Gordon & Moore, CPAs, were the auditors of Fox & Company, a brokerage firm. Gordon & Moore examined and reported on the financial statements of Fox, which were filed with the Securities and Exchange Commission. Several of Fox’s customers were swindled by a fraudulent scheme perpetrated by two key officers of the company. The facts establish that Gordon & Moore were negligent, but not reckless or grossly negligent, in the conduct of the audit, and neither participated in the fraudulent scheme nor knew of its existence. The customers are suing Gordon & Moore under the antifraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the officers. The customers’ suit for fraud is predicated exclusively on the negligence of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme. Answer the following, setting forth reasons for any conclusions stated. a. What is the probable outcome of the lawsuit? Explain. b. What other theory of liability might the customers have asserted? (AICPA, adapted)
> Dynasty Limited has been involved in a research project (code named DNY) for a number of months. There is some doubt as to whether the project should be completed. If it is, then it is expected that DNY will require another 12 months’ work. The following
> Bamboo Limited is a highly specialist firm of central heating suppliers operating exclusively in the textiles industry. It has recently been asked to tender for a contract for a prospective customer. The following details relate to the proposed contract.
> The law should lay down precise formats, contents and methods for the preparation of limited liability company accounts.’ Discuss.
> Foo Limited has been asked to quote for a special order. The details are as follows: 1 Prices are to be quoted at order levels of 50,000, 100,000 and 150,000 units respectively. Foo has some surplus capacity and it could deal with up to 160,000 units. 2
> Agra Limited has been asked to quote a price for a special contract. The details are as follows: 1 The specification required a quotation for 100,000 units. 2 The direct costs per unit for the order would be: materials £3, labour £15, distribution £12. 3
> Assume that you were an IT manager in a large entity and that the services that you provide are made available to both internal and external parties. Specify how you would go about negotiating an appropriate fee for services sought by other departments w
> Many of the solutions to the problems posed in this chapter depend on being able to isolate the variable cost associated with a particular decision. In practice, is it realistic to expect that such costs can be readily identified and measured? Answer:
> This chapter has emphasized that it is managers that make decisions and not management accountants. How far do you agree with this assertion? Answer: 1. Management accountants are employed to provide a service: they advise senior management and comm
> The following information relates to Mere’s budget for the year to 31 December 2021: Note: Fixed overheads are apportioned on the basis of direct labour hours. The directors are worried about the loss that product M is budgeted to make
> Puzzled Limited would like to increase its sales during the year to 3l May 2021. To do so, it has several mutually exclusive options open to it: ● reduce the selling price per unit by 15 per cent; ● improve the product
> The following information relates to Carter Limited for the year to 30 April 2021: During 2022 the company would like to increase its sales substantially, but to do so it would have to reduce the selling price per unit by 20 per cent. The variable cost p
> The following information applies to Ayre Limited for the two years to 31 March 2021 and 2022 respectively: Required: Assuming that the cost relationships had remained as given in the question, calculate the company’s profit if the sal
> Do break-even charts and profit graphs help management to make more meaningful decisions?
> What are the limitations of regulation?
> Contribution analysis described in textbooks is too simplistic and is of little relevance to management.’ How far do you agree with this statement?
> It has been suggested that although contribution analysis is fine in theory, fixed costs cannot be ignored in practice.’ Discuss this statement.
> Mean Limited manufactures a single product, and the following information relates to the actual selling price and actual cost of the product for the four weeks to 31 March 2020: The budgeted selling price and standard cost of each unit was as follows: To
> The budgeted selling price and standard cost of a unit manufactured by Smillie Limited is as follows: Total budgeted sales: 400 units During the period to 31 December 2021, the actual sales and production details for Smillie were as follows: Required: (a
> You are presented with the following budgeted information for Doe Limited: Required: Calculate the sales variances.
> Using the data from the previous question, calculate the following performance measures: (a) Efficiency ratio (b) Capacity ratio (c) Production volume ratio.
> The following information relates to Osprey Limited: Budgeted production: 500 units. Standard hours per unit: 10. Actual production: 600 units. Budgeted fixed overhead: £125,000. Actual fixed overhead: £120,000. Actual hours worked: 4900. Required: Calcu
> You are presented with the following information for Duncan Limited: Budgeted production: 1000 units. Actual production: 1200 units. Standard specification for one unit: 10 hours at £8 per direct labour hour. Actual direct labour cost: £97,200 in 10,800
> The following information relates to Malcolm Limited: Budgeted production: 100 units. Unit specification (direct materials): 50 kilograms * £5 per kilogram = £250. Actual production: 120 units. Direct materials used: 5400 kilograms at a total cost of
> Sales variance calculations are just another example of accountants playing around with numbers.’ Discuss.
