Question: This simulation, available online, presents a draft
This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
![This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.”
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior](../images/this-simulation-available-online-presents-a-draft-of-a-nonpublic-121672-1.jpg)
![This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.”
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior](../images/this-simulation-available-online-presents-a-draft-of-a-nonpublic-121672-2.jpg)
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.â€
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior
![This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.”
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior](../images/this-simulation-available-online-presents-a-draft-of-a-nonpublic-121672-3.jpg)
![This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.”
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior](../images/this-simulation-available-online-presents-a-draft-of-a-nonpublic-121672-4.jpg)
![This simulation, available online, presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected.
An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone’s 20X5 financial statements. As the audit senior for this engagement, you will now review and revise the 20X5 audit report for the Keystone audit. Use the additional client information in the Resources tab to revise the draft and correct any errors and remove any inappropriate or unnecessary items, given the overall context and purpose of the list. Ensure that the 20X5 audit report is appropriate given the information provided.
DOCUMENT
CALLOUTS
CALLOUT LIST #1
Choose an option below:
a. [Original text] Certified Public Accountant’s Report
b. [Delete text]
c. Objective Audit Report
d. Independent Auditor’s Report
e. Registered Auditor’s Report
CALLOUT LIST #2
Choose an option below:
a. [Original text] Sam Best, President:
b. [Delete text]
c. Sam Best, President, and Loren Steele, Controller
d. Department of Internal Auditing
e. Audit Committee of Keystone
f. Board of Directors of Keystone
CALLOUT LIST #3
Choose an option below:
a. [Original text] Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended.
b. [Delete text]
c. Basis for Qualified Opinion
The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.
d. Original text, but change title of section to Basis for Disclaimer of Opinion.
e. Original text, but move paragraph to follow opinion paragraph.
CALLOUT LIST #4
Choose an option below:
a. [Original text] and subject to the accounting change described in the Emphasis of Matter paragraph
b. [Delete text]
c. and except for the matter described in the Emphasis of Matter paragraph
d. and because of the significance of the matter described in the Emphasis of Matter paragraph
e. and considering the matter described in the Emphasis of Matter paragraph
CALLOUT LIST #5
Choose an option below:
a. [Original text] As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change.
b. [Delete entire paragraph]
c. Delete only final sentence, “We concur with the change.”
d. Add the following at the end of the paragraph: We provide no assurance related to this change.
e. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.
CALLOUT LIST #6
Choose an option below:
a. [Original text] Adams, Barnes & Co.
b. [Delete text]
c. Keystone Engagement Partner (provide partner’s name)
d. Include names of all primary engagement staff and partner members.
e. Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partner’s name)
CALLOUT LIST #7
Choose an option below:
a. [Original text] February 6, 20X6.
b. [Delete text]
c. January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.
d. December 31, 20X5.
e. January 31, 20X6.
f. February 2, 20X6.
