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 accounting services to celebrities and other wealthy clients. One of your first engagements is arranged by John Forbes, a long-established business manager for a number of celebrities and a personal friend of yours. You are engaged to audit the personal statement of financial condition (balance sheet) of Dallas McBain, one of Forbes’s clients. McBain is a popular rock star, with a net worth of approximately $100 million. However, the star also has a reputation as an extreme recluse who is never seen in public except at performances. Forbes handles all of McBain’s business affairs, and all your communications with McBain are through Forbes. You have never met McBain personally and have no means of contacting the star directly. All of McBain’s business records are maintained at Forbes’s office. Forbes also issues checks for many of McBain’s personal expenses, using a check-signing machine and a facsimile plate of McBain’s signature. During the audit, you notice that during the year numerous checks totaling approximately $500,000 have been issued payable to Cash. In addition, the proceeds of a $250,000 sale of marketable securities were never deposited in any of McBain’s bank accounts. In the accounting records, all of these amounts have been charged to the account entitled “Personal Living Expenses.” There is no further documentation of these disbursements. When you bring these items to Forbes’s attention, he explains that celebrities such as McBain often spend a lot of cash supporting various “hangers-on,” whom they don’t want identified by name. He also states, “Off the record, some of these people also have some very expensive habits.” He points out, however, that you are auditing only the statement of assets and liabilities, not McBain’s revenue or expenses. Furthermore, the amount of these transactions is not material in relation to McBain’s net worth. Required: a. Discuss whether the undocumented disbursements and the missing securities’ proceeds should be of concern to you in a balance sheet–only audit. b. Identify the various courses of action that you might at least consider under these circumstances. Explain briefly the arguments supporting each course of action. c. Explain what you would do and justify your decision. d. Assume that you are a long-established CPA, independently wealthy, and that the McBain account represents less than 5 percent of the annual revenue of your practice. Would this change in circumstances affect your conclusion in part (c)? Discuss.
> CPAs may become involved in examinations of broker-dealers. a. Describe the information a broker-dealer who maintains custody of customer funds or securities is required to file in an annual compliance report. b. Which of the required information in part
> You are conducting the first audit of the marketing activities of your organization. Your preliminary survey has disclosed indications of deficient conditions of a serious nature. You expect your audit work to document the need for substantial corrective
> Throughout this book, emphasis has been placed on the concept of independence as the most significant single element underlying the development of the public accounting profession. The term “independent auditor” is sometimes used to distinguish the publi
> 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 possible for the scenario. In addition: ∙ Unless stated otherwise, assume
> Steve Ankenbrandt, president of Beeb Corp., has been discussing the company’s internal operations with the presidents of several other multidivision companies. Ankenbrandt discovered that most of them have an internal audit staff. The activities of the s
> In order to function effectively, the internal auditor must often educate auditees and other parties bout the nature and purpose of internal auditing. Required: a. Define internal auditing. b. Briefly describe three possible benefits of an internal audi
> The third general attestation standard indicates that the subject matter of the engagement must be capable of reasonably consistent evaluation against criteria that are suitable and available to the user. Required: a. Explain why criteria are needed for
> The accounting profession has developed Trust Services to help entities differentiate themselves by demonstrating that they are attuned to the risks posed by their environment and that they are equipped with controls that address those risks. Present the
> The management of Williams Co. is considering issuing corporate debentures. To enhance the marketability of the bond issue, management has decided to include a financial forecast in the prospectus. Management has requested that your CPA firm examine the
> Match the following terms with the appropriate definition (or partial definition). Each definition may be used once or not at all. Term Definition (or Partial Definition) a. Compllance auditing b. Complance Supplement c. Government Auditing 1. A do
> In performing an audit in accordance with both generally accepted auditing standards and Generally Accepted Government Auditing Standards, the auditors are required to communicate information about weaknesses in the organization’s internal control. Howev
> In performing an audit in accordance with Generally Accepted Government Auditing Standards, the auditors are required to issue an additional combined report on compliance with laws and regulations and on internal control. Required: a. Describe the natur
> Devry Corporation has established an independent foundation for the purposes of community improvement. The foundation employs an executive director and eight staff people. The internal auditors of the company were requested to do an audit of the foundati
> You are the chief audit executive for the internal auditing function of a large municipal hospital. You receive monthly financial reports prepared by the accounting department, and your review of them has shown that total accounts receivable from patient
> a. A material departure from generally accepted accounting principles will result in auditor consideration of: (1) Whether to issue an adverse opinion rather than a disclaimer of opinion. (2) Whether to issue a disclaimer of opinion rather than a qualifi
> Assume that you are a partner with the firm of Slater & Lowe LLP. You have been asked by Grayson, Inc., an industrial supply company, to provide assurance about the change in existing customer satisfaction over the last three years. Grayson’s management
> SysTrust and WebTrust are Trust Services developed by the AICPA and the CICA. Required: a. Present and describe the Trust Services principles. b. Present and describe the “criteria” related to Trust Services. c. What is the relationship between the prin
> Loman, CPA, who has audited the financial statements of the Broadwall Corporation, a publicly held company, for the year ended December 31, 20X6, was asked to perform a review of the financial statements of Broadwall Corporation for the period ending Mar
> Jiffy Clerical Services is a company that furnishes temporary office help to its customers. The company maintains its accounting records on a basis of cash receipts and cash disbursements. You have audited the company for the year ended December 31, 20X4
> Your working papers for an integrated audit being performed under PCAOB AS 2201 include the narrative description below of the cash receipts and billing portions of internal control of Slingsdale Building Supplies, Inc. Slingsdale is a single-store retai
> Assume that during the audit of the public Chandler Corporation the following critical audit matter was identified and summarized for purposes of inclusion in the audit report. Critique presentation and details of the matter. Critical Audit Matter
> Roscoe & Jones, Ltd., a CPA firm in Silver Bell, Arizona, has completed the audit of the financial statements of Excelsior Corporation as of, and for, the year ended December 31, 20X1. Findings related to the financial statements and the audit include ∙
> Sturdy Corporation (a nonpublic company) owns and operates a large office building in a desirable section of New York City’s financial center. For many years, management of Sturdy Corporation has modified the presentation of its financial statement by 1.
