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auditing 12th
Modern Auditing 5th Edition Walter Gerry Kell, William C. Boynton, Richard E. Ziegler - Solutions
a. Why is a member required to avoid incompatible occupations?b. Give examples of occupations that potentially are incompatible.
Part 1: Assume that you examined the financial statements of the Nelson Company in accordance with GAAS and were satisfied with your findings. Required:Would the fact that the company had a loan (of substantial amount to the Nelson Company) payable to a loan company of which your brother was
An auditor must not only appear to be independent; he must also be independent in fact.Required:a. Explain the concept of an "auditor's independence" as it applies to third party reliance upon financial statements.b. 1. What determines whether or not an auditor is independent in fact?2. What
An auditor's report was appended to the financial statements of Worthmore, Inc. The statements consisted of a balance sheet as of November 30, 19X0 and statements of income and retained earnings for the year then ending. The first two paragraphs of the report contained the wording of the standard
The attribute of independence has been traditionally associated with the CPA's function of auditing and expressing opinions on financial statements.{Required:}a. What is meant by "independence" as applied to the CPA's function of auditing and expressing opinions on financial statements? Discuss.b.
Lakeview Development Corporation was formed on January 2, 19X0, to develop a vacation-recreation area upon land purchased the same day by the corporation for \(\$ 100,000\). The corporation also purchased for \(\$ 40,000\) an adjacent tract of land which the corporation plans to subdivide into
Part I: During \(19 \times 0\) your client, Nuesel Corporation, requested that your conduct a feasibility study to advise management of the best way the corporation can utilize electronic data processing equipment and which computer, if any, best meets the corporation's requirements. You are
In the practice of public accounting an auditor is expected to comply with the Rules of Conduct set forth in the Code of Ethics. Listed below are circumstances that raise a question about an aud tor's ethical conduct:1. The auditor has a bank loan with a bank that is an audit client.2. An
The following circumstances may involve violations of the Rules of Conduct:1. A CPA bases his fee on the outcome of a bankruptcy proceeding.2. A CPA discloses confidential information in a peer review of the firm's practice.3. A CPA issues an unqualified opinion when a client departs from GAAP
The following actions by a CPA may involve violations of the Rules of Conduct:1. Agrees to be the committee chairperson for a local fund-raising activity.2. Serves as an executor and trustee of the estate of an individual who owned the majority stock of a closely-held client corporation.3. Accepts
Gilbert and Bradley formed a corporation called Financial Services, Inc., each man taking 50 percent of the authorized common stock. Gilbert is a CPA and a member of the American Institute of CPAs. Bradley is a CPCU (Chartered Property Casualty Underwriter). The corporation performs auditing and
The following situations involve Herb Standard, staff accountant with the regional CPA firm of Cash \& Green:1. The bookkeeper of Ethical Manufacturing Company resigned two months ago and has not yet been replaced. As a result, Ethical's transactions have not been recorded and the books are not up
What is meant by common law?
Under common law, a CPA may be liable to a client.a. Explain the meaning and importance of the term privity of contract.b. How may an auditor breach a contract?c. What cause ordinarily underlies a breach of contract suit?
a. Who are the two classes of third parties that may sustain suits against auditors under common law?b. Under what circumstances may an auditor be held liable to third parties?
Indicate the significance of Ultramares, Rusch Factors, and the Rhode Island Hospital Trust cases on the auditor's liability for negligence.
Why is the auditor's liability under statutory law more extensive than under common law?
a. Who may bring suit under the 1933 Securities Act?b. What is the basis for such action?
Under what circumstances will a statement be presumed to be misleading?
What are the responsibilities of the plaintiff and the defendant in a 1933 Act suit?
a. Who may bring suit under the 1934 Securities Exchange Act?b. Is the basis for action the same as in a 1933 Act suit? Explain.
What are the conditions associated with liability under Rule \(10 \mathrm{~b}-5\) of the 1934 Act?
What are the responsibilities of the plaintiff and the defendant in a 1934 Act suit?
Enumerate the principal differences in legal liability between the two securities acts.
a. What was the basis for the Hochfelder case?b. What is the significance of the decision in the case?
a. What were the critical issues in (a) the Contine, ital Vending case and (b) the BarChris case?b. What action was taken by the profession as a result of each case?
Contrast the essence of the relative importance of prcfessional standards in legal cases between the AICPA, the SEC, and the courts.
Identify actions which the auditor may take to avoid litigation.
a. Distinguish between errors and irregularities.b. What is the auditor's basic responsibility for errors or irregularities?
a. What responsibility does the auditor have when he believes material errors or irregularities may exist?b. What are the possible effects of the foregoing on the auditor's standard report?
a. Define illegal acts.b. What is the auditor's basic responsibility for such acts?
a. Can an examination made in accordance with generally accepted auditing standards be relied upon to detect illegal acts? Why or why not?b. What are the possible effects of illegal acts on the auditor's report?
