ACC522 Advanced Audit Issues
Unit 1 Assignment
Read Case 1 in Lakeside Company: Analysis of a Potential Audit Client
Answer the questions below.
a. Why would the owners of Lakeside as well as the company’s banks require that an independent CPA firm perform an annual audit?
b. This case implies that no auditor with the firm of Abernethy and Chapman has an in-depth understanding of the consumer electronics industry. Is a CPA firm allowed to accept an engagement without having established the necessary expertise to oversee the audit? Would the knowledge required to audit a consumer electronics company differ significantly from that needed in the examination of a car dealership? Does the auditor have an obligation to discuss his lack of expertise, or his plans to obtain the expertise with the client?
c. Auditors must assess the possibility of fraud risk factors. Fraud risk factors are events or situations that would indicate an increased possibility that fraud has occurred. Lakeside has recently created a profit-sharing bonus plan. Why might such an incentive be a special concern to an auditor?
d. Rogers wants Abernethy and Chapman to assist his company in developing new accounting systems. Does a CPA firm face an independence problem in auditing the output of systems that the same firm designed and installed? Does your answer depend on if the client is publicly traded or not? How so?
e. After the discussion at the CPA firm, Andrews was assigned to visit the headquarters/warehouse of Lakeside to tour the facility. What should Andrews observe, and what factors should he be especially aware of during this visit?
f. Is there any reason why Lakeside might not want to hire a CPA firm that has other clients in the electronics industry?
ACC522 Advanced Audit Issues
Unit 2 Assignment
Case 2 - Exercise 1
Abernethy and Chapman
ANALYSIS OF POTENTIAL LEGAL LIABILITY
Potential Client:
Type of Engagement:
Form Completed By:
Date:
(1) Is the potential client privately held or publicly held?
(2) Evaluate the possible liability to the client that Abernethy and Chapman might incur, if the engagement is accepted.
(3) List the third parties that presently have a financial association with the potential client and could be expected to see the financial statements. These parties are also called primary and foreseen beneficiaries.
(4) Discuss the possibility that other third parties will be brought into a position where they would be expected to see the financial statements of the potential client. These parties are also called foreseeable beneficiaries.
(5) Evaluate the possible legal liability to third parties, both present and potential, that Abernethy and Chapman might incur if the engagement is accepted.
Abernethy and Chapman
INFORMATION FROM PREDECESSOR AUDITOR
Potential Client:
Form Completed By:
Predecessor Auditor:
Date of Interview:
(1) Discuss the predecessor auditor's evaluation of the integrity of the management of the potential client.
(2) Did the predecessor auditor reveal any disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters? If so, fully describe these disagreements.
(3) What was the predecessor auditor's understanding as to the reasons for the change in auditors?
(4) Did the predecessor auditor give any indication of other signi¬ficant audit problems associated with the potential client?
(5) Did the predecessor auditor indicate any problem in allowing Abernethy and Chapman to review prior years' audit documentation for the potential client? If "yes," explain
(6) Was the predecessor auditor's response limited in any way?
Case 2 - Exercise 2
Abernethy and Chapman
Review of Predecessor Auditor's Documentation
Client:
Predecessor Auditor:
Prepared by:
Date:
Prepare a list of the specific contents of the predecessor auditor's documentation that should be examined by Abernethy and Chapman. Indicate each area that should be reviewed and the purpose of studying these particular areas of the audit documentation. Use the following format.
ACC522 Advanced Audit Issues
Unit 3 Assignment
Part 1
The Lakeside Company
Analytical Review Procedures
December 31, 2012
Prepared by:
Date:
(a) Compute the financial ratios listed in Exhibit 3-2 for Lakeside for the years ended December 31, 2010 and December 31, 2011. Comment on any large fluctuations, unusual fluctuations, or lack of expected fluctuations. Also, give an overall conclusion as to the significance of the change in Lakeside’s liquidity, solvency, and profitability positions from 2010 to 2011. Use the following format. [Use Case3.xls for a spreadsheet to compute the ratios].
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Ratio
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2010
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2011
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Significance of Change
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Current
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1.35
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1.35
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No significant fluctuation, indicating a stable liquidity position (based on this measure of liquidity)
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Average Days Inventory on Hand
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Average Days to Collect Receivables
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Debt-to-Total Assets Ratio
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Times Interest Earned
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Profit Margin
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Return on Assets
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Return on Equity
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Overall Conclusion:
(b) Compare the year 2011 financial ratios computed for Lakeside above to the industry average ratios included in Exhibit 3-3. Comment on any large fluctuations, unusual fluctuations, or lack of expected fluctuations. Also, give an overall conclusion as to the significance of the difference between Lakeside’s liquidity, solvency, and profitability positions in 2011 and the industry average positions. Use the following format.
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Ratio
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Industry Ave.
