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Question: What is the purpose of an engagement


What is the purpose of an engagement letter? What subjects should be covered in such a letter?


> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix. You should read all of the reference material preceding instruc

> Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend James Foley asks him, "Doesn't it bother you that your clients don't look forward to seei

> Winston Black was an audit partner in the firm of Henson, Davis & Company. He was in the process of reviewing the audit files for the audit of a new client, McMullan Resources. McMullan was in the business of heavy construction. Black was conducting his

> The Internet has dramatically increased global e-commerce activities. Both traditional "brick and mortar" businesses and new dot-com businesses use the Internet to meet business objectives. For example, eBay successfully offers online auctions as well as

> Following are the auditor's calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client's business and assess the risk of financial failure, but any other relevant conclusions are als

> As part of the analytical procedures of Mahogany Products, Inc., you perform calculations of the following ratios: For each of the preceding ratios: Required a. State whether there is a need to investigate the results further and, if so, the reason for

> An auditor often tries to acquire background knowledge of the client's industry as an aid to audit work. How does the acquisition of this knowledge aid the auditor in distinguishing between obsolete and current inventory?

> In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis. No material exceptions were discovered except for the following: 1. Commission expense as a percent of sales has stayed constant for several years but has increa

> Your comparison of the gross margin percent for Jones Drugs for the years 2008 through 2011 indicates a significant decline. This is shown by the following information: A discussion with Marilyn Adams, the controller, brings to light two possible explana

> Analytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a

> The minutes of the board of directors of the Tetonic Metals Company for the year ended December 31, 2011, were provided to you. Meeting of March 5, 2011 The meeting of the board of directors of Tetonic Metals was called to order by the James Cook, chairm

> In your audit of Canyon Outdoor Provision Company's financial statements, the following transactions came to your attention: 1. Canyon Outdoor's operating lease for its main store is with York Properties, which is a real estate investment firm owned by T

> In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following: 1. Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or

> The following are various activities an auditor does during audit planning. 1. Send an engagement letter to the client. 2. Tour the client's plant and offices. 3. Compare key ratios for the company to industry competitors. 4. Review management's risk man

> The following questions concern the use of analytical procedures during an audit. Select the best response. a. Analytical procedures used in planning an audit should focus on identifying (1) Material weaknesses in internal control. (2) The predictabilit

> The following questions concern the planning of the engagement. Select the best response. a. Which of the following is an effective audit planning procedure that helps prevent misunderstandings and inefficient use of audit personnel? (1) Arrange to make

> When a CPA has accepted an engagement from a new client who is a manufacturer, it is customary for the CPA to tour the client's plant facilities. Discuss the ways in which the CPA's observations made during the course of the plant tour will be of help in

> Name the four categories of financial ratios and give an example of a ratio in each category. What is the primary information provided by each financial ratio category?

> At the completion of every audit, Roger Morris, CPA, calculates a large number of ratios and trends for comparison with industry averages and prior-year calculations. He believes the calculations are worth the relatively small cost of doing them because

> Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios included in publications by Standard and Poor's and compared them with industry standards. Fo

> When are analytical procedures required on an audit? What is the primary purpose of analytical procedures during the completion phase of the audit?

> What are the purposes of preliminary analytical procedures? What types of comparisons are useful when performing preliminary analytical procedures?

> Describe top management controls and their relation to client business risk. Give examples of effective management and governance controls.

> Define client business risk and describe several sources of client business risk. What is the auditor's primary concern when evaluating client business risk?

> Five college seniors with majors in accounting are discussing alternative career plans. The first senior plans to become an internal revenue agent because his primary interest is income taxes. He believes the background in tax auditing will provide him w

> A common type of lawsuit against CPAs is for the failure to detect a fraud. State the auditor's responsibility for such discovery. Give authoritative support for your answer.

> Discuss why many CPA firms have willingly settled lawsuits out of court. What are the implications to the profession?

> Distinguish between "fraud" and "constructive fraud."

> How does the prudent person concept affect the liability of the auditor?

> Distinguish between business failure and audit risk. Why is business failure a concern to auditors?

> Lawsuits against CPA firms continue to increase. State your opinion of the positive and negative effects of the increased litigation on CPAs and on society as a whole.

