reduction to its operating expenses. What “management assertion” did that accounting treatment violate? What audit procedure or procedures might have resulted in the discovery of that accounting treatment?
During the time frame that Intel was making exclusivity payments to Dell, Dell’s business model was being adversely affected by the increasingly competitive nature of the PC industry. What responsibility, if any, do auditors have to analyze a client’s business model? Do auditors have a
What ethical issues do exclusivity agreements such as that between Dell and Intel raise? Are there analogous ethical issues faced by audit firms and their clients? Explain.
Identify the parties who had a stake in, or would be affected by, the outcome of the ethical dilemma faced by William Makadok in 1990. What obligation, if any, did Makadok have to each of these parties?
Place yourself in William Makadok’s position. Would you have responded differently than he did to the circumstances he faced? Explain.
The SEC did not criticize Accuhealth’s independent auditors in the various enforcement releases issued concerning the company’s fraudulent schemes. Under what general circumstances auditors should not be held at least partially responsible for such schemes? Defend your answer.
What specific audit procedures might have led to the detection of Accuhealth’s fraudulent cash and inventory schemes?
The “control environment” is generally considered the most important component of any organization’s internal control process. Defend that generalization. Use examples from this case to support your answer.
The AICPA’s Code of Professional Conduct includes six broad ethical principles. Which of those ethical principles are most relevant to this case? Which of the specific “rules” in the Code of Professional Conduct are most applicable to this case? Defend your answers
Identify specific factors that may influence the market value of a given accounting firm. Relying on publicly available sources, identify common methods used to assign a market value to an accounting firm or practice.
Define what is meant by the phrase “succession planning.” How was succession planning relevant to this case
Identify the accountants in this case who faced ethical dilemmas. Also identify the parties who would be potentially affected by the outcome of each of these dilemmas. What responsibility did each accountant owe to these parties? Did the accountants fulfill these responsibilities?
Describe the procedures an auditor should perform during a review of a client’s quarterly financial statements. In your opinion, did the Touche Ross auditors who discovered the $203,000 adjusting entry during their 1985 second-quarter review take all appropriate steps to corroborate that entry?
In reviewing the United Airlines–Cardillo agreement, Shepherd collected evidence that supported the $203,000 adjusting entry as booked and evidence that suggested the entry was recorded improperly. Identify each of these items of evidence. What characteristics of audit evidence do the
What are the principal objectives of the SEC rule that requires Form 8-K statements to be filed when public companies change auditors? Did Shepherd violate the client confidentiality rule when she discussed the United Airlines–Cardillo transaction in the exhibit letter she filed with Cardillo’s
Do the profession’s technical standards explicitly require auditors to evaluate the integrity of a prospective client’s key executives? Identify the specific measures auditors can use to assess the integrity of a prospective client’s executives.
Is it ethical for a CPA or CPA firm to help companies “manage” their reported earnings and financial condition? In responding to this question, first assume that the CPA or CPA firm is serving as a consultant, and then assume that the CPA or CPA firm is serving as the given entity’s
When a dispute arises between an audit client and its auditor regarding the proper accounting treatment for a transaction or other item, the audit client will sometimes retain another accounting firm to issue a report, previously known as a SAS No. 50 report; on the proper accounting treatment for
Should auditors insist that their clients accept all proposed audit adjustments, even those that have an “immaterial” effect on the given financial statements? Defend your answer.
Should auditors take explicit measures to prevent their clients from discovering or becoming aware of the materiality thresholds used on individual audit engagements? Would it be feasible for auditors to conceal this information from their audit clients?
Identify the general principles or guidelines that dictate when companies are entitled to record revenue. How were these principles or guidelines violated by the $7.8 million barter transaction and the two consignment sales discussed in this case?
Identify and briefly explain each of the principal objectives that auditors hope to accomplish by preparing audit work-papers. How were these objectives undermined by Deloitte’s decision to alter North Face’s 1997 work-papers?
North Face’s management teams were criticized for strategic blunders that they made over the course of the company’s history. Do auditors have a responsibility to assess the quality of the key decisions made by client executives? Defend your answer.
Bermuda’s Minister of Finance retained KPMG to “audit” the business affairs of IPOC to determine whether the company was a criminal enterprise or a legitimate business operation. What type of professional service was KPMG providing during this engagement? Did the engagement qualify as an
What moral, ethical, and professional responsibilities did Guy Enright face when he was asked to turn over confidential documents to the individuals who were representing themselves as intelligence agents for the British and the U.S. governments? Which of those responsibilities did he violate and
Compare and contrast the conduct of Guy Enright and Nick Day. Which of these individuals was most ethical (or least unethical)? Defend your answer.