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Lakeside 2011
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Significance of Change
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Current
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2.16
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1.35
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Lakeside is below the industry average. This may indicate short-term solvency problems
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Average Days Inventory on Hand
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Average Days to Collect Receivables
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Debt-to-Total Assets Ratio
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Times Interest Earned
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Profit Margin
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Return on Assets
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Return on Equity
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Overall Conclusion:
(c) Scan each of the financial statements and the trial balances included in Exhibits 3-4 through 3-7. Comment on any unusual accounts, account balances, or large, unusual, or lack of expected fluctuations from the previous year. You should find at least 10 items. [Note: you may have more than one “finding” for each procedure]. Use the following format:
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Procedure
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Findings
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Significance
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Scan the trial balance.
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1. A debit balance appears in the “Allowance for Doubtful Accounts” account.
2.
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1. Bad accounts may be increasing or a debit entry may have been misposted.
2.
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Scan the income statement.
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Scan the balance sheet.
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Scan the statement of cash flows.
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Part 2
Using library resources, audit text book and other authoritative sources, apply your research by answering the following: 1) The assessment of risk is crucial component of the audit process. Identify the types of risks that are found in an audit. Describe each of these risks. Discuss how these risks are assessed by the auditor and describe the interrelationships among these risks.
2) Research 2 prominent public companies in Lakeside’s industry (consumer electronics) Examples: Radio Shack and Best Buy. Feel free to use these companies or come up with your own from your research. Obtain the most recent financial statements for the companies you chose and compute the financial ratios for these companies like you did in Part 1 3a. Perform a comparative analysis of these financial ratios. How does Lakeside compare with these companies in terms of liquidity, profitability, and solvency?
ACC522 Advanced Audit Issues
Unit 4 Assignment
Individual Assignment 4 template
Case 4 - Exercise 1a
Lakeside Company
Revenue and Cash Receipts - Distributorship Revenue Recognition
Prepared by:
Reviewed by:
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Notes
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Sales Division
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Inventory Department
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Assistant to President
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Controller's Office
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A: Record telephone order on pre-numbered sales invoices.
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ACC522 Advanced Audit Issues
Unit 5 Assignment
Part 1
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Answer all the questions that appear below (and also in Exhibit 5-1) regarding accounts receivable control procedures. Use this case and Exhibits 4-4 and 4-5 to complete this questionnaire.
Case 5 - Exercise 1
Abernethy and Chapman
Internal Control Questionnaire - Accounts Receivable
Client: The Lakeside Company
Prepared by:
Date:
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Questions
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Comments on Current System
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Significance
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Suggestions
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1
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Does an independent party on a regular basis reconcile the subsidiary ledger?
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2
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Are appropriate, established criteria in place for writing off doubtful accounts?
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3
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Are accounts to be written off properly reviewed and authorized by an independent party?
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4
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Is an appropriate follow up made on accounts that are written off?
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5
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Does the company periodically re-evaluate the method in use for estimating bad accounts?
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6
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Are customers billed regularly by a party separate from the subsidiary ledger?
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7
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Is an independent verification made of complaints from customers concerning their bills?
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8
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Was the company’s policy of granting credit changed over the past year?
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9
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Can a credit sale possibly be made without prior credit approval?
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10
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Are credit files complete and periodically reviewed?
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11
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Are invoices verified as to agreement with goods shipped and price of goods?
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12
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Are extensions and footing recalculated?
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13
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Are cash discounts recomputed and verified as to actual days?
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14
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Can a sale possibly be made and goods shipped without an invoice being recorded or mailed?
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Part 2
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test that appears in Exhibit 5-2, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, what potential problems exist? Indicate your responses in the table provided below.
ACC522 Advanced Audit Issues
Unit 6 Assignment
This is a 2 -part assignment
Student Name: _____________________________________
Part 1
Read Case 7 – Designing Substantive Audit Tests: Compensation Plans
Instructions: Answer all the questions that appear below using the template provided:
Paul Reubens is a new staff auditor recently hired by the firm of Abernethy and Chapman. As one of his initial assignments, he is to perform several audit procedures in the Lakeside engagement. He has already completed a set of payroll tests and prepared the audit document presented in Exhibit 7-1. The firm of Abernethy and Chapman has a policy that the senior (in-charge) auditor on an engagement must review and approve all audit documentation. If errors or problems are found, the audit documents are returned to the staff auditor for appropriate revision. This review process helps to ensure that each audit document provides a clear and complete indication of the procedures that were performed and the evidence that was accumulated.
Analyze the audit document in Exhibit 7-1 as if you were the senior auditor. Prepare a list for Reubens of the errors and problems that are present in his audit document. For each, indicate the reason that the current presentation is not acceptable. Refer to Case 6 for standard audit document content and format.
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Case 7 - Exercise 1
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The Lakeside Company
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Payroll Tests
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In-charge Review Comments
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December 31, 2012
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Prepared by:
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Date:
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Item on Working Paper
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Problem
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Part 2
Read Case 8 – Observation of Physical Inventory Count
Instructions: Answer all the questions that appear below using the template (case 8 exercise 1)
provided below:
Mitchell knows that the following three audit objectives related to inventory need to be accomplished:
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- verify that the physical count she observed agrees with the inventory listing shown in Exhibit 8-4
- verify that the inventory listing (Exhibit 8-4) provides a fairly presented inventory cost balance, and
- verify that the reconciling items on Exhibit 8-5 are valid and reasonable.
