Auditing Cases An Interactive Learning Approach 6th edition Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt - Solutions

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Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: • Shady Oaks Centre, a
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: • Shady Oaks Centre, a
RequiredFor each of the following situations, indicate what type of modification/audit report is most appropriate.(a) There is a scope limitation and it is material. However, the overall financial statements are still presented fairly.(b) There is a departure from GAAP and it is pervasively
In connection with your examination of the financial statements of Martinson Inc. for the year ended December 31, your post-balance sheet date audit procedures disclosed the following items: 1. January 5: The funds for a $50,000 loan to the corporation made by Mr. Martinson on May 18 were obtained
Hatami and Partners completed the field work for the December 31, 2011, audit of Harbinger Corporation on March 1, 2012. The financial statements and auditor's report were issued and mailed to shareholders on March 15, 2011. Required In each of the two situations below, select from the list
You are the audit senior of Ball Construction Corporation (BC), a small public company that enters into construction contracts with individuals and developers and builds to their specifications. BC is a Canadian company, but recently opened a branch in the southwestern United States. It is
Manitoba Metal Fabricators (MMF) is a company that makes steel components for the construction industry. It specializes in extreme precision manufacturing where tolerances are measured in distances of less than one millimeter. Its products are used in revolving restaurants, automatic doors, and
Mitch Ziegel and Rosie Punter are discussing the audit plan for a large manufacturing company. The company has two main manufacturing plants plus several warehouse and distribution centres (one in each province). The company has a large investment in trade receivables and there are additional
Brad Gokool is reviewing the results of the subsequent events audit procedures. Brad is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the financial
Katrina Lukacs is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion's assets and liabilities are financial and their valuation is critical to the assessment of the company's solvency and profitability. Katrina has employed two outside experts to
The staff at Nguyen and Partners have completed the necessary audit work for Manitoba Metal Fabricators. The partner responsible for the audit is now reviewing the audit file. She has come across the Schedule of Unadjusted Differences and is considering the type of audit report to issue. Referring
Steven Erasmus has had difficulties throughout the audit of Kingston Catering. The company is a long-standing client of the audit firm and there have been no problems in the past. However, four months into the start of the financial year the company's computer systems failed. Subsequent diagnostic
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year end, December 31, 2012. FH's financial statements for the year ended December 31, 2012, show land and buildings
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year end, December 31, 2012. FH's financial statements for the year ended December 31, 2012, show land and buildings
The global financial crisis led to increasing legal action against auditors as company managers searched for scapegoats and potential places to recover their losses. The tough economic times also likely caused companies that would otherwise have survived to fail, exposing bad management and
Answer the following questions based on the information presented for Cloud 9 in Appendix B of this book and the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required Based on everything you know about the audit of Cloud 9,
The client acceptance process can be quite complex. Identify five procedures an auditor should perform in determining whether to accept a client. Which of these five are required by auditing standards?
What nonfinancial matters should be considered before accepting Ocean as a client? How important are these issues to the client acceptance decision? Why?
Using Ocean's financial information, calculate relevant preliminary analytical procedures to obtain a better understanding of the prospective client and to determine how Ocean is doing financially. Compare Ocean's ratios to the industry ratios provided. Identify any major differences and briefly
(a) Ocean wants Barnes and Fischer to aid in developing and improving its IT system. What are the advantages and disadvantages of having the same CPA firm provide both auditing and consulting services? Given current auditor independence rules, will Barnes and Fischer be able to help Ocean with its
(a) Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should or should not accept Ocean Manufacturing, Inc. as an audit client. Carefully justify your position in light of the information in the case. Include consideration of reasons both for and against
(a) How might the confirmation tendency affect your client acceptance decision? (b) How might the overconfidence tendency come into play in your client acceptance decision? (c) How might an auditor mitigate the possible effects of the confirmation and overconfidence tendencies in a client
You are an audit senior with Gooch & Brown CPA, LLP, a local accounting firm specializing in audits of information systems and financial statements. Your1040Return.com engaged your firm to perform its financial statement audit. You have been asked by the partner to perform the following tasks: (a)
Your1040Return.com's main business strategy involves the delivery of services via the Internet. What are some threats to the viability of Your1040Return.com's business strategy?
When customers register for the Platinum package, they have online access to tax professionals who are paid on a contract basis. If you were in Steven Chicago's shoes, how would you compensate those professionals for their services? What controls could Your1040Return.com implement to ensure that
Auditing standards provide guidance for auditors when evaluating electronic evidence. What are the implications for an auditor when a client's accounting system produces and stores transaction evidence only electronically?
