In February 2019, 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’ 2018 financial statements, you determine that, based primarily on management’s representations, the investigation did not pose a serious threat to the company’s financial well-being. The company subsequently retained a local law firm to represent it in dealing with the state commission. At the end of 2018, you concluded that the action did not represent a severe threat. However, it is now 2019 and you have just received the attorney’s letter, which you find a little unsettling. It states: On January 31, 2019, the U.S. Environmental Protection Agency (EPA) listed the Durango site in Durango, Colorado, on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund). The site includes property adjoining the western boundary of Ceramic Crucibles’ plant in Durango and includes parts of Ceramic Crucibles’ property. The EPA has listed Ceramic Crucibles as one of the three “potentially responsible parties” (“PRPs”) that may be liable for the costs of investigating and cleaning up the site. The EPA has authorized $400,000 for a “Remedial Investigation and Feasibility Study” of the site, but that study will not begin until sometime later in 2019. Thus, we do not deem it possible or appropriate at this time to evaluate this matter with regard to potential liability or cost to the company. You immediately set up a meeting with Dave Buff, Ceramic Crucibles’ vice president; Ron Bonner, the company’s attorney; and Margaret Osmond, an attorney who specializes in EPA-related issues. At the meeting you ascertain that ∙ Ceramic Crucibles bought the Durango facility from TW Industries in 2008. ∙ TW Industries had operated the facility as a manufacturer of ceramic tiles, and it had used lead extensively in incorporating color into the tile. The site has been placed on the National Priorities List (“the List”) apparently because each state must have at least one site on the List. All sites on the List are rated on a composite score that reflects the relative extent of pollution. The Durango site has a rating of 8.3 compared to a rating of no less than 25 for the other sites on the List. The most severe lead pollution (based on toxicity) is in an area located on the other side of a levee behind Ceramic Crucibles’ facilities. Although the area close to the building contains traces of lead pollution, the toxicity in this area is about 50 parts per million (ppm), compared to 19,000 ppm beyond the levee. Although Ceramic Crucibles used lead in coloring its crucibles until about 2010, the lead was locked into a ceramic glaze that met FDA requirements for appliances used in the preparation of food. Apparently, the acids used in determining the leaching properties of lead for EPA tests are stronger than that used by the FDA. Since 2010, Ceramic Crucibles has used lead-free mud in its crucibles. Affidavits taken from present and former employees of Ceramic Crucibles indicate that no wastewater has been discharged though the levee since Ceramic Crucibles acquired the property in 2008. The other PRPs and TW Industries are viable companies that should be in a position to meet their responsibilities resulting from any possible EPA action. Materiality for purposes of evaluating a potential loss is $10 million to $13 million. This is based on the assumption that the loss would be deductible for income tax purposes. In that case, the loss would represent a reduction in stockholders’ equity of 4.5 percent to 7.0 percent. Your best guess is that the company’s exposure does not exceed that amount. Further, based on the financial strength of the company and its available lines of credit, you believe such an assessment would not result in financial distress to the company. The creation of the Environmental Protection Agency (EPA) and that of the Comprehensive Environmental Response, Compensation, and Liability Act is a result of the increasing concern of Americans about pollution. An amendment to the act permits the EPA to perform the cleanup. The EPA has a national priorities list of several thousand sites thought to be severely damaged. The average cost of conducting remedial investigation and feasibility studies ranges from $750,000 to over $1 million, and such studies may take as long as three years. Cleanup costs can often exceed $10 million to $12 million. It is said that the current estimates of $100 billion to clean up nonfederal hazardous waste sites may be conservative. The law requires the EPA to identify toxic waste sites and request records from PRPs. The PRPs are responsible for the cost of cleanup, but if they lack the funds, the EPA uses its funds for the cleanup. The EPA has spent $3.3 billion from its trust fund and collected only $65 million from polluters since the passage of the legislation. Required: a. How would this type of contingency be classified in the accounting literature, and how should it be accounted for? b. Would the amount be material to the financial statements? c. What additional evidence would you gather, and what kinds of representations should you require from the entity? d. Should the investigation affect your opinion on those financial statements?