EXHIBITS
1. Working Paper Memo
2. Audit Report Memo
3. E-mail to Senior](../images/this-simulation-available-online-presents-a-draft-of-a-nonpublic-121672-5.jpg)
Transcribed Image Text:
Certified Public Accountant's Report (Callout #1) To Sam Best, President: (Callout #2) We have audited the accompanying financial statements of Keystone Computers & Networks, Inc., which comprise the balance sheet as of December 31, 20X5, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair pre- sentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We con- ducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclo- sures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting poli- cies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3.,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and eamings per share would be increased by $1.12 for the year then ended. (Callout #3) Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph and subject to the accounting change described in the Emphasis of Matter paragraph, (Callout #4) the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Comput- ers & Networks, Inc., as of December 31, 20X5, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change. (Callout #5) Adams, Barnes & Co. (Callout #6) Phoenix, Arizona February 6, 20X6. (Callout #7) EXHIBIT 1 Working Paper Memo Schedule D-2-3 Plant assets Keystone 1/10/X6 Keystone has changed the life of a material portion of its plant assets from 25 years to 28 years assets. The effect of this change is to materially increase net income. I agree that the change is appropriate. Note 4 discusses the change. Depreciation Expense based on 25-year life: See Schedule XXX Depreciation Expense based on 28-year life: See Schedule XXY Keystone Engagement Partner EXHIBIT 2 Audit Report Memo Memo To: Senior From: Keystone Engagement Partner Date: January 29, 20X6 Re: Audit Report I spoke with the Chairman of the Board of Directors, as well as the President and the Controller. The overall Board deals with governance of Keystone as the company has not developed an audit commit- tee; the CEO and Controller fulfill traditional roles within the company. All agreed on the following: They confirmed that they wish to only present financial statements for the year ended 12/31/20X5. I pointed out to them that given our audit findings and circumstances of the engagement, the audit report will include any modifications required by the standards, but no discretionary sections or disclosures. I agree that the change in plant asset life is justifiable and preferable. Note that the company has not capitalized certain leases, a departure from GAAP. The President and Controller believe that capitalizing the leases would lead to misleading financial statements. I pointed out to them my disagreement, and my belief that not capitalizing the leases materially, but not pervasively, misstates the financial statements. They said they disagree, but that they know that we, as auditors, must "follow the standards." The President and Controller agree that they will sign the representations letter as we have prepared it. EXHIBIT 3 E-mail to Senior To: Senior From: Keystone Engagement Partner Date: February 4, 20X6 Re: Revision of Keystone financial statements (i.e., Note 9), I have spoken with the Chairman of the Board of Directors, as well as the President and Controller con- cerning note 7 to the financial statements describing the fire in the warehouse on February 2, 20X6. January 31 was the date on which we had obtained sufficient appropriate audit evidence with respect to the overall financial statements. But, as indicated, the fire occurred on February 2 and resulted in inclusion of an additional note disclosure that includes the date and other details related to the fire. We will follow an approach of limiting our subsequent event procedures solely to the financial state- ment revisions related to the fire rather than extending all subsequent event procedures and assuming responsibility for all subsequent events. Assuming we complete necessary audit procedures in time, we should plan on issuing our audit report on February 6.
> You have been with Zaird & Associates for approximately three months and are completing your work on the BizCaz audit. BizCaz produces pullover knit shirts to address the business casual market for both men and women. Although your experience has been li
> Hovington, CPA, knows that while audit objectives relating to inventories may be stated in terms of the assertions as presented in this chapter, they also may be subdivided and stated more specifically. He has chosen to do so and has prepared the second
> Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the working papers that were prepared to support the firm’s opinion on Blue’s fi
> 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
> Your firm audits Metropolitan Power Supply (MPS). The issue under consideration is the treatment in the company’s financial statements of $700 million in capitalized construction costs relating to Eagle Mountain, a partially completed nuclear power plant
> Many companies employ outside service companies that specialize in counting, pricing, extending, and footing inventories. These service companies usually furnish a certificate attesting to the value of the physical inventory. Required: Assuming that the