> Do you think it is important for a CEO of a big business to have a sound understanding of finance and accounting?
> Accountants stifle managerial initiative and enterprise.’ Discuss.
> For each of the following brief scenarios, assume that you are the CPA reporting on the company’s financial statements. Using the form included with this problem, describe the reporting circumstance involved, the type or types of opinio
> For each of the following independent cases, state the highest level of deficiency that you believe the circumstances represent: a control deficiency, a significant deficiency, or a material weakness. Explain your decision in each case. Case 1: The comp
> For each of the following brief scenarios, assume that you are reporting on a client’s currentyear financial statements. Reply as to the type or types of opinion possible in the circumstance. S Unmodified—standard U Un
> Because of a very significant scope limitation, the auditors are uncertain about the propriety of the client’s accounting for deferred income taxes. The possible amounts involved are so significant that the auditors have not been able to form an opinion
> What information is provided in a public company audit report relating to critical audit matters?
> The working paper for Keystone Computers & Networks’ analytical review ratios is presented in this Appendix. a. Recalculate the 12/31/X5 ratios using Excel. b. After completing part (a), review the ratios and identify financial statement accounts that sh
> What two types of cyber security examinations are available?
> List the categories of criteria that may be included in a trust services engagement.
> A CPA’s report includes the following: “We are not aware of any material modifications that should be made in order for the information to be in conformity with accounting principles generally accepted in the United States of America, and accordingly, in
> Comment on whether you agree with the following: In a nonpublic company audit report, the second section is always titled “Basis for Opinion.”
> Jim Willingham works as a manager in the Phoenix office of an international public accounting firm. His younger brother has just taken a position as a purchasing agent for one of the public accounting firm’s Phoenix clients. Has Jim’s independence been i
> What are the titles of the sections of the public and nonpublic company audit reports presented in the chapter?
> What does a nonpublic company audit report say concerning the risk of not detecting a material misstatement resulting from fraud versus one resulting from error?
> Comment on whether you agree with the following: Today’s sophisticated information systems make auditing of samples necessary, and auditing of an entire population impossible.
> In a well-controlled IT computer system, the auditors wish to test the control of authorization of cash disbursements. What is the most efficient way that the auditors could test this control?
> In their review of audit working papers, what do managers and partners look for?
> a. Which of the following are components of the risk of material misstatement? Control Risk Detection Risk (1) Yes (2) Yes No (3) No Yes (4) No b. The risk that a material misstatement that could occur in an assertion assuming there are no related contr
> What is the purpose of a “second partner review”? What should be the extent of the second partner’s association with the engagement being reviewed?
> In their audit of accounting estimates, auditors emphasize significant assumptions. Provide characteristics of such assumptions.
> The Institute of Internal Auditors’ Code of Ethics has a number of “Principles.” What are the titles of those principles?
> Smith & Co., a local Dallas public accounting firm, is incorporated as a professional corporation, with three shareholders, all CPAs. The shareholders have developed a combination of marketing, software, and professional expertise that has allowed them t
> You are the partner on the audit of Data save Inc., a small publicly held corporation that manufactures high-speed disk drives for the computer industry. The audit of Data save had been progressing satisfactorily until you were about a month away from is
> Auditors assess the risks of material misstatement and then design further audit procedures. a. Describe the auditors’ approach to identifying and assessing the risks of material misstatement. b. Describe likely responses when an audit is considered to b
> Bill Jones is a partner with Adel son & Co., a one office CPA firm located in Tucson, Arizona. He is the engagement partner on the audit team of NRG, LTD, a public company and he has just discovered that his wife Sophia owns 100 shares of NRG, shares wo
> The CPA firm Hank and Henry LLP is performing its first integrated audit of their recently acquired public client Wigly Corporation. Wigly has been in existence for 10 years. Wigly Corporation has two branch locations and has a monthly performed manageme
> In the audit of Wheat Inc. for the year ended December 31, you discover that the client had been drawing checks as creditors’ invoices became due but had not been mailing the checks immediately. Because of a working capital shortage, some checks have bee
> Use the Code of Professional Conduct (available at pub.aicpa.org/code of conduct) to research each of the circumstances presented in Problem 3-41 and address whether Bell & Greer’s independence is impaired. Provide the section of the Independence Rule an