Go to Apple's website (investor.apple.com) and explore the website. Click on the "SEC Filings" link. Obtain the most recent SEC Form 10-K provided for Apple. Based on the information obtained from the website and your knowledge of the industry, prepare a memo discussing the following items: (a)
Professional auditing standards provide guidance on the auditor's consideration of an entity's business risks. What is the auditor's objective for understanding an entity's business risks? Why does an auditor not have responsibility to identify or assess all business risks? Provide some examples of
Describe how the confirmation tendency might affect auditors' risk assessments. Describe some strategies to mitigate potential bias caused by this tendency.
What "judgment frames" does management of Flash use when discussing the company's performance and prospects? How might judgment framing be used to boost professional skepticism in performing a risk assessment?
A useful approach for understanding a client's business environment and associated business risks is to perform a PESTLE analysis. PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors that are used to asses the client's business environment. A PESTLE
Professional auditing standards provide guidance on the auditor's consideration of an entity's business environment and associated business risks. (a) What is the auditor's objective for understanding an entity's business environment? (b) Why does an auditor not have responsibility to identify or
What could John Peters and the other auditors do to better handle the demands of career and family life?
What alternatives are available to Brent in regards to the audit of payables? What are the pros and cons of each alternative?
What consequences for Brent, the auditing firm, and others involved, may arise from "eating time," as Han suggested? Similarly, what consequences for Brent, the auditing firm, and others involved, may arise from not completing audit procedures, as Megan suggested?
In your opinion, which of Brent's alternative courses of action would provide the best outcome and why? What should Brent do? How would you handle the ethical issues involved in this situation?
(a) How might the confirmation tendency affect Brent's decision? (b) How might the availability tendency come into play in Brent's decision? (c) What could Brent do to mitigate the effects of the confirmation and availability tendencies to improve his professional judgment?
Consider what frames of judgment Brent seems to be focused on. What other judgment frames would be useful in making the best decision in this case?
Given that the firm did not have any problem paying the higher bill, would Nathan's planned course of action be ethical? Why or why not?
What other courses of action might be available to Nathan? Which do you think would be the best action for him to take?
How might the confirmation tendency affect Nathan's decision and what could he do to mitigate the possible effects of this tendency in order to improve his professional judgment?
Do you think situations like this (i.e., aggressive accounting or even financial statement fraud) are common in practice?
(a) What pressures or factors will executives use to encourage accounting managers and staff to go along? (b) What arguments can you use to resist those pressures? (c) How does one determine whether a company is aggressively reporting, but still in the guidelines of GAAP, versus fraudulently
One of the environmental factors affecting judgment is the "rush to solve" judgment trap. Briefly describe that trap and how it applies to the situation affecting the anonymous caller.
Consulting with others is an important step in making important judgments. Could the state board of accountancy be a source of advice?
Which financial statement assertion related to sales transactions did management violate when it issued the falsified financial statements?
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently completed a joint project to develop a common revenue standard for U.S. GAAP and IFRS to improve revenue recognition practices and to remove inconsistencies and weaknesses in revenue
What types of audit procedures could an external auditor perform that might help the auditor detect this fraudulent activity?
People who study instances of financial statement fraud often note that three conditions are generally present for fraud to occur. First, the person perpetrating the fraud has an incentive or pressure to engage in fraud. Second, there is an opportunity for that person to carry out the fraud. Third,
In 2014, the AICPA's Professional Ethics Executive Committee adopted a revised Code of Professional Conduct that is effective December 15, 2014. Briefly describe how the new Code is structured and indicate where would you find guidance about the importance of integrity.
(a) What would you recommend to the caller if you were Dr. Mitchell? (b) What are the risks of continuing to work with the company? (c) What are the risks of resigning immediately?
What responsibility, if any, does the caller have to report this situation directly to the bank involved? Before you respond, think about the risks present if the caller does inform the bank and it later turns out that the caller's assessment of the situation was inaccurate, i.e., there was no
(a) What other parties, if any, should be notified in addition to the bank? (b) What concerns do you have about notifying the external auditors?