She assigns these tasks to Paul Reubens, a new staff auditor recently hired by the firm of Abernethy and Chapman. Prepare a step-by-step audit program for Reubens so that he can achieve these three audit objectives.
ACC522 Advanced Audit Issues
Unit 7 Assignment
Case Study: Missing Receipts
Student Name: _____________________________________
Prepare a presentation that addresses the issues in the case below
Address your presentation to accounting students studying the cases as a lesson in ethics, and you are the instructor.
Be creative with your presentation!
Case Study – The Case of Missing Receipts
Amy and Jane are newly minted CPAs and are currently assigned as external auditors as part of the audit team from XYZ, LLP responsible for the financial audit of the school district of Hamptons located in the state of New York for FYE 2016. Amy and Jane are experiencing major difficulties tracing the original documentation for travel and documentation reimbursement claims made by the top business manager of the district. The manager is aware of the concerns of Amy and Jane and approached them about it. The following conversation took place:
Manager: I have spent an inordinate amount of time requesting for copies of these receipts from the hotel where I stayed. Unfortunately, the vendor informed me that my receipts are no longer available for them to reproduce a copy of.
Amy: How about your credit card statement that shows you paid for these amounts? Could you produce those?
Manager: I did not use a credit card. I paid for them in cash.
Jane: How about a copy of the reservations that you made? Nowadays, we often make reservations online. You may be able to retrieve this information from your email archive.
Manager: I delete all my emails after 3 months. I don’t have any of this.
Amy: Is there any other proof that you can provide to substantiate this reimbursement?
Manager: Girls, what can I tell you? I can’t produce what I don’t have and others are unwilling to provide me with. What do you want me to do?
Instructions: To fully address the questions below, use the following pointers as your guide:
1) Analyze the ethical question or dilemma
2) Consider the stakeholders that are likely to be affected by these actions.
3) Analyze Alternatives and/or consequences
4) Defend a viewpoint
5) Discuss core beliefs, its origins and relationship to the accounting profession
Questions:
1) Amy and Jane are CPAs and members of the AICPA. What ethical standards in the Code of Professional Conduct should guide them in dealing with the dilemma presented by the manager here?
2) Should Amy and Jane report these findings to their audit manager?
3) The manager is very friendly and personable. During the course of the audit, he has often purchased lunch for the audit team even if the team refused to do under the guise that this is a treat for everyone. Amy and Jane are afraid that reporting this situation may have a negative impact on the manager’s job. Should they be concerned about this?
4) What should the firm do regarding this information? What are the proper procedures that they should observe?
5) Besides the missing receipts, would the actions of the business manager here prompt you to consider performing additional tests? Why or why not?
ACC522 Advanced Audit Issues
Unit 8 Assignment
This is a 3 part assignment
Part 1
Case 11: Sampling for Variables – Difference Estimation
Answer the following questions below. Use your text and other available resources to provide
well-reasoned responses.
1) Carole Mitchell attempted to use judgmental sampling to verify the client’s accrual in this case while Dan Cline opted for statistical sampling. What are the advantages and disadvantages of each approach? Will a statistical sample usually be smaller than a non-statistical sample?
2) Exhibit 11-2 presents the results of Mitchell’s initial testing. Was Cline correct in seeking additional audit evidence? Include in your answer the concept of sufficiency of audit evidence.
3) Statistical sampling is occasionally criticized for preventing the auditor from introducing personal judgment into a particular test. Is this assertion valid? How much knowledge of statistical sampling should the auditor have? Is it typical to obtain assistance from a specialist in developing a sample?
4) Statistical sampling has also been criticized for being a slow, time-consuming process relative to judgmental sampling. Is this assertion valid?
5) An auditor may utilize sampling for attributes in some tests and sampling for variables in others. How is the decision made as to which of these methods should be applied? Is it appropriate to use a cost-based decision when considering the independent auditors’ responsibility?
Part 2
Case 12: Review of Subsequent Events
1) Prepare the auditor’s report that you believe is warranted for the Lakeside Company’s 2012 financial statements based on the information contained in the first 11 cases. Lakeside issues comparative financial statements. Assume that any facts not explicitly covered in these cases would not influence the decision as to the type of opinion to be rendered.
2) Separately, provide an explanation why you issued the report that you did.
Part 3
Case 13: Consulting and other Services
Apply your research. Use your text and other available resources to provide well-reasoned responses.
Scenario: The firm of Abernethy and Chapman was asked to do consulting work for Lakeside that is completely separate and unrelated to the audit of the financial statements. Write a report discussing the potential conflict of interest when an auditor does consulting work for an audit client. Does this relationship cause the independence of the auditor to be violated? Why or why not? Since the Enron debacle, how has the accounting profession dealt with this issue?
