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ACC 410 Entire Course Internal vs. External Audit Staffs. Spacecraft, Inc., is a large corporation that is audited regularly by a public accounting firm but also maintains an internal auditing staff. Explain briefly how the relationship of the public accounting firm to Spacecraft differs from the relationship of the internal auditing staff to Spacecraft. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings Audit Reports. Evaluate the following question: “If a CPA firm completes a nonpublic company audit of Adam Company’s financial statements following IACPA generally accepted auditing standards and is satisfied with the results of an audit, an unmodified report may be issued. On the other hand, if no audit is performed of the current year’s financial statements, but the CPA firm has performed satisfactory audits in prior years, has confidence in the management of the company, and makes a quick review of the current year’s financial statements, a qualified report may be issued.” Do you agree? Give reasons to support your answer. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Generally Accepted Auditing Standards. Complete problem below and submit to your instructor. Write under the generally accepted auditing standards column the specific standard that was violated and how the action of Jones resulted in a failure to comply with each standard. Organize your answer as shown below; specifically with a column for the standard that was violated and a column for the required action. The paper should be 2-3 pages. Problem: John Clinton, owner of Clinton Company, applied for a bank loan and was informed by the banker that audited financial statements of the business had to be submitted before the bank could consider the loan application. Clinton then retained Arthur Jones, CPA, to perform an audit. Clinton informed Jones that audited financial statements were required by the bank and that the audit must be completed within three weeks. Clinton also promised to pay Jones a fixed fee plus a bonus if the bank approved the loan. Jones agreed and accepted the engagement. The first step taken by Jones was to hire two accounting students to conduct the audit. He spent several hours telling them exactly what to do. Jones told the students not to spend time reviewing controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Clinton Company’s financial statements. The students followed Jone’s instructions and after two weeks gave Jones the financial statements, which did not include any notes. Jones reviewed the statements and
prepared an unqualified audit report. The report, however, did not refer to generally accepted accounting principles. Required: List on the left side of a sheet of paper the generally accepted auditing standards that were violated by Jones, and indicate how the actions of Jones resulted in a failure to comply with each standard. Organize your answers as follows: Generally Accepted Auditing Standards Actions by Jones Resulting in Failure to Comply with Generally Accepted Auditing Standards General Standards (1) The auditor must have adequate technical training and proficiency to perform the audit. (1) Balance Sheet Verification. “The best means of verification of cash, inventory, office equipment, and nearly all other assets is a physical count of the units; only a physical count gives the auditors complete assurance as to the accuracy of the amounts listed on the balance sheet.” Evaluate this statement. Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings Accounting Principles. Discuss what is meant by the phrase “shopping for accounting principles.” What mechanisms have served to prevent this practice by management? Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Analytical Procedures. In a 2-3 page paper, complete the case below and submit to instructor. Review the income statement for Uden Supply Company and answer the following: a. Describe the purpose of analytical procedures performed in the planning stage of the audit. b. Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis of Uden’s operating performance in years 2001 – 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years. c. Uden’s unaudited financial statements for the current year show a 31 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. d. Indicate whether you believe that the difference calculated in part (c) is material. Explain your answer. (50-100 words). Comparative income statement information for Uden Supply Company is presented in the accompanying table. UDEN SUPPLY COMPANY Comparative Income Statement Years Ended December 20X1, 20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 8,700
9,400 10,100 Cost of goods sold 6,000 6,500 7,000 Gross profit 2,700 2,900 3,100 Sales Commissions 610 660 710 Advertising 175 190 202 Salaries 1,061 1,082 1,103 Payroll taxes 184 192 199 Employee benefits 167 174 181 Rent 60 61 62 Depreciation 60 63 66 Supplies 26 28 30
Utilities 21 22 23 Legal and accounting 34 37 40 Miscellaneous 12 13 14 Interest expense 210 228 240 Net income before taxes 80 150 230 Incomes taxes 18 33 50 Net income 62 117 180 Audit Programs. “All experienced auditors would design exactly the same audit program for a particular audit engagement.” Do you agree? Explain. Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Internal Control Procedures. Describe what is meant by a “walk-through.” Must walk-throughs be performed during audits of internal control over financial reporting? May the client perform a walk-through and the auditors then review the client’s work? Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Internal Control Case. Complete Case 18-37 (p. 724-725) and submit to instructor. 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. Legal Case. Compare the rights of plaintiffs under common law with the rights of persons who purchase securities registered under the Securities Act of 1933 and sustain losses. In your
answer, emphasize the issue of who must bear the burden of proof. Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Ethics Case. Harris Fell, CPA and member of the AICPA, was engaged to audit the financial statements of Wilson Corporation. Fell had half-completed the audit when he had a dispute with the management of Wilson Corporation and was discharged. Hal Compton, CPA, was promptly engaged to replace Fell. Wilson Corporation did not compensate Fell for his work to date; therefore, Fell refused to allow Wilson Corporation’s management to examine his working papers. Some of the working papers consisted of adjusting journal entries and supporting analysis. Wilson Corporation’s management had no other source for this information. Did Fell violate the AICPA Code of Professional Conduct? Explain fully. Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Program Comprehensive Exam. Complete the comprehensive exam, which will take approximately one to two hours and will be graded based on your score. The full instructions for the exam are posted in the classroom. Audit Reporting. Wade Corporation has been your audit client for several years. At the beginning of the current year, the company changed its method of inventory valuation from average cost to last in, first out (LIFO). The change, which had been under consideration for some time, was in your opinion a logical and proper step for the company to take. What effect, if any, will this situation have on your audit report for the current year? Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Audit Reports. The auditors do not believe that certain lease obligations have been reflected in conformity with generally accepted accounting principles in the client’s financial statements. What type of opinion should the auditors issue if they decide that the exceptions are immaterial? Material? Very material? Remember to complete all parts of the problems. Do not forget to show the necessary steps and explain how you attained that outcome. Respond to at least two of your classmates’ postings. Audit Report Modifications. Complete problem below. List a represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications [if any] that would be necessary. Select as the best answer for each situation [items 1 to 6] the type of opinion and modifications, if any, the auditor would normally select. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. The paper should be 2-3 pages. Problem: Items 1 through 6 present various independent factual situations an auditor might encounter in conducting an audit. For each situation assume: Assume: The auditor is independent. The auditor previously expressed an unqualified opinion on the prior year’s financial statements. Only single-year (not comparative) statements are presented for the current year. The conditions for an unqualified opinion exist unless contradicted in the factual situations.
