Assume that Stanford CPAs encountered the following issues during its various audit engagements in 2017: 1. It conducted the audit of Luck, a new client this past year. Last year, Luck was audited by another CPA, who issued an unmodified opinion on its financial statements. Luck is presenting financial statements for 2016 and 2017 in comparative form. 2. One of Stanford’s clients is RealCo, a real estate holding company. Assume that RealCo experienced a significant decline in the value of its investment properties during the past year because of a downturn in the economy and has appropriately recognized that decline in market value under GAAP. Stanford wishes to emphasize the decline in the economy and its impact on RealCo’s financial position and results of operations for 2017 in its audit report. 3. For the past five years, Stanford has conducted the audits of TechTime, a company that provides technology consulting services, and has always issued unmodified opinions on its financial statements. Based on its 2017 audit, Stanford believes that an unmodified opinion is appropriate; however, Stanford did note that TechTime reported its third consecutive operating loss and has experienced negative cash flows because of the inability of some of its customers to promptly pay for services received. 4. Stanford has assisted Cardinal Inc. with the preparation of its financial statements but has not audited, compiled, or reviewed those financial statements. Cardinal wishes to include these financial statements in a communication that would describe Stanford’s involvement in the preparation of the financial statements. Stanford believes that Cardinal’s communication is adequate and appropriately describes Stanford’s limited role in the preparation of the financial statements. 5. Trees Inc. presents summary financial information along with its financial statements. The summary financial information has been derived from the complete set of financial statements that Stanford has audited (and issued an unmodified opinion on the complete financial statements). A lender has engaged Stanford to evaluate and report on Trees’ summary financial information; Stanford believes that the summary financial information is fairly stated in relation to Trees’ complete financial statements. 6. Stanford believes that some of the verbiage in Plunkett’s Management Discussion & Analysis section is inconsistent with the firm’s financial statements. Stanford has concluded that Plunkett’s financial statements present its financial position, results of operations, and cash flows in accordance with GAAP and has decided to issue an unmodified opinion on Plunkett’s financial statements. 7. Oil Patch is a client in the energy industry that is required to present supplementary oil and gas reserve information. Stanford has performed certain procedures regarding this information and concluded that it is presented in accordance with FASB presentation guidelines and does not appear to depart from GAAP. Based on Stanford’s audit, it plans to issue an unmodified opinion on Oil Patch’s financial statements. Required: How would each of these issues affect Stanford’s report on the client’s financial statements? (Do not draft the report that Stanford would issue in each situation).
> Describe some of the trade-offs faced by each of the following: a. a family deciding whether to buy a new car b. a member of Congress deciding how much to spend on national parks c. a company president deciding whether to open a new factory d. a professo
> Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s consumption of coconuts and fish if he lives by himself? Does he
> Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should she do her own typing or hire a secretary? Explain.
> Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching 1 fish? What is Friday’s? Who has an absolute advantage in catching fish? Wh
> Suppose that there are 10million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel
> Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris
> American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100million workers. a.
> How is economics a science?
> When component auditors are involved in the audit of group financial statements, the group auditors may issue a report that a. Refers to the component auditors, describes the extent of the component auditors’ work, and expresses an unmodified opinion. b.
> R. Wolfe became the new auditor for Royal Corporation, succeeding C. Mason, who audited the financial statements last year. Wolfe needs to report on Royal’s comparative financial statements and should disclose in the report an explanation about other aud
> Which of these situations would require auditors to append an emphasis-of-matter paragraph about consistency to an otherwise unmodified opinion? a. Entity changed its estimated allowance for uncollectible accounts receivable. b. Entity corrected a prior
> Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current-year financial statements. 1. The auditors decided that sufficient appropriate evidence could not be obtained to complete the au
> Lando Corporation is a domestic company with two wholly owned subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of its subsidiaries and to serve as the group auditor. Thomas, CPA, has audited th
> D. Brady has been engaged as the auditor of Patriot Company and is currently planning the year-end physical inventory counts. Patriot is a retailer that holds significant inventories in its warehouses and stores in six regions across the United States. B
> Following are four possible scenarios that reflect scope limitations encountered by J. Bruce, CPA, during the audit of Weaver Inc. In all cases, assume that the ending balance in inventory is material to Weaver’s financial position, results of operations
> Which of the following statements is not true with respect to the audit examinations and reports for public and nonpublic entities? a. Audit examinations for nonpublic entities are based on user demand but based on legislative requirements for public ent
> The auditors determined that the entity is suffering financial difficulty and its going-concern status is seriously in doubt. Assuming that the entity adequately disclosed this matter in the financial statements, the auditors must choose between which of
> Auditors found that the entity has not capitalized a material amount of leases in the financial statements. When considering the materiality of this departure from GAAP, the auditors would choose between which reporting options? a. Unmodified opinion or
> Situations in which auditors are unable to obtain sufficient appropriate evidence necessary to support their opinion on the entity’s financial statements are referred to as scope limitations. Required: a. Distinguish between client-imposed scope limitat
> If the opinion issued on prior years’ financial statements is no longer appropriate and financial statements are presented in comparative form, the auditors’ current report should a. Not reference the prior years’ financial statements. b. Indicate that t
> When financial statements are presented in comparative form and another firm audited the prior years’ financial statements (but the other firm’s report is not presented with the financial statements), the auditors’ report on the current-year financial st
> If the auditors decide to present separate reports on the entity’s financial statements and internal control over financial reporting, which of the following should be modified to refer to the other report? Report on Internal Contr
> Which of the following is not included in the standard (unmodified) report on the financial statements? a. An identification of the financial statements that were audited. b. A general description of an audit. c. An opinion that the financial statements
> Company A hired Samson & Delilah, CPAs, to audit the financial statements of Company B and deliver the report to Megabank. Who is the client? a. Megabank. b. Samson & Delilah. c. Company A. d. Company B.