Watts and Williams, a firm of certified public acccountants, audited the accounts of Sampson Skins, Inc., a corporation that imports and deals in fine furs. Upon completion of the examination the auditors supplied Sampson Skins with 20 copies of the certified balance sheet. The firm knew that
Jackson was a junior staff member of an accounting firm. He began the audit of the Bosco Corporation which manufactured and sold expensive watches. In the middle of the audit, he quit. The accounting firm hired another -.. son ts continue the audit of Bosco. Due to the changeover and the time
- Walter Young, doing business as Walter Young Fashions, engaged the CPA partnership of Small \& Brown to examine his financial statements: During the examination, Small \& Brown discovered certain irregularities which would have indicated to a reasonably prudent accountant that James Smith, the
Donald Sharpe recently joined the CPA firm of Spark, Watts, and Wilcox. He quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures to the letter. On his third audit for the firm, Sharpe examined the underlying documentation of two
Keen, a CPA and sole practitioner, was retained by Arthur \& Son, a partnership, to audit the company books and prepare a report on the financial statements for submission to several prospective partners as part of a planned expansion of the firm. Keen's fee was fixed on a per-diem basis. After a
Risk Capital Limited, a Delaware corporation, was considering the purchase of a substantial amount of the treasury stock held by Florida Sunshine Corporation, a closely held corporation. Initial discussions with the Florida Sunshine Corporation began late in 19X0.Wilson and Wyatt, Florida
A number of situations that pertain to the auditor's liability under common and statutory law are described below. At the end of each case, a statement is made concerning one or more of the parties in the suit.1. In connection with a filing with the SEC, Elite Corporation engaged the public
The Dandy Container Corporation engaged the accounting firm of Adams and Adams to examine financial statements to be used in connection with a public offering of securities. The audit was completed and an unqualified opinion was expressed on the financial statements which were submitted to the
While examining the financial statements of Fesmore Industries, Inc., for the fiscal year ended October 31, 19X0. Dey \& Co., CPAs, discovered that J. Parker Dilmore, executive vice-president of Fesmore, was actively involved in trading Fesmore's common stock. While Dilmore has always owned at
Barney \& Company, CPAs, has been engaged to perform an examination of the financial statements of Waldo, Inc., for several years. The terms of the engagement have been set out in an annual engagement letter signed by both parties. The terms of each engagement included the following:This being an
Gordon \& Groton, CPAs, were the auditors of Bank \& Company, a brokerage firm and member of a national stock exchange. Gordon \& Groton examined and reported on the financial statements of Bank which were filed with the SEC.Several of Bank's customers were swindled by a fraudulent scheme
In the audit of different clients, you encounter the following pertaining to illegal acts:1. You are unable to determine the amounts associated with certain events or if, in fact, an act is illegal.2. You conclude that an illegal act is material in amount and that it has been buried in
The CPA firm of Martinson, Brinks \& Sutherland, a partnership, was the auditor for Masco Corporation, a medium-sized wholesaler. Masco leased warehouse facilities and sought financing for leasehold improvements to these facilities. Masco assured its bank that the leasehold improvements would
Several years ago, Dale Holden organized Holden Family Restaurants. Holden started with one restaurant that catered to the family trade. Holden Family Restaurant became very popular because the quality of the food and service was excellent, the restaurant was attractive yet modest, and the prices
How extensive is the SEC's authority over the public sale of securities?
Identify the five divisions of the SEC.
Describe the responsibilities and primary functions of the Division of Corporation Finance.
Enumerate the principal duties of the Chief Accountant.
Identify and briefly describe the types of authoritative pronouncements issued by the SEC.
List the specific types of information included in Regulation S-K and Accounting Series Releases.
Briefly describe the SEC's rules concerning(a) qualifications of independent accountants and(b) accourtant's reports.
The registration of securities is designed to insure investors against loss. Do you agree or disagree? Why?
a. Describe the customary review that is made of a registration statement.b. Indicate the courses of action the SEC may take when an original filing is deficient.
Identify the steps in the registration process that occur after the registration statement is filed with the Commission.
a. What are the two basic objectives of the Securities Act of 1933?b. Distinguish between a registration statement and a prospectus.
Enumerate the basic information that is common to registraticns under the 1933 Act.
Describe the basic financial data required under the 1933 Act, including the time period covered, and whether the data must be audited.
Identify the major responsibilities of the accountant in a 1933 Act registration.
a. What is an S-1 Review?b. What specific steps are required in making an S-1 Review?
a. What procedures are generally required in a comfort letter engagement?b. What is included in a comfort letter?
Why does an accountant issue a letter of consent? What condition must be met in issuing this type of report?
a. Contrast the requirements for financial information of Form 10 of the Securities Exchange Act of 1934 with Form S-1 of the 1933 Act.b. What is meant by incorporation by reference?
