Contemporary Auditing 10th edition Michael C. Knapp - Solutions

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At December 31, 2015, EarthWear has $5,890,000 in a liability account labeled "Reserve for returns." The footnotes to the financial statements contain the following policy: "At the time of sale, the company provides a reserve equal to the gross profit on projected merchandise returns, based on
Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2016. As with all audit engagements, Arthur's initial procedures are to analyze the entity's financial data by reviewing trends in significant ratios and comparing the company's performance with the industry so that he better
The auditors for Weston University are conducting their audit for the fiscal year ended December 31, 2015. Specifically, the audit firm is now focusing on the audit of revenue from this season's home football games. While planning the audit of sales of football tickets, one of their newer staff
Ken Smith, the partner in charge of the audit of Houghton Enterprises, identified the following significant deficiencies during the audit of the December 31, 2015, financial statements: 1. Controls for granting credit to new customers were not adequate. In particular, the credit department did not
On September 2, 2010, the Securities & Exchange Commission brought an action against Sujata Sachdeva, vice president of finance, and Koss senior accountant and subordinate, Julie Mulvaney, who allegedly helped her cover up the fraudulent scheme. The SEC alleged that Sachdeva and Mulvaney caused
On February 14, 2013, former city comptroller and treasurer of Dixon, IL, Rita Crundwell was sentenced to 19½ years in prison for diverting $53 million from city funds for her own benefit. It appears that the fraud began in 1990 at a relatively small amount, but the level of her embezzlements
For each of the following cases, indicate why management and the auditors determined that the control deficiency was a material weakness. Case 1: In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2015, we identified a material weakness over the
Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2015. On January 5, 2015, Brown observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts have been
The "Accounts Receivable-Confirmation Statistics" working paper shown on the next page was prepared by an audit assistant for the 2015 audit of Lewis County Water Company, Inc., a continuing audit client. The engagement supervisor is reviewing the working papers.Required:Describe the deficiencies
You are engaged to audit the Ferrick Corporation for the year ended December 31, 2015. Only merchandise shipped by the Ferrick Corporation to customers up to and including December 30, 2015, has been eliminated from inventory. The inventory as determined by physical inventory count has been
Distinguish among the three categories of expenses. Provide an example of each type of expense.
You are the auditor for KPDZ Corporation. You gathered comparative information for inventory and accounts payable and calculated the days purchases in accounts
In 2015 Kida Company purchased more than $10 million worth of office equipment under its "special" ordering system, with individual orders ranging from $5,000 to $30,000. "Special" orders entail low-volume items that have been included in an authorized user's budget. Department heads include in
You are engaged to perform an audit of the Giordani Corporation for the year ended December 31, 2015. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than $25,000 for two business days before and after year-end from the purchases journal and
In addition to policies and processes around payroll transactions, what other policies and processes are involved in the human resource management process?
What risk factors associated with human resource management could pose significant inherent risks?
Discuss two control environment factors that have a pervasive effect on the human resource management process that an auditor should consider.