At the time Cynthia Cooper discovered the accounting fraud, WorldCom did not have a whistleblower hotline process in place. Instead, Cynthia took on significant risks when she stepped over Scott Sullivan's head and notified the audit committee chairman of her findings. Conduct an Internet search to
Use the Internet to conduct research related to whistleblower processes. Prepare a report summarizing key characteristics for the operation of an effective corporate whistleblower hotline. Be sure to highlight potential pitfalls that should be avoided.
As Vice President of Internal Audit, Cynthia Cooper reported directly to WorldCom's CFO, Scott Sullivan, and not to the CEO or audit committee. Research professional standards of the Institute of Internal Auditors to identity recommendations for the organizational reporting lines of authority
Conduct an Internet search to locate a copy of the Sarbanes−Oxley Act of 2002 and summarize the requirements of Section 406 of the Act. Then, search the SEC's web site (www.sec.gov) to locate the SEC's Final Rule: "Disclosure Required by Sections 406 and 407 of the Sarbanes−Oxley Act of 2002
Often the life of a whistleblower involves tremendous ridicule and scrutiny from others, despite doing the "right thing." Describe your views as to why whistleblowers face tremendous obstacles as a result of bringing the inappropriate actions of others to light.
Describe the personal characteristics a person should possess to be an effective whistleblower. As you prepare your list, consider whether you think you've got what it takes to be a whistleblower.
Assume that a close family member came to you with information about a potential fraud at his or her employer. Prepare a summary of the advice you would offer as he or she considers taking the information forward.
Conduct an Internet search to locate a copy of the Sarbanes−Oxley Act of 2002. Read and summarize the requirements of Section 302 of the Act. Discuss how those provisions would or would not have deterred the actions of Scott Sullivan, CFO at WorldCom.
Document your views about the effectiveness of regulatory reforms, such as the Sarbanes−Oxley Act of 2002, in preventing and deterring financial reporting fraud and other unethical actions. Discuss whether you believe the solution for preventing and deterring such acts is more effective through
The following requirements relate to Ms. Stitt's testimony about the concept of reasonable assurance: (a) Research the auditing standards for "reasonable assurance" and provide your assessment as to the accuracy of Ms. Stitt's description of that concept in her testimony. (b) Ms. Stitt testified
The following requirements relate to Ms. Stitt's testimony about the CanWest non-compete payments: (a) The concept of a "related party" is defined by generally accepted accounting principles (GAAP). Review the FASB's Accounting Standards Codification and determine where guidance for related parties
The following requirements relate to Ms. Stitt's testimony about the audit committee presentation: (a) Visit the PCAOB's website to identify where guidance related to auditor communications with audit committees resides. (b) Provide a brief overview of the requirements in PCAOB auditing standards
The following requirements relate to Ms. Stitt's testimony about the audit workpapers: (a) Based on your review of requirements in auditing standards related to auditor documentation why must auditors prepare audit documentation? (b) Discuss the concept of "experienced auditors" as described in
In December 2012, the PCAOB issued Staff Audit Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits. Review that Alert to answer the following questions: (a) How does the PCAOB define professional skepticism? (b) How do responsibilities for applying professional
What were the business risks Enron faced, and how did those risks increase the likelihood of material misstatements in Enron's financial statements?
In your own words, summarize how Enron used SPEs to hide large amounts of company debt.
(a) What are the responsibilities of a company's board of directors?(b) Could the board of directors at Enron-especially the audit committee-have prevented the fall of Enron?(c) Should they have known about the risks and apparent lack of independence with Enron's SPEs? What should they have done
Explain how "rule-based" accounting standards differ from "principle-based" standards. How might fundamentally changing accounting standards from bright-line rules to principle-based standards help prevent another Enron-like fiasco in the future? Some argue that the trend toward adoption of
What are the auditor independence issues surrounding the provision of external auditing services, internal auditing services, and management consulting services for the same client? Develop arguments for why auditors should be allowed to perform these services for the same client. Develop separate
A perceived lack of integrity caused irreparable damage to both Andersen and Enron. How can you apply the principles learned in this case personally? Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might affect your career. What
Enron and Andersen suffered severe consequences because of their perceived lack of integrity and damaged reputations. In fact, some people believe the fall of Enron occurred because of a form of "run on the bank." Some argue that Andersen experienced a similar "run on the bank" as many top clients
Why do audit partners struggle with making tough accounting decisions that may be contrary to their client's position on an issue? What changes should the profession make to eliminate these obstacles?
What has been done, and what more do you believe should be done to restore the public trust in the auditing profession and in the nation's financial reporting system?