> For each of the following brief scenarios, assume that you are reporting on a client’s current-year financial statements. Reply as to the type or types of opinion possible in the circumstance. S Unmodified—standard U Unmodified with emphasis-of-matter or
> You are a young CPA just starting your own practice in Hollywood, California, after five years’ experience with a “Big 4” firm. You have several connections in the entertainment industry and hope to develop a practice rendering income tax, auditing, and
> The auditors’ working paper that relates control strengths and weaknesses to the assertions about purchases and accounts payable is presented in Appendix 14A. This working paper also presents the auditors’ planned assessed level of control risk for each
> As indicated on the control risk assessment working paper in Appendix 14A, the auditors identified two weaknesses in internal control over the acquisition cycle of KCN. Describe the implications of each of the two weaknesses in terms of the type of error
> A summary of the controls for the acquisition cycle of Keystone Computers & Networks, Inc., appears in Appendix 14A. Required: a. For the following three controls over the acquisition cycle, indicate one type of error or fraud that the control serve
> Chem-Lite, Inc., maintains its accounts on the basis of a fiscal year ending March 31. At March 31, 20X1, the Equipment account in the general ledger appeared as shown below. The company uses straight-line depreciation, a 10-year life, and 10 percent sal
> Robert Myers, CPA, has been engaged to audit the City of Mystic in accordance with the Single Audit Act. Robert is aware that the Single Audit Act requires additional tests of major federal financial assistance programs, and he is trying to identify thos
> You are reviewing the property, plant, and equipment working papers of Mandville Corporation, a company that publishes travel guides. The lead schedule for the account is included in the chapter as Figure 13.1. The following are among the findings relati
> For each of the following brief scenarios, assume that you are the CPA reporting on the financial statements of a nonpublic company. Using the form included with this problem, describe the reporting circumstance involved, the type or types of opinion pos
> Assume that you are a CPA interested in expanding your services to provide System and Organization Controls Control (SOC) reports. Access the AICPA store website (aicpastore. com) and find guidance that will help you achieve your goal. Skim through the a
> Webstar, a nonpublic company, is owned by Ben Williams and three of his friends. Previously, the company’s financing has been internally generated, with limited equity contributions by the owners. The company has not been audited in the past, and William
> You have just been assigned as a member of the audit team of Bozarkana Company (a new client) and are considering accounts payable. Bozarkana Company uses a computerized voucher system for payables. As a starting point, you asked Bill Bozarkana, the cont
> Nancy Howe, your staff assistant on the April 30, 20X2, audit of Wilcox Company, was transferred to another audit engagement before she could complete the audit of unrecorded accounts payable. Her working paper, which you have reviewed and are satisfied
> Taylor, CPA, is engaged in the audit of Rex Wholesaling for the year ended December 31. Taylor obtained an understanding of internal control relating to the purchasing, receiving, trade accounts payable, and cash disbursement cycles and has decided not t
> You are engaged in the audit of the financial statements of Holman Corporation for the year ended December 31, 20X6. The accompanying analyses of the Property, Plant, and Equipment and related accumulated depreciation accounts have been prepared by the c
> Assume that you are auditing the financial statements of Agee Corporation. During the course of the audit, you discover the following circumstances. 1. Management of Agee has decided to discontinue the production of consumer electronics, which represents
> You are an audit manager of the rapidly growing CPA firm of Raye and Coye. You have been placed in charge of three new audit clients, which have the following inventory features: 1. Canyon Cattle Co., which maintains 15,000 head of cattle on a 1,000-squa
> You are involved in your CPA firm’s first audit of Zorostria, a retailer of artwork, primarily paintings and photographs purchased from artists in Southeast Asia (particularly Vietnam, Cambodia, and Laos). Zorostria has stores in seven cities throughout
> The following are typical questions that might appear on an internal control questionnaire for inventory: 1. Are written procedures prepared by the client for the taking of the physical inventory? 2. Do the client’s inventory-taking procedures include a
> 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
> Katherine Whipple of Food Queen Grocery, In., has asked you and your team to meet with her concerning a possible attest engagement relating to the assertion that Food Queen has the lowest overall prices of all grocery stores in the Salt Lake City area. F
> Williams 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 sp
> Described below are potential financial statement misstatements that are encountered by auditors. a. Inventory is understated because warehouse personnel overlooked several racks of parts in taking the physical inventory. b. Inventory is overstated becau