Kachelmeier, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2015. On January 5, 2015, Kachelmeier observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts
Ando Company, a diversified manufacturer, has six divisions that operate throughout the United States and Puerto Rico. Ando has historically allowed its divisions to operate autonomously. Ando does not have an internal audit department and corporate intervention occurs only when planned results
On January 15, 2015, 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
Maslovskaya, CPA, has been engaged to examine the financial statements of Broadwall Corporation for the year ended December 31, 2015. During the year, Broadwall obtained a long-term loan from a local bank pursuant to a financing agreement that provided that 1. The loan was to be secured by the
The long-term debt working paper shown below was prepared by entity personnel and audited by Andy Fogelman, an audit assistant, during the calendar year 2015audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing the working paper thoroughly.Required:There
The following client-prepared bank reconciliation is being examined by Zachary Kallick, CPA, during the examination of the financial statements of Simmons Company.Required:Items (a) through (e) represent items an auditor would ordinarily find on an entity prepared bank reconciliation. The
Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of Vernon's internal control system, Phung set control risk at the maximum level for all financial statement
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Company for the year ended December 31, 2015. On April 2, 2016, an inquiry letter to J. J. Young, Consolidated's outside attorney, was drafted to corroborate the information furnished to Cole by management
Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2015. Namiki plans to complete the fieldwork and sign the auditor's report about March 10, 2016. Namiki is concerned about events and transactions occurring after December 31, 2015, that may
For each of the following items, assume that Josh Feldstein, CPA, is expressing an opinion on Scornick Company's financial statements for the year ended December 31, 2015; that he completed fieldwork on January 21, 2016; and that he now is preparing his opinion to accompany the financial
Items 1 through 16 represent a series of unrelated statements, questions, excerpts, and 17-8, 17-10 comments taken from various parts of an auditor's working paper file. Below items 1 through 16 is a list of the likely sources of the statements, questions, excerpts, and comments. Select, as the
In February 2016, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company's Durango facility to determine if there were any violations of federal or state environmental laws. In formulating your opinion on Ceramic Crucibles' 2015 financial
Medical Products, Inc. (MPI) was created in 2013 and entered the optical equipment industry. Its made-to-order optical equipment requires large investments in research and development. To fund these needs, MPI made a public stock offering, which was completed in 2014. Although the offering was
Devon, Inc., a private company, engaged Rao to examine its financial statements for 18-4, 18-6 the year ended December 31, 2015. The financial statements of Devon, Inc., for the year ended December 31, 2014, were examined by Jones, whose March 30, 2015, auditor's report expressed an unqualified
On March 12, 2016, Kristen & Valentine, CPAs, completed the audit of the financial statements of Modern Museum, Inc., for the year ended December 31, 2015. Modern is a privately held company. Modern Museum presents comparative financial statements on a modified cash basis. Assets, liabilities,
For the year ended December 31, 2014, Friday & Co., CPAs ("Friday"), audited the 18-4, 18-6 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, 2013, because that date
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, 2015 and 2014. Monterey is a privately held company that prepares its
You are auditing the financial statements for your new client, Paper Packaging Corporation, a manufacturer of paper containers, for the year ended March 31, 2016.Paper Packaging’s previous auditors had issued a going concern opinion on theMarch 31, 2015, financial statements for the following
In 2014, your firm issued an unmodified report on Tosi Corporation, a private company. During 2015, 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 four major sections of the AICPA Code of Professional Conduct? What additional guidance is provided for applying the Rules of Conduct?
What elements must a client prove to maintain an action against an auditor for negligence?
You are the manager of the examination engagement of the financial projection of Honey's Health Foods as of December 31, 2015, and for the year then ended. The audit senior, Currie, has prepared the following draft of the examination report: To the Board of Directors of Honey's Health Foods: We
The following report was drafted on October 25, 2015, by Major, CPA, at the completion of an engagement to compile the financial statements of Ajax Company for the fiscal year ended September 30, 2015. Ajax is a non-public entity in which Major's child has a material direct financial interest.
This question consists of 13 items pertaining to possible deficiencies in an accountant's review report. Select the best answer for each item. Indicate your answers in the space provided.Jordan & Stone, CPAs, audited the financial statements of Tech Company, a nonpublic entity, for the year
Identify the parties impacted by the quality and rigor of an organization's corporate governance. What responsibilities do corporate executives have to those parties?
Identify and describe the corporate governance-related responsibilities of corporate accountants, independent auditors, and external accountants hired by companies to perform forensic investigations.
Identify the apparent flaws in Le-Nature's corporate governance. Relate those flaws to the five components of the COSO internal control framework and the "fraud triangle."
Le-Nature's was not a SEC registrant. Identify corporate governance safeguards imposed on SEC registrants that are not imposed on non-SEC registrants.
Following the Special Committee investigation in late 2003, Le-Nature's dismissed EY and retained BDO Seidman to serve as its independent audit firm. What safeguards are in place to mitigate the impact of auditor changes on the credibility and integrity of the independent audit function?
Identify the key differences between a "quarterly review" and an "annual audit" performed by an organization's independent auditors.
Pascarella & Wiker was retained by K & L Gates to assist in the fraud investigation requested by Le-Nature's Special Committee. What type of professional service was Pascarella & Wiker providing? What professional standards governed Pascarella & Wiker's conduct during the provision of that service?