> For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue. Assume that each item is at least material. a. Thibodeau Mines, Inc., uses LIFO for valuing inventories held
> For each of the following independent situations, indicate the type of financial statement audit report that you would issue and briefly explain your reasoning. Assume that each item is at least material. a. Barefield Corporation, a wholly owned subsidia
> During the examination of the annual financial statements of Amis Manufacturing, Inc., a nonpublic company, the company’s president, R. Heinrich, and Luddy, the auditor, reviewed the matters that were to be included in a written representation letter. Up
> Arenas, an assistant accountant with the firm of Gonzales & Ramirez, CPAs, is auditing the financial statements of Tech Consolidated Industries, Inc. The firm’s audit program calls for the preparation of a written management representation letter. Requi
> 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, 2018; that he completed fieldwork on January 21, 2019; and that he now is preparing his
> Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2018. Namiki plans to complete the fieldwork and sign the auditor’s report about March 10, 2019. Namiki is concerned about events and transactions occ
> Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Company for the year ended December 31, 2018. On April 2, 2019, an inquiry letter to J. J. Young, Consolidated’s outside attorney, was drafted to corroborate the informat
> During an audit engagement, Harper, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments. Required:
> Describe two or more factors that the auditor should consider in assessing the inherent risk for (a) intangible assets and (b) the property management process.
> 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 con
> The schedule on the following page was prepared by the controller of World Manufacturing, Inc., for use by the independent auditors during their examination of World’s year-end financial statements. All procedures performed by the audit assistant were no
> Sevcik Company’s auditor received, directly from the banks, confirmations and cutoff statements with related checks and deposit tickets for Sevcik’s three general-purpose bank accounts. The auditor determined that the controls over cash are satisfactory
> Cassandra Corporation, a manufacturing company, periodically invests large sums in investment (debt and equity) securities. The investment policy is established by the investment committee of the board of directors, and the treasurer is responsible for c
> Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son, a high-tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two a
> Lee, CPA, the continuing auditor of Wu, Inc., is beginning to audit the common stock and treasury stock accounts. Lee has decided to design substantive procedures without relying on the company’s internal control system. Wu has no par and no stated-value
> Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry “Property, plant, and equipment.” Gonzales has been asked by the company’s management if audit ad
> Nakamura, CPA, has accepted an engagement to audit the financial statements of Grant Manufacturing Company, a new client. Grant has an adequate control environment and a reasonable segregation of duties. Nakamura is about to set the control risk for the
> Park Corporation, a local sporting goods company, has asked your firm for assistance in setting up its website. HeeSoo Park, the CEO, is concerned that potential customers will be reluctant to place orders over the Internet to a relatively unknown entity
> This question consists of 13 items pertaining to possible deficiencies in an accountant’s review report. Indicate whether each statement about a possible deficiency is correct (C) or incorrect (I) in the space provided. Jordan & Stone, CPAs, audited the
> List four categories of intangible assets and four types of property, plant, and equipment transactions.
> The following report was drafted on October 25, 2018, by Major, CPA, at the completion of an engagement to compile the financial statements of Ajax Company for the fiscal year ended September 30, 2018. Ajax is a non-public entity in which Major’s child h
> You are the manager of the examination engagement of the financial projection of Honey’s Health Foods as of December 31, 2018, and for the year then ended. The audit senior, Currie, has prepared the following draft of the examination report: To the Board
> Your client, Cheaney Rental Properties, has engaged you to perform a compilation of its forecasted financial statements for a loan with the National Bank of Rockwood. Required: a. Describe the steps an accountant should complete when conducting a compil
> Orange Grove Farms has approached your CPA firm with some questions. Orange Grove’s management has spoken with a bank about obtaining a loan to expand its operations. The bank has informed Orange Grove that the bank will not make the requested loan unles
> Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements. Sleek needed the audit to obtain bank loans and to offer public stock so that i
> Butler Manufacturing Corporation planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Meng, CPA, to audit its financial statements. Butler told Meng that the financial statements would
> Astor Electronics, Inc., markets a wide variety of computer-related products throughout the United States. Astor’s officers decided to raise $1 million by selling shares of Astor’s common stock in an exempt offering under Regulation D of the Securities A
> Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements. The purpose of the audit was to determine whether the unaudited financial statements furnished to
> Perez, CPA, has been asked by a nonpublic company, for which Perez provides audit services, to perform a nonrecurring engagement involving implementation of an IT information and control system. The entity requests that, in setting up the new system and
> Each of the following situations involves a possible violation by a member in industry of the AICPA’s Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and ex
> What are the functions of the registrar, the transfer agent, and the dividend-disbursing agent?