> Under the Single Audit Act, auditors must test for compliance with the specific requirements of all major programs. State whether each of the following is required under that act: Is it Statement required? a. Determine that the organization complles
> Select the best answer for each of the following questions. Explain the reasons for your selection. a. Internal auditing can best be described as: (1) An accounting function. (2) A compliance function. (3) An activity primarily to detect fraud. (4) A con
> Match the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all. Definition (or Partlal Definition) Term a. A service developed by the AICPA and CICA to provide assurance 1. CBIZ 2. Financl
> For each of the situations (a) through (e), select the CPA engagement that is most likely to be appropriate from the list of services below: 1. Compliance 2. Continuous auditing 3. Forecast 4. Internal control over financial reporting 5. MD&A 6. Prim
> Indicate whether a CPA may provide each of the following services, and whether independence is required, by placing a check in the appropriate box. May Provide; Independence Independence May Not Is Required May Provide; Service Is Not Required Prov
> Following are descriptions of potential needs of clients for various services. For each need, identify the type of service that would best meet the client’s need using the following: ∙ Attestation of prospective financ
> Select the best answer for each of the following and explain fully the reason for your selection. a. A report on an attestation engagement should: (1) State the nature of the client’s control system. (2) State the practitionerâ
> Auditors who audit public and nonpublic companies must be familiar with professional standards developed by a variety of sources. For each of the types of services, indicate the proper source of professional requirements. Each source may be used once, mo
> The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment: 1. Has a dollar minimum been established for expenditures to be capitalized? 2. Are subsidiary ledgers for plant and equipment reg
> Indicate whether a CPA may provide each of the following services, and whether independence is required, by placing a check in the appropriate box. May Provide; Independence Independence Is Required May Provide; Service Is Not Required May Not Provi
> State whether you agree or disagree with each of the following relating to the topic of special-purpose financial reporting frameworks. a. International Financial Reporting Standards are considered a special-purpose financial reporting framework. b. Cash
> Bill Jones, the president of AMTO, a nonpublic audit client of your firm, has come to you and indicated that his company established a subsidiary in the country of Laos this year and that he wants your firm to issue an audit report on that subsidiary for
> The following statements relate to auditor reporting on financial statements prepared using special-purpose financial reporting frameworks. For each, indicate whether the statement is correct or incorrect. Statement Correct Incorrect 1. A speclal-p
> Select the best answer for each of the following and explain fully the reason for your selection. a. Which of the following is not typically performed when the auditors are performing a review of client financial statements? (1) Analytical procedures app
> Match the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all. Definition (or Partial Definition) Term a. A control deficlency, or a combination of control deficlencles, In Internal contr
> During audits of internal control over financial reporting of various issuers, the auditors encountered the independent situations below. For each situation a through e select from the following list the appropriate audit responses. Each reply may be use
> Bill Jensen, a staff member of Zhan & Co., CPAs, has given you the following list of what he refers to as “internal control deficiencies” for the Zabling Co. audit and has asked you to review each point and make certain that you agree that each is an int
> While performing an internal control audit in conformity with PCAOB AS 2201, the auditors must be able to identify both control strengths and control weaknesses. Items (1) through (11) present various control strengths and deficiencies. For each item, se
> Select the best answer for each of the following questions. Explain the reasons for your selection: a. In an integrated audit, which of the following must the auditors communicate to the audit committee? b. In an integrated audit, which of the followi
> Your client, Summerford, Inc., has a debt agreement with Valley City Bank that includes a number of restrictions and covenants. Violation of any restriction or covenant results in the entire amount of the debt becoming due immediately. For each of the fo
> Johnson & Barkley, CPAs, audited the consolidated financial statements of Jordan Company (a public company) for the year ended December 31, 20X7. Johnson & Barkley previously have audited and issued standard unqualified audit reports on Jordan Company’s
> For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Reply as to the type(s) of opinion (per below) possible for the scenario. In addition: ∙ Unless stated otherw
