Each of the following situations involves possible violations of the AICPA Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and the rationale for the existing rule. a. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth extended her an offer of employment to join the internal audit department as an audit manager. When the discussions with Carolina BioHealth began, Jessica informed her office’s managing partner and was removed from the audit engagement. b. The audit firm of Miller and Yancy, CPAs, has joined an association of other CPA firms across the country to enhance the types of professional services the firm can provide. Miller and Yancy share resources with other firms in the association, including audit methodologies, audit manuals, and common IT systems for billing and time reporting. One of the partners in Miller and Yancy has a direct financial interest in the audit client of another firm in the association. c. Spencer Dunn is the partner in charge of the audit of Brentwood Bank. Dunn is in the process of purchasing a mountain house and has obtained mortgage financing from Brentwood Bank. d. Melanie Greer’s audit client has a material investment in Summit, Inc. Greer’s nondependent parents also own shares in Summit, and Summit is not an attest client of Greer’s firm. The amount of her parent’s ownership in Summit is not significant to Greer’s net worth. e. Joe Pugh is a former partner in Pinnacle and Hughes, CPAs. Recently, he left the firm to become the chief operating officer of Ensworth Clothing, Inc., which is an audit client of Pinnacle and Hughes. In his new role, Pugh has no responsibilities for financial reporting. Pinnacle and Hughes made significant changes to the audit plan for the upcoming audit. f. Odonnel Incorporated has struggled financially and has been unable to pay the audit fee to its auditor, Seale and Seale, CPAs, for the 2017 and 2018 audits. Seale and Seale is currently planning the 2019 audit. g. Morris and Williams, a regional CPA firm, is providing information systems consulting to one of their publicly traded audit clients. They are assisting in the implementation of a new financial reporting system selected by management. h. Chris Lancaster is a financial analyst in the financial reporting department of Cockerham International, a privately held corporation. Chris was asked to prepare several journal entries for Cockerham International related to transactions that have not yet occurred. The entries are reflected in financial statements that the company recently provided to the bank in connection with a loan outstanding due to the bank.
> The client changed from FIFO to LIFO inventory valuation in the current year and reflected this change in their financial statements. How should this be reflected in the auditor’s report?
> What is the primary purpose of analytical procedures performed during the completion phase of the audit?
> Describe the information included in the opinion and basis for opinion sections in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature of the additional paragraphs in the audit report?
> On February 17, 2019, a CPA completed all the evidence gathering procedures on the audit of the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2019. The audit is satisfactory in all respects except for the
> What are the purposes of the auditor’s responsibilities section in the auditor’s report? Identify the most important information included in the auditor’s responsibilities section.
> Distinguish among the following three factors impacting a loan interest rate: risk-free interest rate, business risk, and information risk. Which one or ones does the auditor reduce by performing an audit?
> Why might an organization seek the assurance of a CPA about information presented in the organization’s corporate sustainability report?
> Explain the auditor’s responsibility to consider compliance with laws and regulations. How does this responsibility differ for laws and regulations that have a direct effect on the financial statements compared to other laws and regulations that do not h
> Identify the four parts of the Uniform CPA Examination.
> How do the eight parts of a standard unmodified opinion audit report for nonpublic companies differ from those found in a qualified opinion report?
> Auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable practitioners to improve the quality of their performance.
> Explain how audit risk and materiality are related and why they need to be considered together in planning an audit.
> Explain audit services, attestation services, and assurance services, and give examples of each.
> Assume materiality for the financial statements as a whole is $100,000 and performance materiality for accounts receivable is set at $40,000. If the auditor finds one receivable that is overstated by $55,000, what should the auditor do?
> Explain why there is an inverse relationship between planned detection risk and the amount of evidence an auditor collects for a specific audit objective.
> Assume a company with the following balance sheet accounts: You are concerned only about overstatements of owner’s equity. Set performance materiality for the three relevant accounts such that the preliminary judgment about materiality
> Diane Smith, CPA, performed tests of controls and substantive tests of transactions for sales for the month of March in an audit of the financial statements for the year ended December 31, 2019. Based on the excellent results of both the tests of control
> How might the performance of test of controls provide evidence related to the presentation transaction-related audit objective?
> Explain the relationship between the occurrence transaction-related audit objective and the existence and completeness balance-related audit objectives.
> What are the three categories of members under the AICPA Code of Professional Conduct?
> List the nine balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.
> Identify risks for extensive IT-based accounting systems.
> Explain the relationship between the methodology for designing tests of controls and substantive tests of transactions in Figure 13-5 (p. 429) and the methodology for designing tests of details of balances in Figure 13-7 (p. 431). Figure 13-5: Figure
> Table 13-3 (p. 427) illustrates variations in the emphasis on different types of audit tests. What are the benefits to the auditor of identifying the best mix of tests? Table 13-3: TABLE 13-3 Variations in Evidence Mix Substantive Substantive Tests
> Assume that the client’s internal controls over the recording and classifying of fixed asset additions are considered deficient because the individual responsible for recording new acquisitions has inadequate technical training and limited experience in
> If the auditor assesses control risk as high for a transaction-related audit objective, what does that imply for detection risk and the level of substantive testing?