> How is the auditors’ responsibility for expressing the opinion on financial statements disclosed in the standard (unmodified) report for a nonpublic company? a. Stated explicitly in the Auditor’s Responsibility section. b. Unstated but understood in the
> Which of the following is not required by generally accepted auditing standards? a. Written representations. b. Attorney letter. c. Management letter. d. Engagement letter.
> What actions should auditors take if evidence suggests that substantial doubt exists about the client’s ability to continue as a going concern?
> Under which of the following conditions can a disclaimer of opinion never be issued? a. The entity’s going-concern problems are highly material and pervasive. b. The entity does not allow the auditors access to evidence about important accounts. c. The a
> When auditors wish to issue an unmodified opinion but highlight that the entity changed its method of accounting for software development costs, they would most appropriately identify the change in accounting method in which of the following? a. The intr
> What factors may indicate that substantial doubt exists about the client’s ability to continue as a going concern?
> The auditing standards regarding subsequently discovered facts refers to knowledge obtained after a. The date the fieldwork began. b. The date of the auditor’s report. c. The date of the financial statements. d. The date interim audit work was complete.
> For each of the following departures from GAAP, indicate the type of opinion that the auditors would issue as well as any modifications that would be made to the standard (unmodified) report. a. A departure that had an immaterial effect on the financial
> The concepts of materiality and pervasiveness are important to auditors in examinations of financial statements and expressions of opinion on these statements. Required: How will materiality influence auditors’ reporting decisions in the following circu
> In December of the current year, Williams Company changed its method of accounting for inventory and cost of goods sold from LIFO to FIFO. The account balances shown in the trial balance have already been recalculated and adjusted retroactively as requir
> On January 1, Graham Company purchased land (the site of a new building) for $100,000. Soon thereafter, the state highway department announced that a new feeder road would run next to the site. The effect was a dramatic increase in local property values.
> Gustav Humphreys (chair of the board) and Ingrid VanEns (vice president, finance) prepared the draft of the financial review section of the annual report. You are reviewing it for consistency with the audited financial statements. The draft contains the
> AOW is the group auditor for the December 31, 2017, consolidated financial statements of Ferguson Company and subsidiaries. However, component auditors perform the work on certain subsidiaries for the year under audit amounting to 29 percent of total ass
> AOW has completed the audit of the financial statements of Musgrave Company for the year ended December 31, 2017, and is now preparing the report. AOW has audited Musgrave’s financial statements for several years, but this year Musgrave delayed the start
> Pitts Company has experienced significant financial difficulty. Current liabilities exceed current assets by $1 million, cash has decreased to $10,000, the interest on the long-term debt has not been paid, and a customer has brought a lawsuit against Pit
> One of the great resources for auditors is the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system database at www.sec.gov. Public companies file SEC-required documents electronically. The SEC makes this information a
> What are the major differences in the auditors’ report for nonpublic and public entities?