> Items 1 through 5 present various independent factual situations an auditor might encounter in conducting an audit of a nonpublic company. For each situation, assume: ∙ The auditor is independent. ∙ The auditor previou
> For each of the account balances and associated assertions below, select the audit procedure from the list provided that provides the most appropriate audit evidence for the account assertion. //
> Match the following terms to the appropriate definition (or partial definition). Each definition is used once. Term Definition (or Partial Definition) a. Commitment b. Contingent llablity c. General risk 1. A contractual obligation to carry out a tr
> In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken place after December 31, 20X3, but before she has issued he
> In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: a. January 7, 20X4: The mineral content of a shipment of ore en rou
> The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 (“legal response”). For each excerpt, select the most appropriate
> Select the best answer for each of the following and give reasons for your choice: a. Which of the following is least likely to be considered a substantive procedure relating to payroll? (1) Investigate fluctuations in salaries, wages, and commissions. (
> The auditors’ report that follows was drafted by a staff accountant of Williams & Co., CPAs, at the completion of the audit of the financial statements of Lenz Corporation (nonpublic company) for the year ended December 31, 20X1. As
> Match the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all. Definition (or Partial Definition) Term a. An Institutlon charged with responslblity for avolding 1. Common stock overissuanc
> Select the best answer choice for each of the following, and justify your selection in a brief statement. a. Which of the following is least likely to be an audit objective for debt? (1) Determine the existence of recorded debt. (2) Establish the complet
> This simulation, available online, presents an audit request list document for materials requested of management that has been prepared by an audit team staff member for the Keystone audit. Because this simulation addresses material presented in Chapters
> In applying audit procedures and evaluating the results of those procedures, auditors may encounter specific information that may raise a question concerning the existence of noncompliance with laws and related party transactions. Indicate whether each o
> The auditors of SSC Company, a nonpublic company, are working on both audit objectives for the various accounts and documentation requirements. Parts (a) through (d) of this question relate to objectives, while part (e) addresses documentation. The audit
> The following flowchart depicts the activities relating to the purchasing, receiving, and accounts payable departments of Model Company, Inc. Assume that you are a supervising assistant assigned to the Model Company audit. Joe Werell, a beginning assis
> Select the best answer for each of the following and explain the reason for your selection. a. Which of the following procedures is least likely to be completed before the balance sheet date? (1) Confirmation of receivables. (2) Search for unrecorded lia
> a. Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? (1) Accumulated depreciation. (2) Insurance expense. (3) Property, plant, and equipment. (4) Purchase returns and allowances. b. Which of the f
> Hwang Corporation has engaged in a number of expenditures relating to a land acquisition for a future plant. For each of the following, indicate whether you as the auditor of Hwang Corporation would propose an adjusting entry. Assume all transactions are
> Select the best answer for each of the questions below and explain fully the reason for your selection. a. To assure accountability for fixed-asset retirements, management should implement an internal control that includes: (1) Continuous analysis of mis
> Andy Watson, CPA, is a senior auditor on the audit of Carlson, Inc. Andy is reviewing the results of analytical procedures related to inventory. For results (a), (b), and (c), select the explanation that is most likely to be consistent with the change de
> This simulation, also available online, presents an Analytical Procedures/Risk Assessment Analysis document prepared by two members of your audit team—your responsibility is to evaluate various statements included in that document. Back
> a. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: (1) Valuation. (2) Rights. (3) Existence. (4) Presentation. b. An auditor selects items from the client’s inventory listi
> Auditors often observe the counting of their clients’ inventories. You are working in the area of inventory with a new assistant on the audit of Jilco Inc. The assistant has a number of questions concerning inventory and the observation of inventory. Ple
> The nonpublic company attestation standards provide guidance for three basic types of engagements. Required: a. Describe these three types of engagements. b. Describe the types of procedures performed for each of these three types of engagements. c. Dis
> Other types of assurance services provided by CPAs have developed as a natural extension of the audit function. a. Explain what is meant by the term assurance services. b. Describe the forces that have caused a demand for other types of assurance service