> Each of the following situations involves a possible violation of the Independence Rule of the AICPA’s Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why. a. Julia Roberto, a sole practit
> Do an Internet search to find the SOC 3 report for Google’s Cloud Platform System for the latest period available. Required: a. Read the report. Identify the accounting firm that performed the SOC 3 attestation engagement. Which of the Trust Services Cr
> The AICPA has developed assurance services related to electronic commerce called Trust Services. Do an online search for Trust Services on the AICPA website (www. aicpa.org). Required: a. Find and list the five broad areas into which the Trust Services
> The IIA maintains its own website containing useful information about the Institute and the internal auditing profession in general. Visit the IIA’s home page (www. theiia.org). Required: a. Under the tab “Bookstore & Publications,” click on “Internal A
> A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements. Required: a. Search the EDGAR database found at http://www.sec.gov/edgar/searchedgar/companysearch.html to find a company’s 10-K that r
> Visit the AICPA’s website (www.aicpa.org), under “Research,” and then “Standards.” Click on “Code of Professional Conduct.” Find the Independence Rule and its related interpretations in Part 1 of the Code of Professional Conduct. Research the relevant ru
> Both Intel (www.intel.com) and Microsoft (www.microsoft.com) have large amounts of investment securities. Visit their home pages, and review their financial statements for information on how they account for investment securities and the amounts of those
> Visit the website of another catalog retailer similar to Earth Wear Clothiers, and determine what useful lives and depreciation methods are used for property, plant, and equipment. Compare those methods to Earth Wear, and, if different, consider the impl
> AT-C Section 315, “Compliance Attestation,” allows a practitioner to perform agreed-upon procedures to assist users in evaluating management’s written assertions about (1) the entity’s compliance with specified requirements, (2) the effectiveness of the
> Critics of the Sarbanes-Oxley Act do not believe the Act will be effective at deterring accounting frauds because it primarily relies on specifying new crimes and higher penalties (i.e., increasing the maximum fine and prison terms). Critics argue that i
> Identify two substantive analytical procedures that can be used to audit prepaid insurance.
> oration and Watson Corporation, publicly held companies traded on NASDAQ. Watson recently acquired Lestrad Corporation in a merger that involved swapping 1.75 shares of Watson for 1 share of Lestrad. In connection with that merger, CD&A issued an unquali
> Schoeck, CPA, is considering leaving a position at a major public accounting firm to join the staff of a local bookkeeping and advisory firm that does write-up work, tax preparation and planning, and financial planning. The local firm is not owned by CPA
> Refer back to the hypothetical Sun City Savings and Loan case presented toward the beginning of this chapter, and consider each of the following independent situations: a. Suppose that Pina, Johnson & Associates also audited one of the entities who had r
> While completing a test of controls, you appropriately cleared two minor exceptions by examining related documents. The entity will need to do some serious digging to find the documents to resolve a third, similar, exception and wants to know if you real
> Your supervisor tells you that for the next month you will be working on an audit entity with a controller who loves to talk. She explains that the entity will want you to spend an hour or so talking about politics, sports, and life’s mysteries and you n
> For each of the following scenarios, indicate whether or not independence-related SEC rules are being violated, assuming that the audit entity is a public company. Briefly explain why or why not. a. Adrian Reynolds now works as a junior member of the acc
> You are auditing the financial statements for your new client, Paper Packaging Corporation, a manufacturer of paper containers, for the year ended March 31, 2019. Paper Packaging is a public company. Paper Packaging’s previous auditors
> Wyly Waste Management (“WWM”) is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $100,000. Shortly after the end of the year, WWM’s CFO is meeting with your audit partner to review the preliminary results of the audit
> Medical Products, Inc. (MPI) was created in 2016 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 comp
> How does the purchasing process affect prepaid insurance and property, plant, and equipment transactions?