How would you respond if you faced a set of circumstances similar to those faced by Guy Enright?
KPMG filed a civil lawsuit against Diligence, Inc., in 2005 after learning of the “sting operation” that firm had perpetuated on Guy Enright. What rationale or legal principles would have been the basis for that lawsuit? Do you believe that KPMG would have been successful if it had pursued that
Do you believe that Bill Grant was justified in refusing to provide the requested Work-papers to the grand jury? Explain.
What responsibility, if any, does a public accounting firm have to its partners and employees when they are subpoenaed to testify regarding a client?
What is the purpose of “attorneys’ letters” obtained during the course of an audit? If attorneys are aware that these letters can be routinely subpoenaed, how does this fact likely affect the quality of the audit evidence yielded by the letters?
Do you believe the documentation included in tax accrual audit work-papers is likely affected by auditors’ knowledge that those work-papers can be obtained by the IRS? Explain.
The legal opinion in this case did not indicate how Lola Rojas actually used the funds she embezzled from Ryden Trucking. Suppose that she did use those funds to pay medical expenses of her mother. Given this assumption, would you describe her behavior as “unethical”? Defend your answer.
What factors may have motivated Jermell Marshall to go to such great lengths to help Rojas? Do you believe that Marshall acted “prudently” in dealing with Rojas?
Although not mentioned in this case, the plaintiff that sued Marshall maintained that he had been negligent in supervising Rojas while she was assigned to the Ryden engagement. That negligence, according to the plaintiff, had contributed to Rojas’s decision to embezzle funds from Ryden. Briefly
The appellate judge who reviewed the lower court opinion in this case observed that Marshall may have been “morally obligated” to warn Rojas’s new employer of her prior criminal conduct. Explain the difference between a “moral obligation” and a “legal obligation.” If someone fails to
How, if at all, should MMC report the expected loss on the large receivable in its Form 10-K financial statements? Explain.
Place yourself in Richard Grimes’ position. What decision alternatives does he have after overhearing the conversation between Alva Russell and Daniel Slater? Which of these alternatives should he choose? Why?
Did Richard have a responsibility to make the two client executives aware of his presence when he was outside of Russell’s office? Why or why not?
In your opinion, did Vaughn overreact to Walker’s admission that she had been untruthful regarding the CPA exam? If so, how would you have dealt with the situation if you had been in Vaughn’s position? How would you have dealt with the situation if you had been in Roberts’ position?
Vaughn obviously questioned Walker’s personal integrity. Is it possible that one can fulfill the responsibilities of a professional role while lacking personal integrity? Why or why not?
What conclusion do you believe Bill DeBurger reached in his inventory memo? Put yourself in his position. What conclusion would you have expressed in the inventory memo? Why?
Would you have dealt with your uncertainty regarding the inventory account differently than Bill did? For example, would you have used a different approach to raise the subject with Sam Hakes?
Evaluate Sam Hakes’ response to Bill’s statement that he was unable to sign off on the inventory account. In your view, did Sam deal with the situation appropriately? Was Sam’s approach “professional”? Explain.
Is it appropriate for relatively inexperienced auditors to be assigned the primary responsibility for such critical accounts as Marcelle Stores’ inventory? Explain
Place yourself in Hamilton Wong’s position. Would you report all of your time worked on the Wille & Lomax audit? Why or why not? Do you believe that Lauren Hutchison behaved unethically by underreporting the time she worked on that engagement? Defend your answer
Academic research suggests that underreporting time on audit engagements is a common practice. What are the key objectives of tracking hours worked by individual accounts or assignments on audit engagements? What implications does the underreporting of time have for individual auditors, their
What measures can accounting firms take to ensure that time budgets do not interfere with the successful completion of an audit or become dysfunctional in other ways?
What measures can accounting firms take to reduce the likelihood that personal rivalries among auditors of the same rank will become dysfunctional?
Compare and contrast the professional roles of an audit senior and a staff accountant. In your analysis, consider the different responsibilities assigned to each role, the job-related stresses that individuals in the two roles face, and how each role contributes to the successful completion of an
Assume that you are Tommy O’Connell and have learned that Carl Wilmeth will be working for you on the Altamesa audit engagement. Would you handle this situation any differently than Tommy did? Explain.