Auditing standards note that three conditions are generally present when fraud occurs. Research the authoritative standards for auditors and provide a brief summary of each of the three fraud conditions. Additionally, provide an example from the Comptronix fraud of each of the three fraud
Auditing standards note that there is a possibility that management override of controls could occur in every audit and accordingly, the auditor should include audit procedures in every audit to address that risk. (a) What do you think is meant by the term "management override"? (b) Provide two
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued a thought paper titled, "Enhancing Board Oversight: Avoiding Judgment Traps and Biases." Visit COSO's website (www.coso.org) to download a free copy of this paper to answer the following questions: (a) What must
PCAOB Auditing Standards No. 8, Audit Risk, provides guidance about the auditor's consideration of audit risk in an audit of financial statements. Visit the PCAOB's website (www.pcaob.org) to obtain the standard to address the following questions. (a) What is audit risk? (b) Audit risk is a
Describe typical factors that auditors evaluate when assessing inherent risk. With the benefit of hindsight, what inherent risk factors were present during the audits of the 1989 through 1992 Comptronix financial statements?
Describe the five components of internal control. What characteristics of Comptronix's internal control increased control risk for the audits of the 1989-1992 year-end financial statements?
The Committee of Sponsoring Organizations of the Treadway Commission (widely known as COSO) revised its Internal Control - Integrated Framework to update its guidance to reflect a number of advancements in best practices, including those related to information technologies. Visit COSO's website
The board of directors, and its audit committee, can be an effective corporate governance mechanism. (a) Discuss the pros and cons of allowing inside directors to serve on the board. Describe typical responsibilities of audit committees. (b) What strengths and weaknesses were present related to
Public companies must file quarterly financial statements in Form 10-Qs that have been reviewed by the company's external auditor. The PCAOB embraced existing auditing standards in place at April 2003 as its Interim Standards. Guidance for auditors of public companies in regards to reviews of
Describe whether you think Comptronix's executive team was inherently dishonest from the beginning. How is it possible for otherwise honest people to become involved in frauds like the one at Comptronix?
The PCAOB's Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements, describes the auditor's responsibility to use a "top-down approach" and describes the auditor's responsibility for testing "entity level controls."
Professional auditing standards outline the auditor's consideration of material misstatements due to errors and fraud. (a) What responsibility does an auditor have to detect material misstatements due to errors and fraud? (b) What two main categories of fraud affect financial reporting? (c) What
Professional standards indicate that an entity's internal controls consist of five interrelated components. (a) What responsibility does an auditor have related to each of these five components? (b) One component of internal control is the entity's control environment. What factors should an
Professional standards recognize there is a possibility that management may override internal controls. (a) Provide an example where management override occurred in the Cendant fraud. (b) What are the required auditor responses to further address the risk of management override of internal controls?
Several misstatements were identified as a result of the fraud perpetrated by CUC management. (a) For each misstatement identified, indicate one management assertion that was violated. (b) For each misstatement identified, indicate one audit procedure the auditor could have used to detect the
Some of the members of CUC's financial management team were former auditors for Ernst & Young, LLP.(a) Why would a company want to hire a member of its external audit team?(b) If the client has hired former auditors, how might this affect the independence of the existing external auditors?
What is meant by the term professional judgment, and why is it a particularly important concept to consider in the Cendant case?
What are some examples of judgment traps and tendencies that likely affected the auditor's judgment when auditing CUC's financial statements?
Review Waste Management's Consolidated Balance Sheet as of December 31, 1996. Identify accounts whose balances were likely based on significant management estimation techniques. Describe the reasons why estimates were required for each of the accounts identified.
What are some examples of judgment traps and tendencies that likely influenced the auditor's judgment when auditing Waste Management's financial statements?
Describe why accounts involving significant management estimation are generally viewed as inherently risky.
Review professional auditing standards to describe the auditor's responsibilities for examining management-generated estimates. Also, describe the techniques commonly used by auditors to evaluate the reasonableness of management's estimates.
The Waste Management fraud primarily centered around inappropriate estimates of salvage values and useful lives for property and equipment. Describe techniques Andersen auditors could have used to assess the reasonableness of those estimates used to create Waste Management's financial statements.
Three conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to commit the fraud act. Second, circumstances exist - for example, absent or ineffective internal controls or the ability for management to

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Auditing Cases An Interactive Learning Approach 6th edition Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt - Solutions

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