> Andrew Wilson, CPA, has assembled the financial statements of Texas Mirror Co., a small nonpublic company. He has not performed an audit of the financial statements in accordance with generally accepted auditing standards. Wilson is confused about the st
> In connection with a public offering of first-mortgage bonds by Guizzetti Corporation, the bond underwriter has asked Guizzetti’s CPAs to furnish it with a comfort letter giving as much assurance as possible on Guizzetti’s unaudited financial statements
> You have been engaged by the management of Pippin, Inc., a nonpublic company, to review the company’s financial statements for the year ended December 31, 20XX. To prepare for the engagement, you consult the Statements on Standards for Accounting and Rev
> Occasionally, public accounting firms are engaged to report on specified elements, accounts, and items of financial statements. Required: a. Discuss types of reports that may be provided for a nonpublic company for specified elements, accounts, and item
> Schmich and Schmich, CPAs, in Minneapolis, Minnesota, has completed the audit of XYM Co. for the year ended December 31, 20X1. The financial statements for this nonpublic client are prepared following the cash basis of accounting. Note 7 to the financial
> For each of the independent situations described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company’s net income using the following: Inherent Risk Factor Effect o
> You have been asked by Ambassador Hardware Co., a small nonpublic company, to submit a proposal for the audit of the company. After performing an investigation of the company, including its management and accounting system, you advise the president of Am
> The CPA firm of Webster, Warren, & Webb LLP issued an adverse opinion on the internal control of Alexandria Financial, a public company, due to a material weakness. The weakness involved the lack of sufficient accounting expertise to evaluate and adopt a
> Tests of controls are ordinarily performed for both financial statement audits and internal control audits. a. What is the objective of tests of controls when performed for internal control audits? b. What is the objective of tests of controls when perfo
> The CPA firm of Carson & Boggs LLP is performing an internal control audit in accordance with PCAOB AS 2201. The partner in charge of the engagement has asked you to explain the process of determining which controls to test. Describe the process, present
> While performing your audit of Williams Paper Company, you discover evidence that indicates that Williams may not have the ability to continue as a going concern. a. Discuss types of information that may indicate substantial doubt about a client’s abilit
> Lando Corporation is a domestic company with two wholly owned domestic subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of the subsidiaries and to act as the group auditors. Thomas, CPA, has au
> Rowe & Myers audits the financial statements of Dunbar Electronics. During the audit, Ross & Myers engaged Jones & Abbot, a Canadian public accounting firm, as a component auditor to audit Dunbar’s wholly owned Canadian subsidiary. Required: a. Should R
> An accountant of an audit client made the following statement: It is important to read the notes to financial statements, even though they are presented in technical language and are incomprehensible. Auditors may reduce their exposure to third-party lia
> Linda Tanner, CPA, is auditing the Carson Company. For the current year, Carson is presenting December 31, 20X5, financial statements with comparative financial statements for the year ended December 31, 20X4. In the prior year audit, Linda identified an
> On July 27, 20X0, Arthur Ward, CPA, issued an unqualified audit report on the financial statements of Dexter Company for the year ended June 30, 20X0. Two weeks later, Dexter Company mailed annual reports, including the June 30 financial statements and W
> During the year 1 audit of Cellenting Co., the auditor performed various procedures relating to inventory. Match each of the following procedures with the description below: Audit procedures ∙∙ Analytical procedure &ac
> Nolan 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 u
> What documentary evidence is usually available to the auditors in the client’s office to substantiate the legal ownership of property, plant, and equipment?
> The auditors’ verification of plant and equipment is facilitated by several factors not applicable to audit work on current assets. What are these factors?
> Once the auditors have completed their test counts of the physical inventory, will they have any reason to make later reference to the inventory tags used by the client’s employees in the counting process? Explain.
> For what purposes do the auditors make and record test counts of inventory quantities during their observation of the taking of the physical inventory? Discuss.
> What are the purposes of the auditors’ observation of the taking of the physical inventory? (Do not discuss the procedures or techniques involved in making the observation.)
> What part, if any, do the independent auditors play in the planning for a client’s physical inventory?
> The client’s cost accounting system is often an important part of the CPAs’ audit of the financial statements of a manufacturing company. For what purposes do the auditors consider the cost accounting system?