> On January 15, 2018, 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
> Pierce, an independent auditor, was engaged to examine the financial statements of Wong Construction, Inc., for the year ended December 31. Wong’s financial statements reflect a substantial amount of mobile construction equipment used in the firm’s opera
> 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 2018 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewi
> The FASB’s revised standard on leases, ASC 842, was effective for public companies beginning 2018. One significant implication of this standard is that operating leases that were previously kept off the balance sheet are now required to be recorded on th
> What types of services can be performed under Statements on Standards for Accounting and Review Services?
> For what types of actions are auditors liable to a client under common law? Why would the client prefer to sue the auditor for a tort action rather than for a breach of contract?
> The questions that follow are based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not. Situation Yes No a. A par
> To support financial statement assertions, an auditor develops specific audit procedures to satisfy or accomplish each assertion. Required: Items (a) through (c) represent assertions for investments. Select the most appropriate procedure from the follow
> Items 1 through 16 represent a series of unrelated statements, questions, excerpts, and 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,
> To support financial statement assertions, an auditor develops specific substantive procedures to satisfy or address each assertion. Required: Items (a) through (c) represent assertions for the property and equipment accounts. Select the most appropriat
> 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 e
> The tick mark ▲ most likely indicates that the amount was traced to the a. Deposit in transit of the applicable bank reconciliation. b. December cash receipts journal. c. January cash receipts journal. d. Year-end bank confirmations.
> On September 10, Melinda Johnson was auditing the financial statements of a new audit client, Mother Earth Foods, a health-food chain that has a June 30 year-end. The company is privately held and has just gone through a leveraged buyout with long-term f
> Which of the following comparisons would be most useful to an auditor in evaluating the overall financial results of an entity’s operations? a. Prior-year accounts payable to current-year accounts payable. b. Prior-year payroll expense to budgeted curren
> Under which conditions would an online dating company be more likely to opt for a SOC 3 report over a SOC 2 report? a. The company wishes the report to be distributed only to a restricted set of users who understand the details of the IT system being rep
> Which of the following is true of a SOC 2 engagement? a. The report resulting from a SOC 2 engagement can be made available for general use. b. A SOC 2 engagement is based on criteria from COSO’s internal control framework. c. A SOC 2 engagement is based
> Which of the following assurances is not provided by compliance with Trust Services principles? a. There are procedures to protect the system against unauthorized physical access. b. The financial statements created by the system are free of material mis
> Which of the following is not a Trust Services principle? a. Processing integrity. b. Privacy. c. Digital certificate authorization. d. Availability.
> The four principles of the IIA Code of Ethics are a. Confidentiality, competency, objectivity, and integrity. b. Objectivity, independence, compliance, and due diligence. c. Honesty, integrity, independence, and competency. d. Integrity, confidentiality,
> Which of the following is not one of the general areas of the IIA’s International Standards for the Professional Practice of Internal Auditing? a. Performance standards. b. Implementation standards. c. Ethical standards. d. Attribute standards.
> The general accreditation granted by the Institute of Internal Auditors is known as a. CFE. b. CGAP. c. CFSA. d. CIA.