> The auditors’ report that follows was drafted by a staff accountant of Smith & Co., CPAs, at the completion of the audit of the financial statements of Lenses Co. (a public company) for the year ended December 31, 20X7. Required:
> Robertson Company had accounts receivable of $200,000 at December 31, 20X0, and had provided an allowance for uncollectible accounts of $6,000. After performing all normal auditing procedures relating to the receivables and to the valuation allowance, th
> During your observation of the November 30, 20X0, physical inventory of Jay Company, you note the following unusual items: a. Electric motors in finished goods storeroom not tagged. Upon inquiry, you are informed that the motors are on consignment to Jay
> Rowe Manufacturing Company has about 50 production employees and uses the following payroll procedures. The factory supervisor interviews applicants and on the basis of the interview either hires or rejects the applicants. After being employed, the appli
> In connection with an audit of the financial statements of Olympia Company, the auditors are reviewing procedures for accumulating direct labor-hours. They learn that all production is by job order and that all employees are paid hourly wages, with time
> The following are typical questions that might appear on an internal control questionnaire for payroll activities: 1. Is there adequate separation of duties between employees who maintain human resources records and employees who approve payroll disburse
> Your client is a company that owns a shopping center with 30 store tenants. All leases with the store tenants provide for a fixed rent plus a percentage of sales, net of sales taxes, in excess of a fixed dollar amount computed on an annual basis. Each le
> Rita King, your staff assistant on the April 30, 20X2, audit of Maxwell Company, was transferred to another assignment before she could prepare a proposed adjusting journal entry for Maxwell’s Miscellaneous Revenue account, which she ha
> You are engaged in the audit of Phoenix Corp., a new client, at the close of its first fiscal year, April 30, 20X1. The accounts had been closed before the time you began your year-end fieldwork. You review the following stockholders’ e
> You have received confirmations from the transfer agent and the registrar of Lowe Company as to the number of authorized and outstanding shares as of December 31, 20X1, Lowe’s year-end. a. Which financial statement assertions do these confirmations most
> Robert Hopkins was the senior office employee at the Griffin Equipment Company. He enjoyed the complete confidence of the owner, William Barton, who devoted most of his attention to sales, engineering, and production problems. All financial and accountin
> Your client, Software and Stuff (Software), has developed a new electronic game. One part of the game uses software developed by another company, Component of Yuma (Component). Software signed an agreement with Component that provides that Software will
> Marshall and Wyatt, CPAs, has been the independent auditor of Interstate Land Development Corporation for several years. During these years, Interstate prepared and filed its own annual income tax returns. During 20X4, Interstate requested Marshall and W
> The observation of a client’s physical inventory is a mandatory auditing procedure when possible for the auditors to carry out and when inventories are material. Required: a. Why is the observation of physical inventory a mandatory auditing procedure? E
> The audit staff of Adams, Barnes & Co. (ABC), CPAs, reported the following audit findings in their 20X5 audit of Keystone Computers & Networks (KCN), Inc.: 1. Unrecorded liabilities in the amount of $6,440 for purchases of inventory. These inventory item
> As part of your first audit of the financial statements of Marina del Rey, Inc., you have decided to confirm some of the accounts payable. You are now in the process of selecting the individual companies to whom you will send accounts payable confirmatio
> The following are typical questions that might appear on an internal control questionnaire for accounts payable. 1. Are monthly statements from vendors reconciled with the accounts payable listing? 2. Are vendors’ invoices matched with receiving reports
> You are the senior accountant in the audit of Granger Grain Corporation, whose business primarily involves the purchase, storage, and sale of grain products. The corporation owns several elevators located along navigable water routes and transports its g
> Western Trading Company is a sole proprietorship engaged in the grain brokerage business. On December 31, 20X0, the entire grain inventory of the company was stored in outside bonded warehouses. The company’s procedure of pricing inventories in these war
> 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
> 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
> 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, ass
> 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. (