> The SEC Enforcement Division investigates possible violations of securities laws, recommends SEC action when appropriate, either in a federal court or before an administrative law judge, and negotiates settlements. Litigation Releases, which are descript

> Frank Dorrance, a senior audit manager for Bright and Lorren, CPAs, has recently been informed that the firm plans to promote him to partner within the next year or two if he continues to perform at the same high-quality level as in the past. Frank excel

> In 2006, Arnold Diaz was a bright, upcoming audit manager in the South Florida office of a national public accounting firm. He was an excellent technician and a good "people person." Arnold also was able to bring new business into the firm as the result

> Barbara Whitley had great expectations about her future as she sat in her graduation ceremony in May 2010. She was about to receive her Master of Accountancy degree, and next week she would begin her career on the audit staff of Green, Thresher & Co., CP

> Discuss the major factors in today's society that have made the need for independent audits much greater than it was 50 years ago.

> List five examples of specific operational audits that can be conducted by an internal auditor in a manufacturing company.

> The following are situations that may violate the Code of Professional Conduct. Assume, in each case, that the CPA is a partner. 1. Contel, CPA, advertises in the local paper that his firm does the audit of 14 of the 36 largest community banks in the sta

> Ann Archer serves on the audit committee of JKB Communications, Inc., a telecommunications start-up company. The company is currently a private company. One of the audit committee's responsibilities is to evaluate the external auditor's independence in p

> Marie Janes encounters the following situations in doing the audit of a large auto dealership. Janes is not a partner. 1. The sales manager tells her that there is a sale (at a substantial discount) on new cars that is limited to long-established custome

> The national stock exchanges require listed companies to have an independent audit committee. Required a. Describe an audit committee. b. What are the typical functions performed by an audit committee? c. Explain how an audit committee can help an audit

> Each of the following situations involves possible violations of the AICPA's Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and

> Each of the following situations involves a possible violation of the AICPA's Code of Professional Conduct. For each situation, state the applicable section of the rules of conduct and whether it is a violation. a. Emrich, CPA, provides tax services, man

> The following situations involve the provision of nonaudit services. Indicate whether providing the service is a violation of AICPA rules or SEC rules including Sarbanes-Oxley requirements on independence. Explain your answer as necessary. a. Providing b

> State the allowable forms of organization a CPA firm may assume.

> What is the purpose of the AICPA's Code of Professional Conduct restriction on commissions as stated in Rule 503?

> What is the purpose of the client's performance measurement system? How might that system be useful to the auditor? Give examples of key performance indicators for the following businesses: (1) A chain of retail clothing stores; (2) An Internet portal;

> Explain why auditors need an understanding of the client's industry. What information sources are commonly used by auditors to learn about the client's industry?

> What factors should an auditor consider prior to accepting an engagement? Explain.

> What are the responsibilities of the successor and predecessor auditors when a company is changing auditors?

> Identify the eight major steps in planning audits.

> Planning is one of the most demanding and important aspects of an audit. A carefully planned audit increases auditor efficiency and provides greater assurance that the audit team addresses the critical issues. Auditors prepare audit planning documents th

> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material pr

> The long-term debt schedule on page 207 (indexed K-1) was prepared by client personnel and audited by AA, an audit assistant, during the calendar year 2011 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing

> Grande Stores is a large discount catalog department store chain. The company has recently expanded from 6 to 43 stores by borrowing from several large financial institutions and from a public offering of common stock. A recent investigation has disclose

> You are the in-charge on the audit of Vandervoort Company and are to review the audit schedule shown above. Required a. List the deficiencies in the audit schedule. b. For each deficiency, state how the audit schedule could be improved. c. Prepare an imp

> Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and

> Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the repo

> Following are 10 audit procedures with words missing and a list of several terms commonly used in audit procedures. Audit Procedures 1. _____ the unit selling price times quantity on the duplicate sales invoice and compare the total to the amount on the

> The following are nine situations, each containing two means of accumulating evidence: 1. Confirm receivables with consumers versus confirming accounts receivable with business organizations. 2. Physically examine 3-inch steel plates versus examining ele

> The following audit procedures were performed in the audit of inventory to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the cli

> The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included. Audit Procedures 1. Trace from re

> As auditor of the Star Manufacturing Company, you have obtained a. A trial balance taken from the books of Star one month before year-end: Dr. (Cr.) Cash in bank â€&brv

> Eight different types of evidence were discussed. The following questions concern the reliability of that evidence: Required a. Explain why confirmations are normally more reliable evidence than inquiries of the client. b. Describe a situation in which

> List two examples of audit evidence the auditor can use in support of each of the following: a. Recorded amount of entries in the acquisitions journal b. Physical existence of inventory c. Accuracy of accounts receivable d. Ownership of fixed assets e. L