> The following auditors’ report was drafted by Quinn Moore, a staff auditor with Tyler & Tyler, CPAs, at the completion of the audit of the financial statements of Park Publishing Company for the year ended September 30, 2017. The en
> Auditors have a responsibility related to management’s disclosure of new information related to subsequent events until a. The date of the financial statements. b. The date of the auditor’s report. c. The audit report release date. d. The following year’
> Your partner drafted the following auditors’ report yesterday. You need to describe the reporting deficiencies, explain the reasons for them, and discuss with the partner how the report should be corrected. You have decided to prepare a
> Following is Rex Wolf’s report on Bonair Corporation’s financial statements. Bonair publishes general-purpose financial statements for distribution to owners, creditors, potential investors, and the general public. R
> An assistant drafted the following auditors’ report at the completion of the audit of Cramdon Inc. on March 5, 2018. The partner in charge of the engagement has decided the opinion on the 2017 financial statements should be modified onl
> The board of directors of Cook Industries Inc. engaged Brown & Brown, CPAs, to audit the financial statements for the year ended December 31, 2017. Required: Identify the deficiencies in the following draft of the report. Do not rewrite the report.
> On September 23, 2018, Betsy Ross drafted the following report on Continental Corporation’s financial statements. Required: List and explain the deficiencies and omissions in the report prepared by Ross on Continental Companyâ&#
> For each of the following situations, indicate the type of opinion(s) that auditors could issue (more than one opinion may be appropriate in each circumstance). Unless otherwise noted, assume that no departures from GAAP were identified in the audit enga
> Central City was involved in litigation brought by Mexican American Legal Defense and Educational Fund (MALDEF) over the creation of single-member voting districts (which require candidates to receive only the highest number of votes, even if not a major
> Distinguish between client-imposed scope limitations and circumstance-imposed scope limitations. Which of these scope limitations is generally of more concern to auditors?
> Omega Corporation is involved in a lawsuit brought by a competitor for patent infringement. The competitor is asking $14 million actual damages for lost profits and unspecified punitive damages. The lawsuit has been in progress for 15 months, and Omega h
> For each of the following independent situations, describe the most appropriate course of action that the auditors should take. a. Drew Allison is conducting the audit of Anderson Inc. as of December 31, 2017. At the beginning of the evidence gathering,
> A. Griffin audited the financial statements of Dodger Magnificat Corporation for the year ended December 31, 2017. She completed gathering sufficient appropriate evidence on January 30 and later learned of a stock split voted by the board of directors on
> Jay Ralph completed the December 31, 2017, audit of Raider Company on February 3, 2018; Raider’s financial statements and Ralph’s reports on Raider’s financial statements and internal control over financial reporting were released on February 12, 2018. D
> The following are independent situations that have occurred in your public accounting firm, Arthur Hurdman: Case 1 During the internal inspection by a regional office of Arthur Hurdman, one of its clients, Wildcat Oil Suppliers, was selected for review.
> On June 1, Sidney Faultless of A. J. Faultless & Co., CPAs, noticed some disturbing information about the firm’s client, Hopkirk Company. A story in the local paper mentioned the indictment of Tony Baker, whom Faultless knew as the assistant controller a
> In connection with your examination of the financial statements of Olars Manufacturing Corporation for the year ended December 31, your post balance-sheet substantive procedures disclosed the following items: 1. January 3. The state government approved a
> You are in the process of completing the gathering of sufficient appropriate evidence for Top Stove Corporation, a company engaged in the manufacture and sale of kerosene space heaters. To date, there has been every indication that the financial statemen
> Crankwell Inc. is preparing its annual financial statements and annual report to stockholders. Management wants to be sure that all of the necessary and proper disclosures have been incorporated into the financial statements and the annual report. Two cl
> Michael Ewing is auditing the financial statements of Dallas Company for the year ended December 31, 2017. In concluding the process of gathering sufficient appropriate evidence, Ewing has asked to meet with his supervisor on the audit (John Ross) to dis
> How is the auditors’ standard (unmodified) report modified for qualified or adverse opinions issued as a result of departures from GAAP?
> From the “Inspections” section of the PCAOB’s website, access the most recent inspection reports for each of the Big Four firms (Deloitte, EY, KPMG, and PwC). Each inspection report contains the following information: An introductory preface. Inspection
> Officers of Richnow Company do not wish to disclose information about a product liability lawsuit filed by a customer seeking $500,000 in damages. They believe the suit is frivolous and without merit. Outside counsel is more cautious. The auditors insist
> The following subsequent event was disclosed in Dole Food Company’s 2009 annual report: Note 24: Subsequent Event On February 27, 2010, a significant earthquake struck the country of Chile. Although Dole’s Chilean operations resumed business after the e
> Subsequent knowledge of which of the following would cause the entity to adjust its December 31 financial statements? a. Sale of an issue of new stock for $500,000 on January 30. b. Settlement of a damage lawsuit for a customer’s injury sustained Februar
> Pat Colt is auditing the financial statements of Manning Company. The following is a summary of the uncorrected misstatements that Colt has identified during the past three years. These misstatements are immaterial and have related to isolated matters. I
> During the conduct of an audit, auditors may identify misstatements as a result of the completion of their substantive procedures. An important activity performed in the completion stages of the audit is considering the materiality of misstatements ident
> Aaron Rivers, CPA, is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common
> Faye Jaworski, CPA, is auditing the financial statements of Fulbright Company. As she is nearing the audit completion date, Jaworski realizes that she needs to evaluate whether all material contingencies are properly accounted for and disclosed in Fulbri
> The firm of Cole & Cole, CPAs, is auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2017. On March 6, 2018, C. R. Brown, Consolidated’s chief financial officer, gave the auditors a draft of an attorney lette
> Classify each of the following issues according to whether they will be (1) included in written representations in all audits, (2) included in written representations in audits of public entities (under PCAOB standards), or (3) not included in written re
> If the entity is subject to PCAOB requirements regarding communication about control deficiencies (AS 1305), what written representations should auditors obtain from the client with respect to internal control over financial reporting?