> Metropolitan Corporation has a significant investment in a closely-held corporation, Wake Forest Company. Metropolitan’s investment does not enable the company to exercise significant influence over the operating and financial operations of Wake Forest
> Assume that you are auditing the financial statements of Young Manufacturing Co. Management of Young has designed a review control for cash disbursements using data analytics. The company’s software examines all disbursements for duplicate payments, unus
> Carson Inc. is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit c
> Assume that you are auditing the financial statements of Wexler Inc. Wexler’s financial statements include a number of significant estimates. a. Describe the desired internal controls over the processes for developing accounting estimates b. Describe how
> Robert Tailor, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Tailor has decided that he
> Many companies have implemented COSO’s enterprise risk management framework to assist them in managing risks. a. Are public companies required by the SEC to implement COSO’s enterprise risk management framework? Explain. b. Describe two of the components
> Auditors identify “significant risks” when performing their audits. a. Explain what is meant by a significant risk. b. What factors do auditors consider in assessing whether a risk is a significant risk? c. Describe how a significant risk should be treat
> Assume that you are auditing the financial statements of Wagner Pharma Co. for the year ending June 30, 20X1. Wagner has very large warehouses where it stores its numerous prescription drug products. The company tracks inventory with a radio frequency id
> Warren Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories. All goods purchased pass through a receiving department
> Micro core Corp., a high-technology company, utilizes the following procedures for recording materials and transferring them to work in process. (1) Upon receipt of raw materials by stores, the storekeeper prepares a stock-in report with part number and
> Note: This simulation integrates concepts first presented in Chapter 5 (see Figure 5.1 for Assertions about Account Balances) and information from throughout the procedural chapters (Chapters 10 through 16) rather than only Chapter 16 coverage. This prob
> Described below are potential financial statement misstatements that are encountered by auditors in the audit of inventory and cost of goods sold. a. Management of a chain of discount department stores systematically overstates inventory quantities at se
> Howe Pharmaceutical Company produces a number of drugs that are regulated by various agencies, including, in the United States, the federal Food and Drug Administration (FDA). These agencies issue licenses that approve drugs for sale and establish specif
> International Trading Co., a client of your CPA firm, has requested your advice on the following problem. It has three clerical employees who must perform the following functions: (1) Maintain general ledger. (2) Maintain accounts payable ledger. (3) Mai
> Match the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all.
> Wren, Inc., a nonpublic company, retains Ying and Company CPA to audit its financial statements and internal control. Sarah Smith, the senior on the audit prepared the following first draft of an unmodified report: Respond as to the accuracy of the follo
> For each term in the first column, select the partial (or compete) definition or illustration. Each partial (or complete) definition or illustration may be used only once, or not at all.
> Match each the following statements with the appropriate type of auditors’ opinion (each auditors’ report may be used once, more than once, or not at all): A. Adverse. D. Disclaimer. Q. Qualified. U. Unmodified.
> John Wilson wishes to use no statistical sampling to select a sample of his client’s 3,000 accounts receivable, which total $4,500,000. He believes that $225,000 represents a reasonable tolerable misstatement. He also has assessed both the combination of
> The auditors of Kansas Corporation wish to use a structured approach to no statistical sampling to evaluate the reasonableness of the accounts receivable. Kansas has 30,000 receivable accounts with a total book value of $5,000,000. The auditors have asse
> Select the best answer for each of the following questions. Explain the reasons for your selection. 16 If the auditors had identified a number of items in the population that they considered individually significant (e.g., perhaps three accounts exist th
> Assume you are testing the internal controls over sales transactions for the Tidwell Co. audit. You have tested the general controls and found them to be operating effectively. You are now testing the application controls over sales transactions and have
> Ratio estimation and difference estimation are two widely used variables sampling plans. a. Under what conditions are ratio estimation or difference estimation appropriate sampling plans for estimating the total dollar value of a population? b. What rela
> Linda Williams is auditing the financial statements of Western Industries. In the performance of mean-per-unit estimation of credit sales, Williams took a sample of 200 of the 10,000 items in the population (book value $6,000,000). The sample’s average b
> You are the auditor of Unet Inc., an auto air-conditioner service and repair company, and you have decided to use the mean-per-unit method to test the existence and gross valuation of recorded accounts receivable. The client’s records include 10,000 acco