> The following are examples of audit procedures: 1. Review the accounts receivable with the credit manager to evaluate their collectibility. 2. Compare a duplicate sales invoice with the sales journal for customer name and amount. 3. Add the sales journal

> The following are examples of documentation typically obtained by auditors: 1. Vendors' invoices 2. General ledger files 3. Bank statements 4. Cancelled payroll checks 5. Payroll time records 6. Purchase requisitions 7. Receiving reports (documents prepa

> The following questions concern audit documentation. Choose the best response. a. Which of the following is not a primary purpose of audit documentation? (1) To coordinate the audit. (2) To assist in preparation of the audit report. (3) To support the f

> Busch Corporation has an existing loan in the amount of $4.5 million with an annual interest rate of 5.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to rep

> The following questions concern persuasiveness of evidence. Choose the best response. a. Which of the following types of documentary evidence should the auditor consider to be the most reliable? (1) A sales invoice issued by the client and supported by

> Explain the purposes and benefits of audit documentation software.

> How does the auditor read and evaluate information that is available only in machine-readable form?

> Who owns the audit files? Under what circumstances can they be used by other people?

> Why is it essential that the auditor not leave questions or exceptions in the audit documentation without an adequate explanation?

> Distinguish between the following types of current period supporting schedules and state the purpose of each: analysis, trial balance, and tests of reasonableness.

> Define what is meant by a permanent file, and list several types of information typically included. Why does the auditor not include the contents of the permanent file with the current year's audit file?

> Explain why it is important for audit documentation to include each of the following: identification of the name of the client, period covered, description of the contents, initials of the preparer, date of the preparation, and an index code.

> List the purposes of audit documentation and explain why each purpose is important.

> Distinguish between attention-directing analytical procedures and those intended to eliminate or reduce detailed substantive procedures.

> What major characteristics of the organization and conduct of CPA firms permit them to fulfill their social function competently and independently?

> Your client, Harper Company, has a contractual commitment as a part of a bond indenture to maintain a current ratio of 2.0. If the ratio falls below that level on the balance sheet date, the entire bond becomes payable immediately. In the current year, t

> Identify the most important reasons for performing analytical procedures.

> Explain the importance of analytical procedures as evidence in determining the fair presentation of the financial statements.

> Distinguish between internal documentation and external documentation as audit evidence and give three examples of each.

> What are the characteristics of a confirmation? Distinguish between a confirmation and external documentation.

> List the eight types of audit evidence included in this chapter and give two examples of each.

> Identify the six characteristics that determine the reliability of evidence. For each characteristic, provide one example of a type of evidence that is likely to be reliable.

> Identify the two factors that determine the persuasiveness of evidence. How are these two factors related to audit procedures, sample size, items to select, and timing?

> Explain why the auditor can be persuaded only with a reasonable level of assurance, rather than convinced, that the financial statements are correct.

> Describe what is meant by an audit program for accounts receivable. What four things should be included in an audit program?

> What are the two AICPA resource centers to which CPA firms may belong? What are the primary purposes of the two centers?

> Discuss the similarities and differences between evidence in a legal case and evidence in an audit of financial statements.

> The use of audit software has increased dramatically in recent years. Software is now used to fulfill administrative functions in the audit environment, document audit work, and conduct data analysis. This problem requires students to visit the ACL web s

> Rene Ritter opened a small grocery and related-products convenience store in 1989 with money she had saved working as an A&P store manager. She named it Ritter Dairy and Fruits. Because of the excellent location and her fine management skills, Ritter Dai

> Following are seven audit activities. a. Examine invoices supporting recorded fixed asset additions. b. Review industry databases to assess the risk of material misstatement in the financial statements. c. Summarize misstatements identified during testin

> The following (1 through 18) are the balance-related, transaction-related, and presentation and disclosure related audit objectives. Balance-Related Audit Objectives 1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Cutoff 6. Detail t

> The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to is the list of accounts payable taken from the accounts payable master file. The total of the list equals the accounts payable balance

> The following are specific presentation and disclosure-related audit objectives applied to presentation and disclosure for fixed assets (a through d) and management assertions (1 through 4). Specific Presentation and Disclosure-Related Audit Objective a.

> The following are specific balance-related audit objectives applied to the audit of accounts receivable (a through h) and management assertions about account balances (1 through 4). The list referred to in the specific balance-related audit objectives is

> The following are various management assertions (a through m) related to sales and accounts receivable. Management Assertion a. All sales transactions have been recorded. b. Receivables are appropriately classified as to trade and other receivables in th

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