> Each of the following statements is a communication from management. Indicate whether the inclusion of each statement in written representations is appropriate. Provide your rationale for any statements whose inclusion in written representations is not a
> During the audit of the annual financial statements of Amis Manufacturing Inc., the company’s president, Vance Molar, and Wanda Dweebins, the engagement partner, reviewed matters that were supposed to be included in written representations. Amis Manufact
> Hart, an assistant accountant with the firm of Better & Best, CPAs, is auditing the financial statements of Tech Consolidated Industries Inc. The firm’s audit plan calls for the preparation of written representations. Required: a. In an audit of financi
> The scope of an audit is not restricted when an attorney letter limits the response to a. Matters to which the attorney has given substantive attention in the form of legal representation. b. An evaluation of the likelihood of an unfavorable outcome of t
> Which of these substantive procedures is not used to obtain evidence about contingencies? a. Scanning expense accounts for credit entries. b. Obtaining a letter from the client’s attorney. c. Reading the minutes of the board of directors’ meetings. d. Ex
> The primary reason auditors request responses to attorney letters is to provide auditors a. The probable outcome of asserted claims and pending or threatened litigation. b. Corroboration of the information furnished by management about litigation, claims
> Which of the following substantive procedures would auditors most likely perform to obtain evidence about the occurrence of subsequent events? a. Recompute a sample of large-dollar transactions occurring after the date of the financial statements for ari
> Which of the following substantive procedures should auditors ordinarily perform regarding subsequent events? a. Compare the latest available interim financial statements with the financial statements being audited. b. Send second requests to the client’
> What is an auditor’s primary method to corroborate information on litigation, claims, and assessments? a. Examining legal invoices sent by the client’s attorney. b. Verifying attorney–client privilege through interviews. c. Reviewing the response from th
> Hall accepted an engagement to audit the year 1 financial statements of XYZ Company. XYZ completed the preparation of the year 1 financial statements on February 13, year 2, and its auditors began the fieldwork on February 17, year 2. Hall completed gath
> What are the major categories of information contained in written representations?
> Which of the following statements is not true with respect to written representations? a. The failure of management to furnish them is a significant scope limitation, resulting in either an adverse opinion or a disclaimer of opinion. b. They should addre
> After the audit report release date, auditors determine that an important auditing procedure was omitted. Which of the following initial courses of action is most appropriate? a. Perform the omitted procedure or an alternative procedure. b. Notify the bo
> Which of the following best describes the role of analytical procedures near the end of the audit engagement? a. To identify possible deficiencies in the client’s internal control over financial reporting. b. To identify accounts that appear to be missta
> When reporting under GAAS, certain statements are required in all auditors’ reports (“explicit”) and others are required only under certain conditions (“implicit”).
> Identify information that auditors are required to communicate to individuals charged with governance of the client.
> What steps should auditors take if, after the audit report release date, they discover that an important audit procedure was omitted?
> Which of the following statements is most likely to be included in an attorney letter? a. “Certain representations in this letter are described as being limited to matters that are material.” b. “If any unasserted claims or assessments are omitted from t
> What is the purpose of dual dating the auditor’s report?
> What are auditors’ responsibilities for subsequently discovered facts if these are identified (a) prior to the audit report release date and (b) following the audit report release date?
> What is an updated report? What is a reissued report?
> In addition to obtaining responses to attorney letters, what other procedures can be used to gather audit evidence regarding litigation, claims, and assessments?
> Identify the two types of subsequent events. How should information about these events be reflected in the financial statements?
> What procedures do auditors perform to identify subsequent events?
> What alternatives are available to auditors for reporting on the financial statements and internal control over financial reporting in the audit of public entities?
> What are some of the benefits of audit documentation review to a public accounting firm?
> What is an engagement quality review?