> Financial statements that have been reviewed by an accountant should be accompanied by a report stating that a. The scope of the inquiry and the analytical procedures performed by the accountant have not been restricted. b. All information included in th
> The standard report issued by an accountant after reviewing financial statements states that a. A review includes assessing the accounting principles used and significant estimates made by management. b. A review includes examining, on a test basis, evid
> Taylor, CPA, has been engaged to audit the financial statements of Palmer Company, a continuing audit client. Taylor is about to perform substantive audit procedures on Palmer’s goodwill (excess of cost over fair value of net assets purchased) and tradem
> Which of the following statements is correct concerning both an engagement to compile and an engagement to review a non-public entity’s financial statements? a. The accountant is not required to obtain an understanding of internal control. b. The account
> When compiling the financial statements of a non-public entity, an accountant should a. Review agreements with financial institutions for restrictions on cash balances. b. Understand the accounting principles and practices of the entity’s industry. c. In
> Which of the following statements concerning prospective financial statements is correct? a. Only a financial forecast would normally be appropriate for limited use. b. Only a financial projection would normally be appropriate for general use. c. Any typ
> An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements, provided that a. The prospective financial statements are also examined. b. Responsibility for the adequacy of the procedures performed is taken b
> Which of the following professional services would be considered an attest engagement? a. A management consulting engagement to provide IT advice to a client. b. An engagement to report on compliance with statutory requirements. c. An income tax engageme
> An assurance report on information can provide assurance about the information’s a. Reliability. b. Relevance. c. Timeliness. d. All of the above.
> Which of the following is a provision of the Foreign Corrupt Practices Act? a. It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business. b
> Which of the following is not a provision of the Sarbanes-Oxley Act? a. A requirement to retain audit work papers for at least five years. b. It is a criminal offense to take any harmful action in retaliation against anyone who voluntarily comes forward
> Under the Private Securities Litigation Reform Act, Baker, CPA, reported certain uncorrected illegal acts to Super mart’s board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal
> Fritz Corporation, whose shares are publicly traded, engaged Hay Associates, CPAs, to audit its financial statements. Hay gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Hay’s opinion was included in Fr
> Natherson, CPA, is engaged to audit the financial statements of Lewis Lumber for the year ended December 31. Natherson obtained and documented an understanding of internal control relating to the purchasing process and set control risk at the maximum lev
> If Hansen succeeds in the Section 11 suit against Dart, Hansen will be entitled to a. Damages of three times the original public offering price. b. Rescind the transaction. c. Monetary damages comparable to the loss suffered. d. Damages, but only if the
> In a suit against Jay and Dart under the Section 11 liability provisions of the Securities Act of 1933, Hansen must prove that a. Jay knew of the misstatements. b. Jay was negligent. c. The misstatements contained in Dart’s financial statements were mate
> To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove Defendant's Intent Plaintiff's Reliance on the to Deceive Registration Statemen
> How does the Securities Act of 1933, which imposes civil liability on auditors for misrepresentations or omissions of material facts in a registration statement, expand auditors’ liability to purchasers of securities beyond that of common law? a. Purchas
> Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King’s financial statements, Safe Bank loaned King $500,000. King Corporation and Safe Bank are both located in a st
> Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by Frank & Company, CPAs. Jenna had engaged Frank to audit Cord’s financia
> Which of the following best describes whether a CPA has met the required standard of care in auditing an entity’s financial statements? a. Whether the client’s expectations are met with regard to the accuracy of audited financial statements. b. Whether t
> Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the fin
> In connection with the element of engagement performance, a CPA firm’s system of quality control should ordinarily include procedures covering all of the following except a. Performance evaluation. b. Consistent, high-quality engagement performance. c. S
> One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through a. A system of quality control. b. A system of peer review. c. C
> The Brant Group reported total interest expense for the year of $2,000. The table below provides the monthly balance of their long-term debt. Interest is paid monthly on the average daily balance during the month. The annual interest rate for the debt is
> Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n) a. Authorized quality control review board. b. Successor CPA firm that has been engaged to audit the former audit entity. c.
> During the audit of Moon Co., the auditor disagrees with management’s estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance? a
