ACC 555 (Midterm Exam Solution)

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(TCO F) The objective of the ordinary audit of financial statements is the expression of an opinion on:

 

(TCO F) Which of the following statements is most correct regarding errors and fraud?

 

(TCO F) If the auditor believes that the financial statements are not fairly stated or is unable to reach an conclusion because of insufficient evidence, the auditor:

 

(TCO F) Auditors accumulate evidence to:

 

(TCO F) Which of the following forms of evidence is most reliable?

 

(TCO F) Analytical procedures are required during which phase(s) of the audit?Test of Controls; Planning; Completion

 

(TCO F) To be considered reliable evidence, confirmations must be controlled by:

 

(TCO F) When the auditor has reason to believe an illegal act has occurred without any corrective action being taken, the auditor should:

 

(TCO F) Traditionally, confirmations are used to verify:

 

(TCO G) Which of the following is correct with respect to the use of analytical procedures?

 

(TCO G) Which is a liquidity activity ratio?

 

(TCO A) Match the following definitions to the terms.____ Public Company Accounting Oversight Board Auditing Standards____ Generally Accepted Auditing Standards____ Statements on Auditing Standardsa. Pronouncements providing specific guidance on auditing matters for all entities except public companiesb. The standards used for public company auditsc. Standards used by non-public companies and for interim audits for public companies as initially adopted by the PCAOB

 

(TCO B) The following is a portion of a qualified audit report issued for a private company:Independent Auditor’s ReportTo the shareholders of Tamarak Corporation,We have audited the accompanying balance sheet of Tamarak Corporation as of October 31, 2009, and the related statements of income, retained earnings, and cash flows for the past year. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement

presentation. We believe that our audit provides a reasonable basis for our opinion.The company has included in property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be expensed in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be decreased by $4,000,000, long-term debt by $2,000,000, and retained earnings by $180,000 as of October 31, 2009, and net income and earnings per share would be decreased by $180,000 and $0.62, respectively, for the past year.Required: Complete the above qualified audit report by preparing the opinion paragraph. Do not date or sign the report.

 

(TCO C) The following situation involves a possible violation of the AICPA’s Code of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.Your answer should be set up something like this:Rule # __________ Violation? Yes or No1 or 2 line explanation:Brad Heist, CPA, was traveling from Dallas to Houston, Texas, when he was pulled over by a police officer on suspicion of driving under the influence. The breath-a-lyzer and a subsequent blood test revealed that Brad was definitely impaired. He was convicted in court of driving while under the influence of alcohol (DUI). This was Brad’s fourth conviction of DUI in less than a year, a felony under current Texas law. Accordingly, Brad was sentenced to 18 months in prison.

 

(TCO C) The following situation involves a possible violation of the AICPA’s Code of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.Your answer should be set up something like this:Rule # __________ Violation? Yes or No1 or 2 line explanation:Jim is the audit partner for the small CPA firm of Jim, CPA, PA. Jim’s neighbor Duffy has a financial advisement practice whereby she sells mutual funds to individuals for their retirement. Jim’s firm is performing the audit for a privately held company Jim’s best friend Cressy owns. Jim refers Cressy to Duffy for retirement advice. Cressy buys 10 units of ABC Mutual Fund which generates Duffy a fat little commission fee. Duffy buys Jim a $25 gift certificate to the local movie theater.

 

(TCO C) Brandt, CPAs has obtained Big-Bucks, a new publicly-held client. Big-Bucks has various accounting-related needs that Brandt, CPAs would like to fulfill. Partner-in-charge D. Brandt has discussed with Big-Bucks the possibility of performing the annual audit of Big-Bucks

as well as preparing the tax returns, business plan, quarterly write-up services, and providing consultation on the viability and valuation of mining gas reserves in Tennessee. An outside expert would be hired by Brandt CPAs to provide expert advice to the CPA firm on mining gas reserves. Additionally, Brandt, CPA’s audit manager who will be assigned to this audit has previously been approached by Big-Bucks to come work for the company as Chief Financial Officer. The audit manager has refused the offer, since his cousin’s sister-in-law is a 10 percent shareholder in Big-Bucks and does not want her to have any say in his employment.Under the Sarbanes-Oxley Act of 2002, what issues do you see and how would you advise Brandt, CPAs? Is there ever a time when Brandt, CPAs could perform any of these services for Big-Bucks?

 

(TCO D) There are four major sources of an auditor’s legal liability. One source is liability to the audit client under common law. Briefly summarize the other three sources.

 

(TCO F) Below are 10 documents typically examined during an audit. Classify each document as either internal or external.Type of Document Documents________________ 1. Canceled checks for payments of accounts payable________________ 2. Payroll time cards________________ 3. Duplicate sales invoices________________ 4. Vendors’ invoices________________ 5. Bank statements________________ 6. Minutes of the board of directors’ meetings________________ 7. Signed lease agreements________________ 8. Notes receivable________________ 9. Subsidiary accounts receivable records________________ 10. Remittance advices

 

(TCO G) Discuss the essential activities involved in the initial planning of an audit.

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