Again, assume that you are Tommy. Carl is badgering you for something to do midway through the Altamesa job. You suspect that he is not completing all of his assigned procedures, but at the time you are wrestling with an important accounting issue facing the client. What would you do at this point?
Assume that at some point Tommy told Morrison that he suspected Carl was not completing his assigned tasks. The only evidence Tommy had to support his theory was the fact that Carl had come in significantly under budget on every major task assigned to him over a period of several months. If you
Would it have been appropriate for Avis to substitute another store for Store 51 after she discovered the cutoff errors in that store’s accounting records? Defend your answer.
Identify the parties potentially affected by the outcome of the ethical dilemma faced by Avis Love. What obligation, if any, did Avis have to each of these parties?
Does the AICPA’s Code of Professional Conduct prohibit auditors from developing friendships with client personnel? If not, what measures can auditors take to prevent such friendships from interfering with the performance of their professional responsibilities?
Identify the key audit objectives associated with year-end cash receipts and sales cutoff tests.
What method would you have recommended that Avis or her colleagues use in deciding whether the cutoff errors she discovered had a material impact on Lowell’s year-end financial statements? Identify the factors or benchmarks that should have been considered in making this decision
Do you believe Charles Tollison was qualified for a partnership position with his firm? Explain.
Did Tollison’s firm treat him “fairly”? Why or why not?
Identify the criteria you believe large international accounting firms should use when evaluating individuals for promotion to partner. In your opinion, which of these criteria should be most heavily weighted by these firms? Should smaller accounting firms establish different criteria for
Discuss the advantages and disadvantages of the “up or out” promotion policy followed by many accounting firms.
Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client poses a higher-than-normal degree
What quality control mechanisms should major accounting firms have in place to ensure that audit partners have the proper training and experience to supervise audit engagements?
Identify the accounting standards and concepts that dictate the proper accounting treatment for sales returns. How were these standards and concepts violated by Ligand?
During the review of Ligand’s first-quarter financial statements for 2004, the Deloitte auditors learned that the company had significantly underestimated its future sales returns at the end of 2003. What responsibility, if any, did this discovery impose on the Deloitte auditors?
Since its inception, the PCAOB has been criticized by many parties. Summarize the principal complaints that have been directed at the PCAOB. Do you believe this criticism is justified? Explain. What measures could the PCAOB take to improve its effectiveness and efficiency as a regulatory body?
In your opinion, how should Sarah have handled this matter? Identify the factors that Sarah should have considered in dealing with the situation. Also, identify the professional and personal responsibilities of Sarah, R. J. Bell, and other relevant individuals in this matter.
What were the costs and potential costs to Sarah’s employer in this case? How should accounting firms attempt to prevent these types of situations from occurring? Assume that rather than speaking to Bell, Sarah had told the office managing partner about the problem she faced. How should the
This case took place several years ago. Do you believe that events similar to those that took place in this case could occur now? Explain.
How do you believe Alex Saunders should have reacted when Jim Charles insisted that Bud be removed from the bank’s audit engagement team? What would you have done under similar circumstances if you had been Saunders?
In your opinion, did Saunders’ decision to comply with Charles’ request violate any professional or ethical standards? Defend your answer.
The key events in this case transpired during the late 1970s. Do you believe that such a series of events could occur now? Explain.
Do public accounting firms have a responsibility to facilitate the career success of female employees? Why or why not? Identify policies accounting firms could implement to increase the retention rate of female employees.
In business circles, one frequently hears references to the “old boy network.” Many women in professional firms complain that their gender precludes them from becoming a member of the old boy network within their firm. Define, in your own terms, the phrase old boy network. Should professional
Suppose that an audit client objects to a given auditor because of his or her gender or race. Identify the alternative courses of action the auditor’s employer should consider taking in such a case. Which of these alternatives do you believe the accounting firm should take? Defend your answer.
The nepotism rules of many professional firms pose a major inconvenience for married couples who work for, or would like to work for, those firms. Discuss the costs and benefits of these rules in a public accounting setting. In practice, do you believe these rules are equally fair (or unfair) to
Observers of the accounting profession suggest that many courts attempt to “socialize” investment losses by extending auditors’ liability to third-party financial statement users. Discuss the benefits and costs of such a policy to public accounting firms, audit clients, and third-party

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