The Overstock-Grant Thornton dispute was publicly aired via disclosure statements filed with the SEC. What impact do you believe those disclosures had on the investing public's confidence in the financial reporting domain and the independent audit function? Were the interactions between Overstock
Do you believe that the $785,000 amount at the center of the Overstock-Grant Thornton dispute was material? Defend your answer. What factors other than quantitative considerations should have been considered in deciding whether the $785,000 amount was material?
Briefly compare and contrast the nature and purpose of an independent audit versus a quarterly review.
The SEC requires registrants to have their quarterly financial statements reviewed by an independent accounting firm but does not mandate that a review report be included in a Form 10-Q. Under what circumstances must a review report accompany quarterly financial statements in a 10-Q? Why doesn't
What is the purpose or purposes of Form 8-K filings by SEC registrants? What specific items of information must be included in an 8-K that announces a change in audit firms?
Do you agree with the accounting treatment that Overstock typically applied to the revenues generated by its "Partner" line of business? Why or why not?
What type of professional service engagement was the assignment completed by the team of auditors led by Katelyn Light? Defend your answer. Which professional standards are applicable to such engagements?
Compare the overall goals of the two teams of auditors in this case. In what ways were those goals similar? How did they differ?
Under what circumstances, if any, can an audit firm rely on the audit procedures performed by another audit firm?
Identify the weaknesses in PHC's inventory-taking procedures. What implications did those weaknesses have for the two teams of auditors?
Do you believe that it was appropriate for Juan Suarez to insist that Dani Morgan and Tyler Christian not be informed of the complete nature of their PHC assignment? Why or why not?
Assess the conduct of Katelyn Light, Dani Morgan, and Tyler Christian. Do you believe they behaved "professionally" during the PHC assignment? Defend your answer. Did any other accountants or auditors in this case behave less than professionally? Explain.
The improper payments made by APC occurred during the time frame that Andrea Jung served as Avon's CEO. Was she "responsible" for those payments even if she was unaware of them? Why or why not?
Identify the role and responsibilities that an internal audit staff typically assumes in a company's internal control system.
The IMA Statement of Ethical Professional Practice identifies four ethical standards, three of which are competence, confidentiality, and integrity (see "Ethics Center" on IMA website). Relying on those three ethical standards, evaluate the conduct of Avon's internal audit staff during the
Do you agree with Avon's corporate legal staff that the potential FCPA violations were a legal issue and not an internal audit issue? Explain.
The COSO internal control framework identifies five components of an entity's internal control. Which, if any, of those five components of Avon's internal control were flawed? Explain. If there were multiple flaws in Avon's internal control, identify which one you believe was most serious and
Avon's independent audit firm did not report any material weaknesses in Avon's internal control during the course of the FCPA scandal. Define a "material weakness" in internal control and explain whether or not you believe Avon had one or more material weaknesses in internal control during the
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.
Assume you were a member of the panel that presided over the academic misconduct hearing involving Zane Corbin. Given just the information provided in the case, how would you have voted at the conclusion of the hearing? Defend your answer.
Again, assume you were a member of the five-person panel appointed to review the charge of academic misconduct filed against Zane Corbin. What questions would you have posed to Zane, Professor Herrick, and Professor Goggans during their testimony before the panel? How, if at all, might the answers
Given the facts available in this case, do you believe the Upchurch Medal awarded to Zane Corbin should have been rescinded despite the outcome of the academic misconduct hearing? Why or why not?
Reportedly, one member of the hearing panel believed Zane was guilty of the charge filed against him but voted to acquit him because the adverse consequences Zane faced if the Upchurch Medal was rescinded far outweighed the severity of the "indiscretion" he had committed. Was that a reasonable or
The second member of the hearing panel who voted to acquit Zane was not convinced the available evidence demonstrated "beyond a reasonable doubt" that Zane was guilty of the charge filed against him. Was that an appropriate justification for voting to acquit Zane? Defend your answer.
Describe how an allegation of academic misconduct similar to the charge filed against Zane Corbin would be dealt with at your institution. Identify the strengths and weaknesses of the system in place at your institution to address such matters.
Do you agree with Deloitte's assertion that Adams had no "substantive role" in the 2008 and 2009 Caesars audits? Defend your answer.