Identify the principal data required in a Form \(10-\mathrm{K}\) filing and what data, if any, that must be audited.
Briefly explain the two major accounting requirements in filing quarterly reports under the 1934 Act.
a. What data are required in a Form \(8-\mathrm{K}\) filing?b. What information must be submitted in regard to auditor changes?
Distinguish between injunctive and administrative proceedings in enforcement of the securities acts.
a. What sanctions may be imposed under Rule 2(e)?b. What sanctions have been used under this rule?
There are five Divisions in the SEC. Listed below are activities that pertain to one of these divisions:1. Supervises field investigations of possible violations of the federal securities statutes.2. Assists the Commission in proceedings under the Bankruptcy Act.3. Reviews and processes
Four types of accounting-related pronouncements are issued by the SEC:(1) Regulation S-X, Regulation S-K, Accounting Series Releases (ASRs), and Staff Accounting Bulletins (SABs). Listed below are statements that relate to one of the four pronouncements.1. Contains accounting provisions that
A number of steps are involved in the registration process under the 1933 Securities Act. Ten of these steps are listed below in random order:1. Data for registration are collected by company accountants, reviewed by lawyers and reviewed and audited by independent accountant.2. Management and legal
Ensign Corporation is a manufacturing firm with ten domestic plants. Increased demand for the company's products and a near full capacity production have caused management to decide to build a new plant. The plant expansion is to be financed by a public issue of \(\$ 10,000,000\) of long-term
The most common annual report required by the SEC is Form 10-K. Form 10 , another SEC report, is often used to register under the Securities Exchange Act of 1934. Item 2 of both Form \(10-\mathrm{K}\) and Form 10 calls for a summary of operations. A similar report, a Summary of Earnings, is
Below are events pertaining to a public client subject to SEC jurisdiction:1. There is a change in independent auditors that is not related to a disagreement over accounting principles.2. There is a change in an accounting principle which the auditor believes is preferable.3. Interim financial
The Jerford Company is a well-known manufacturing company with several wholly owned subsidiaries. The company's stock is traded on the New York Stock Exchange, and the company files all appropriate reports with the Securities and Exchange Commission. Jerford Company's financial statements are
Contrast judgmental and statistical sampling.
Explain the applicability of statistical sampling to (a) the general standards and (b) the first field work standard.
How can statistical sampling be utilized in making a study of internal control?
Define precision and reliability statistically and indicate their meaning in auditing.
What factors should be considered by the auditor in specifying precision?
What are the underlying basic concepts of a random sample?
Differentiate among the four principal types of selection techniques.
Identify and distinguish between the two types of statistical sampling techniques.
Assume a population of checks numbered 4001 to 6000 . Indicate the first five numbers to be selected from the random number table in Figure 5-1, if the auditor uses the second set of four digits, starts with row 4 of column 1, and reads from top to bottom and left to right. COLUMNS Row (1) (2) (3)
Identify the four steps of an attribute sampling plan.
What factors must be considered in identifying the population to be sampled?
Why are the attributes of interest important in a sampling plan?
How can the auditor estimate the expected popu!ation occurrence rate?
What factors are needed in determining the size of a sample?
Jsing the appropriate table, determine the sample size in each of the following situations: SAMPLING FOR ATTRIBUTES Expected Population Occurrence Rate (%) 32412 65743 2 Reliability Upper Precision (%) (%) a. 90 b. 90 C. 95 d. 95 e. 95
Indicate the effect (increase, decrease, or none) on sample size of the following change, assuming other factors are held constant: (a) increase reliability, (b) decrease upper precision limit, and (c) decrease expected population occurrence rate.
Using the appropriate table, determine the achieved upper precision limit based on actual sample results in each of the following cases: a. Sample Size 180 Number of Occurrences Reliability (%) 3 95 b. 240 C. 250 d. 220 e. 190 7485 95 95 90 90
What factors should be considered by the auditor in analyzing occurrences found in the sample?
Distinguish between formulating statistical conclusions about the population and determining the acceptability of the population.
Distinguish between formulating statistical conclusions about the population and determining the reliability of the control being tested.
Identify and discuss the alternative courses of action for an auditor when his sample results indicate that a control cannot be relied upon.
a. Describe the circumstances where discovery sampling may be useful in auditing.b. What factors are necessary to determine sample size in discovery sampling?
The Doak Company uses prenumbered vouchers. During a given test period, voucher numbers 1000 to 8000 were used.Required:a. Select the first five vouchers to be included in a random sample in each of the following situations using Figure 5-1:b. Contrast the effect on audit evidence of sampling with
This problem focuses on the determination of sample sizes.Required:a. Given the constraints of a 7 percent desired upper precision limit, and an estimated population occurrence rate of from 1 to 4 percent, indicate the specific combinations of these factors at both 90 and 95 percent reliability
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