> How does the auditor use information obtained from the control risk assessment and testing of controls to plan audit procedures?
> Accounting standards require that companies provide footnote disclosures that enable a reader to understand the nature, timing, amount, and uncertainty surrounding revenue and cash flows arising from contracts with customers. Provide an example of an int
> Discuss the importance of the control environment, or “setting the tone at the top,” in establishing a culture of honesty and integrity in a company.
> The two components of professional skepticism are a questioning mind and a critical assessment of the audit evidence. How do these components help an auditor distinguish an unintentional misstatement from an intentional (fraudulent) misstatement?
> Explain the benefits of using audit engagement management software.
> What is meant by the control environment? What is the relationship between the control environment and the other four components of internal control?
> Describe the types of procedures auditors perform as part of their risk assessment procedures.
> What two aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?
> Provide two examples of factors that might increase the risk of material misstatement at the overall financial statement level.
> Define misappropriation of assets and give two examples of misappropriation of assets.
> Describe the following documents and records and explain their use in the sales and collection cycle: bill of lading, credit memo, remittance advice, and accounts receivable trial balance.
> In Part I of the case, you performed preliminary analytical procedures for Pinnacle (pp. 267–269). The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. During the planning phase of the audit, yo
> In Parts I (pp. 267–269) and II (pp. 302–303) of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. The auditor also assesses fraud risk as part of risk assessment p
> Following are descriptions of 10 internal controls. 1. The company has an organizational chart that establishes the formal lines of reporting and authorization protocols. 2. Before a cash disbursement can be processed, all payee information must be verif
> During audit planning, an auditor obtained the following information: 1. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist. 2. There are recurring attem
> Define what is meant by a tick mark. What is its purpose?
> Newspaper headlines frequently highlight instances where business professionals, politicians, and others are accused of engaging in unethical behavior. In response, there have been numerous attempts to reduce their occurrence. For example, some have argu
> The list below indicates various audit, attestation, and other engagements involving auditors. 1. A report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes–Oxley Act. 2. An examination report on
> Each year near the balance sheet date, when the president of Bargon Construction, Inc., takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent. Jack Morgan, head bookkeeper for the company, uses thi
> The following audit procedures are included in the audit program of Holland Equipment, Inc. 1. Use audit software to examine journal entries in the sales, cash receipts, purchases, cash disbursements, payroll, and general journals for any amounts exceedi
> Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. There
> The following misstatements are included in the accounting records of the Dillon Manufacturing Company: 1. Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened. 2. A sales invoice was miscalculated by $1,000 as a result
> Public companies are required to file restated financial statements with the SEC when they discover after the audited financial statements have been issued that the financial statements are materially misstated. The misstatements may have been the result
> Each of the following situations involves a possible violation of the AICPA Code of Professional Conduct. For each situation, state the applicable rule of conduct and whether it is a violation. a. Stefan, CPA, provides tax services, management advisory s
> Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. Required: a. Explain what low, medium, and high mean for each of the four risks and planned evidence. b. Fi
> What are the purposes of the AICPA Statements on Standards for Attestation Engagements?
> Target and Kohl’s are chains of stores that cater to customers who desire name-brand goods at lower prices. The Securities and Exchange Commission (SEC) Form 10-K filing rules require management of U.S. public companies to include background information
> Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks. 1. Fernandez Wholesalers sells energy drinks to various distributors. As they have expanded sales to additi
> Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedur
> This problem requires you to access PCAOB Auditing Standard AS 2110, Identifying and Assessing Risks of Material Misstatements (pcaobus.org). Use this standard to answer each of the questions below. For each answer, document the paragraph(s) in AS 2110 s
> The following are concepts discussed in Chapter 8 and this chapter: 1. Preliminary judgment about materiality 7. Estimated total misstatement in a segment 2. Control risk 8. Planned detection risk 3. Risk of fraud 9. Estimate of the combined misstatement
> The following are various activities an auditor does during audit planning. 1. Review accounting principles unique to the client’s industry 2. Determine the likely users of the financial statements 3. Evaluate the appropriate financial statement measures
> Gordon & Groton, CPAs, were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
> Taylor Bean & Whitaker Mortgage Corp. (Taylor Bean) was a Florida mortgage lender. Once one of the nation’s largest privately held mortgage companies, the company collapsed in 2009 after a multibillion dollar mortgage fraud unraveled. The downfall of Tay
> Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20 copies of the audited financial statements. The firm knew
> As the in-charge senior auditor on the audit engagement for JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for performing risk assessment procedures related to the sales cycle. JA Tire has four sales divisions within the
> Identify the management assertion and general balance-related audit objective for the specific balance-related audit objective: All recorded fixed assets exist at the balance sheet date.