The SEC applies a principles-based approach to mitigating the risks that may undercut auditor independence. Identify the four guiding principles applied by the SEC to protect the independence of auditors of public companies.
Assume Adams had used his personal funds to finance his gaming activities in the Caesars casino. Under those circumstances, would he have violated any ethical or professional standards? Again, defend your answer.
The SEC observed in AAER No. 3554 that "any loan . . . to or from an audit client" is "inconsistent" with auditor independence. Despite that statement, are there any circumstances in which an auditor can have an outstanding loan from an audit client? Explain.
Do CPAs have a higher moral or ethical responsibility than other citizens to complete their income tax returns honestly? Defend your answer.
Do you believe Judge Fischer made the proper decision when she chose to only fine George Mark and give him a probationary sentence? Why or why not? Do you believe the judge should have taken into consideration Mark's apparent remorse and his work with charities in deciding the sentence to give him?
What steps should auditors take when they discover circumstances which were unknown to them at the audit report date that might have affected the report they issued?
Characterize the errors made by William Blackwell and Madison Wells as either "honest mistakes," negligence, or recklessness. Defend each of your characterizations.
While reviewing the long-term debt work papers, neither Madison nor Alanis discovered the critical error Blackwell had made when testing Le Prix's compliance with its debt covenants. What auditing standards, if any, dictate that audit work papers be reviewed by senior members of an audit team? What
In your opinion, how should Madison have reacted to Alanis's temper tantrum? What would you do in a similar set of circumstances?
When Alanis refused to discuss with Madison how Le Prix's debt covenant violations had been addressed, what alternatives were available to her? Place yourself in her position. Which of those alternatives would you have chosen?
List the key personal traits an office managing partner (OMP) should possess. List those traits in descending order of importance. Be prepared to defend your choices. Would the list you developed apply equally well to an audit partner? If not, point out how the personal traits an OMP should possess
A fundamental ethical principle in the AICPA Code of Professional Conduct is "integrity." Did Tillman Rollins act with integrity in his treatment of Eugene Smith? Defend your answer.
Would you want to work in a practice office in which Tillman Rollins is the OMP? Explain.
After Rollins made the decision to hire Eugene Smith, what measures could Rollins, White Eagle, and Martin have taken to enhance Smith's chances of being successful with the given firm?
An international news agency discovered the auditor independence infractions committed by EY. Does this fact suggest that regulatory enforcement within the U.S. financial reporting domain is lax? Defend your answer.
Should the SEC/PCAOB provide a complete list of non-audit services that independent auditors are prohibited from providing to their public company audit clients? Defend your answer.
Should accounting firms be permitted to provide lobbying or legislative advisory services to non-audit clients? Why or why not? Should accounting firms be permitted to lobby rule-making bodies regarding proposed accounting standards? Again, defend your answer.
Who approves or should approve the non-audit services that SEC registrants purchase from their independent audit firms?
As noted in this case, email messages generally have a "low expectation of privacy." What does that phrase mean and what implications does it have for business professionals?
What ethical or professional standards should auditors consider when writing email messages and when communicating on social media networks? What consequences may auditors face if they violate those standards?
The young lady identified as "Glory" in this case was less than enthused with the work role and work environment of independent auditing. What measures should college students take to reduce the likelihood of choosing a job or professional role that is unsuitable for them?
Place yourself in Glory's position. How would you have communicated your decision to resign?
List in a bullet format the key items that should be documented in an audit engagement letter. Is an engagement letter a legally binding contract? Explain.
What factors or circumstances may have caused KPMG to reduce the number of budgeted hours for the 1995 TDW audit and to assign less experienced personnel to that engagement? For each factor or circumstance you identified, indicate whether you believe it is a valid reason for the given decision.
Is the "quality" of an audit adversely affected when an accounting firm reduces the planned number of hours to be expended on that audit? Is the quality of an audit adversely affected when an accounting firm uses less experienced personnel to perform the engagement? Defend your answers.
Do you agree with the appellate court's ruling that accounting firms should be permitted to determine the nature and scope of their audits without consulting or informing their clients? Explain.

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Contemporary Auditing 10th edition Michael C. Knapp - Solutions

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