The conditions stated in the factual situations are material. · No report modifications are to be made except in response to the factual situation. Situations: 1. In auditing the long-term investments account, an auditor is unable to obtain audited financial statements for an investee located in a foreign country. The auditor concludes that sufficient appropriate audit evidence regarding this investment cannot be obtained. 2. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. However, the financial statement disclosures concerning these matters are adequate. 3. A principal auditor decides to take responsibility for the work of another CPA who audited a wholly owned subsidiary of the entity and issued an unqualified opinion. The total assets and revenues of the subsidiary represent 17 percent and 18 percent, respectively, for the total assets and revenues of the entity being audited. 4. An entity issues financial statements that present financial position and results of operations but omits the related statement of cash flows. Management discloses in the notes to the financial statements that it does not believe that statement of cash flows to be a useful financial statement. 5. An entity changes its depreciation method for production equipment from straight-line to a units-of-production method based on hours of utilization. The auditor concurs with the change, although it has a material effect on the comparability of the entity’s financial statements. 6. An entity discloses certain lease obligations in the notes to the financial statements. The auditor believes that the failure to capitalize these leases is a departure from generally accepted accounting principles. Required: List A represents the types of opinions the auditor ordinarily would issue and List B represents the report modifications (if any) that would be necessary. Select as the best answer for each situation (items 1 through 6) the type of opinion and modifications, if any, the auditor would normally select. The types of opinions in List A and the report modifications in List B may be selected once, more than once, or not at all. (AICPA, adapted) List A List B Types of Opinions Report Modifications A. An “except for” qualified opinion H. Describe the circumstances in a explanatory paragraph preceding the opinion paragraph without modifying the three standard paragraphs. B. An unqualified opinion I. Describe the circumstances in an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. C. An adverse opinion J. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the opinion paragraph. D. A disclaimer of opinion K. Describe the circumstances in an explanatory paragraph following the opinion paragraph, and modify the opinion paragraph.
E. Either an “except for” qualified opinion or an adverse opinion. L. Describe the circumstances in an explanatory paragraph preceding the opinion paragraph, and modify the scope and opinion paragraphs. F. Either a disclaimer of opinion or an “except for” qualified opinion. M. Describe the circumstances in an explanatory paragraph following the opinion paragraph, and modify the scope and opinion paragraphs. G. Either an adverse opinion or a disclaimer of opinion N. Describe the circumstances within the scope paragraph without adding an explanatory paragraph. O. Describe the circumstances within the opinion paragraph without adding an explanatory paragraph. P. Describe the circumstances within the scope and opinion paragraphs without adding an explanatory paragraph. The final paper will be based on Appendix 6C Illustrative Audit Case: Keystone Computers at pages 237-244 in your text. Write, in outline format but in complete sentences, a 6 to 10 page audit plan. It is recommended that you look at Figure 18.8 on page 708, which shows the control objectives related to accounts receivable. In your audit plan cover the steps necessary to determine if you should select the client, the internal control procedures which need to be reviewed, the substantive tests [using accounts receivable a guide], and the final reporting steps. Based on the actual facts in the case determine the emphasis you want to place on various accounts. Also reflect back over your entire accounting program and think about how the accounts are interrelated. For example, when allowance for doubtful accounts is credited the offset is to bad debt expense. Therefore one of the steps should be to trace the debit side of the entry to the balance for bad debt expense. Make your comments as specific as possible. Rather than say look for unusual entries, say look for entries from unusual sources and rounded amounts with focus on those near an accounting cut off. Use precise language. Rather than saying you “vouched accounts payable,” say that you looked at the item to determine that it was a bona fide business expense. Remember to focus on the key audit objectives and support needed after applying the audit risk model. Remember, the purpose of the Final Paper is for you to culminate the learning achieved in the course by describing your understanding and application of knowledge in the field of accounting. The Final Paper should focus on real life, real time application of topics covered in this course; the uses you have seen and the uses you can envision. The paper must be submitted to your instructor no later than the last day of class. Earlier submittal is appreciated.