> Following are statements of earnings and financial position for Wexler Industries. // Required: a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total asset
> Ling, an audit manager, is planning the audit of Modern Technologies, Inc. (MT, Inc.), a manufacturer of electronic components. This is the first year that Ling’s audit firm has performed the audit for MT, Inc. Ling set the preliminary
> Analytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a
> The following are specific balance-related audit objectives applied to the audit of accounts receivable (a. through i.) and management assertions about account balances (1 through 6). The list referred to in the specific balance-related audit objectives
> Your comparison of the gross margin percent for Jones Drugs for the years 2016 through 2019 indicates a significant decline. This is shown by the following information: A discussion with Tanvi Anand, the controller, brings to light two possible explana
> The minutes of the board of directors of the Tetonic Metals Company for the year ended December 31, 2019, were provided to you. Meeting of March 5, 2019 The meeting of the board of directors of Tetonic Metals was called to order by James Cook, the chairm
> Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the engagement, you are performing initial audit planning and
> You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2019. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year. You have obt
> Following are the auditor’s calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but an
> This problem requires the use of ACL software, which can be accessed by following the instructions available on the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook webs
> What are the information and established criteria for the audit of Jones Company’s tax return by an internal revenue agent? What are they for the audit of Jones Company’s financial statements by a CPA firm?
> The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a. through f.), management assertions about classes of transactions and events and related disclosures (1 through 6), and general tran
> The following audit procedures were performed in the audit of inventor to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the clie
> The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included. Audit Procedures 1. Trace from re
> As auditor of the Star Manufacturing Company, you have obtained a trial balance taken from the books of Star one month before year end: There are no inventories consigned either in or out. All notes receivable are due from outsiders and held by Star.
> The following are examples of documentation typically obtained by auditors: 1. Duplicate sales invoices 2. Receiving reports 3. Minutes of the board of directors 4. Signed W-4s 5. Subsidiary accounts receivable records 6. Vendors’ invoices 7. General led
> For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic
> Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2019. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following rep
> A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: a. “The accompanying financial statements present fairly, in a
> The following questions require you to access AICPA standards (www.aicpa.org), PCAOB auditing standards (pcaobus.org), and IAASB auditing standards (www.iaasb.org). a. Your audit supervisor stated it was important for you to understand AU-C 315. Which or
> In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following: 1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accou
> Identify some of the most important ways that the profession and society encourage CPAs to conduct themselves at a high level.
> The following (1 through 16) are the balance-related and transaction related audit objectives. Identify the specific audit objective (1 through 16) that each of the following specific audit procedures (a. through l.) satisfies in the audit of sales, ac
> There are many types of information that require assurance. Individually or in groups, identify the following types of assurance services. a. Identify three or more assurance services that are likely to be provided only by public accounting firms. b. Ide
> Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via
> The following independent scenarios describe auditor decisions made during an audit engagement. 1. Chen Li worked on the audit of American Healthcare Associations (AHA), which operates hospitals and outpatient centers in Texas and Oklahoma. Chen was assi
> The following information was obtained from several accounting and auditing enforcement releases issued by the SEC after its investigation of fraudulent financial reporting involving Just for Feet, Inc.: Just for Feet, Inc., was a national retailer of at
> The SEC Enforcement Division investigates possible violations of securities laws; recommends SEC action when appropriate, either in a federal court or before an administrative law judge; and negotiates settlements. Litigation Releases, which are descript
> James Burrow is the loan officer for the National Bank of Dallas. National has a loan of $325,000 outstanding to Regional Delivery Service, a company specializing in delivering products of all types on behalf of smaller companies. National’s collateral o
> Monterrey Corporation has an existing loan in the amount of $7 million with an annual interest rate of 6.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to r
> As discussed in the chapter opening vignette and on page 9, companies are increasingly issuing reports on corporate social responsibility. Visit the Global Reporting Initiative website (www.globalreporting.org) and answer the following questions. a. What
> Visit the PCAOB’s website (www.pcaobus.org) and locate the PCAOB’s Settled Disciplinary Order against David M. Burns issued on December 19, 2017, to answer the following questions: a. What position did Burns hold within the audit firm and how long had he
> Explain how the increased use of fair value accounting might increase information risk.
> The following questions relate to the AICPA Code of Professional Conduct, which can be viewed online or downloaded in pdf format at www.aicpa.org: a. When should a member apply the conceptual framework for members in public practice? Which rule or rules
> The following questions deal with tests of controls. Choose the best response. a. To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Wh
> The following questions concern types of audit tests. Choose the best response. a. An auditor’s deci0sion either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determine
> The following are general questions about internal control. Choose the best response. a. Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure? (1) Mistakes in judgm