> James Duffney, CPA, has randomly selected and audited a sample of 100 of Will-Mart’s accounts receivable. Will-Mart has 6,000 accounts receivable accounts with a total book value of $6,000,000. Duffney has determined that the account’s tolerable misstate
> Select the best answer for each of the following questions. Explain the reasons for your selection. a. The auditors are using unratified mean-per-unit sampling to audit accounts receivable as they did in the prior year. Which of the following changes in
> Use the replies presented in the preceding problem for this problem. a. Use the ratio method to calculate: (1) Projected misstatement. (2) Estimated total audited value. b. Use the difference estimation method to calculate: (1) Projected misstatement. (2
> Brittany Petro wishes to use mean-per-unit sampling to evaluate the reasonableness of the book value of the accounts receivable of Littler, Inc. littler has 10,000 receivable accounts with a total book value of $1,500,000. Petro estimates the population&
> Len Wagner, CPA, is considering the use of monetary unit sampling in examining the sales transactions and accounts receivable of Mason Wholesale Company. Required: a. How does the definition of the items in an accounts receivable population vary between
> The auditors wish to test the valuation of accounts receivable in the audit of Desert Enterprises of Bullhead City. The client has $500,000 of total recorded receivables, composed of 850 accounts. The auditors have determined the following: The auditors
> Kevin koi, CPA, was engaged to audit Tolle Company’s financial statements for the year ended December 31, 20X0. After obtaining an understanding of Tolle’s internal control, koi decided to obtain audit evidence about the effectiveness of both the design
> You have been assigned to the audit of Utopia Industries Inc. for the year ended December 31, 20X1. The company makes components for communications and defense applications. To obtain an understanding of the methods of revenue recognition used by such bu
> On January 1, 2024, Canseco Plumbing Fixtures purchased equipment for $30,000. Residual value at the end of an estimated four-year service life is expected to be $2,000. The company expects the equipment to operate for 10,000 hours. Calculate depreciatio
> The following is an excerpt from a disclosure note in The Clorox Company’s annual report for the fiscal year ended June 30, 2020: Required: 1. What amount did Clorox report in its balance sheet related to the pension plan at June 30, 2
> The information below pertains to the retiree health care plan of Thompson Technologies: Thompson began funding the plan in 2024 with a contribution of $127,000 to the benefit fund at the end of the year. Retirees were paid $52,000. The actuaryâ
> Sachs Brands’ defined benefit pension plan specifies annual retirement benefits equal to 1.6% × service year’s × final year’s salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2010 and is expected to retire
> Stockton Labeling Company has a retiree health care plan. Employees become fully eligible for benefits after working for the company eight years. Stockton hired Misty New burn on January 1, 2024. As of the end of 2024, the actuary estimates the total net
> Century-Fox Corporation’s employees are eligible for postretirement health care benefits after both being employed at the end of the year in which age 60 is attained and having worked 20 years. Jason Snyder was hired at the end of 2001
> Reproduced below are the journal entries related to Illustration 17–12 in this chapter that Global Communications used to record its pension expense and funding in 2024 and the new gain and loss that occurred that year. To focus on the
> Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2024: Required: 1. Determine Lakeside’s pension expense for 2024, and prepare the appropriate journal entries to record the e
> The following pension-related data pertain to Metro Recreation’s noncontributory, defined benefit pension plan for 2024 ($ in thousands): Required: Prepare a pension spreadsheet that shows the relationships among the various pension ba
> The funded status of Patel Paneling Inc.’s defined benefit pension plan and the balances in prior service cost and the net gain—pensions, are given below ($ in thousands): Retirees were paid $270,000, and the employer
> Lewis Industries adopted a defined benefit pension plan on January 1, 2024. By making the provisions of the plan retroactive to prior years, Lewis incurred a prior service cost of $2 million. The prior service cost was funded immediately by a $2 millio
> Refer to the situation described in BE 11–17. Assume that the present value of the estimated future cash flows generated from the division’s assets is $22 million and that their fair value approximates fair value less costs to sell. What amount of impair
> The Collar Company has a defined benefit pension plan. Pension information concerning the fiscal years 2024 and 2025 are presented below ($ in millions): Information Provided by Pension Plan Actuary: a. Projected benefit obligation as of December 31, 202
> Refer to the situation described in P 17–10. Assume Electronic Distribution prepares its financial statements according to International Financial Reporting Standards (IFRS). Also assume that 10% is the current interest rate on high-quality corporate bon
