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ACC522 Advanced Audit Issues

Unit 1 Discussion

Let’s explore what CPA firms do during the course of a financial statement audit by answering the following questions:

What is the main objective of the audit of an entity’s financial statements?

What representations or guarantees do auditors make about the accuracy of the financial statements?

Is it the responsibility of the auditor to detect all kinds of fraud that may have taken place for the financial statements being audited? Explain.

Why is there a need for the CPA firm to understand the business of the audit client?

Read Introductory Case on pages X and XI in the Lakeside Company text. Read chapters 1 and 2 and use your library resources to answer the following questions:

What are the main duties of each of the positions that comprise Abernethy and Chapman’s engagement team (i.e., partner, manager, senior auditor, and staff auditor)?

What is the purpose of having a partner-in-charge and a consulting partner on each engagement? What are the rules regarding partner rotation? Why is this important?

 

ACC522 Advanced Audit Issues

Unit 2 Discussion

What is the purpose of a peer review? Discuss the reasons why peer reviews have become necessary and the type of examination that is performed.

What is the purpose of an engagement letter? What sections should be included in an engagement letter? Let’s discuss.

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

Explain where the auditors need to have an understanding of the client’s industry in performing an audit.

 

ACC522 Advanced Audit Issues

Unit 3 Discussion

MATERIALITY

What is materiality as it relates to accounting and auditing? What is the relationship between materiality and the phrase “obtain reasonable assurance” in the auditor’s report?

How are benchmarks used in setting a preliminary judgement about materiality? How will these benchmarks differ based on the client’s industry?

Explain why materiality is important but difficult to apply in practice.

What’s the BIG DEAL about RISK?

What procedures would you perform during the risk assessment process? Why would you choose these procedures?

Besides inquiring from the management involved in preparing the financial statements, who else should you inquire from as part of your risk assessment procedures? Describe how these individuals might be helpful to you in assessing risks of material misstatement?

When the auditor determines that “a risk of material misstatement is considered a significant risk, what are the next steps that the auditor may likely perform?

 

ACC522 Advanced Audit Issues

Unit 4 Discussion

Fraud versus Error

What is the difference between fraud versus and error?

Let’s discuss the importance of distinguishing the auditor’s assessment of the risk of material misstatement due to fraud from the assessment of the risk of material misstatement due to error.

How should the auditor consider risks related to revenue recognition when assessing the risk of material misstatement due to fraud?

What types of inquiries should the auditor make when considering the risk of material misstatement due to fraud?

Internal Control Environment and Processes

What aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?

What is the control environment? What is the relationship between the control environment and the other four components of internal control?

The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of custody of assets from accounting. Explain the difference in the purposes of these two types of separation of duties.

What is the auditor’s responsibility for obtaining an understanding of the internal control?

What is an internal control walkthrough? What is its purpose?

 

ACC522 Advanced Audit Issues

Unit 5 Discussion

Read Case # 6 in Lakeside Company along with the chapters assigned in the audit text. Respond and challenge is other respectfully on the following questions:

The first generally accepted auditing standard of fieldwork states that assistants, if any, are to be properly supervised. Why is this requirement necessary, and what supervision is indicated on the audit document produced in Exhibit 6-1?

On the audit document, Heyman has included the objective, conclusions, and scope of this testing. Why is this information important on the audit document?

The case states that audit procedures are designed by the auditor in-charge of the engagement. Are audit procedures designed separately for each audit? Do auditing firms ever use standardized audit procedures? Which is preferable for the firm’s quality controls, client-specific or standardized procedures?

Assume that Art Heyman had found one or more apparent inconsistencies during his work on this part of the audit. What would be his responsibility in addressing these problems? To whom should he inquire? What documentation should he maintain?

Read Case # 5 in Lakeside Company and assigned readings in the Audit text. Answer the following questions. Challenge each other respectfully.

You were up all hours studying for your audit class. You decided to go to a fast food restaurant for a quick bite. On the drive through window you see a sign that says, “If you did not receive a receipt for this transaction, please let us know and your meal is free.” Why is the restaurant posting this sign? What does it hope to accomplish?

Discuss the auditor’s responsibility for detecting fraud, including fraudulent financial reporting and misappropriation of assets.

After having read the first 5 cases in Lakeside Company, discuss the potential signs that you have read that should alert the auditors of the potential existence of fraud.

 

ACC522 Advanced Audit Issues

Unit 6 Discussion

Read Case 8 – Observation of Physical Inventory Count about Lakeside Company

There is a discrepancey between the perpetual inventory records of Lakeside Company when compared against the physical count.

Questions:

1) Is this difference a material amount that would justify further investigation by Abernethy and Chapman (A & C)? Why or why not?

2) Management may sometimes deliberately attempt to either overcount or undercount ending inventory. Explain the rationale behind this type of irregularity. In your opinion, does this potential problem exist with Lakeside Company? Explain the level of significance.

3) Let’s assume that a material misstatement occurs in counting Lakeside’s inventory that A & C did not discover until the audit was completed and the audited financial statements were released. What is the CPA firm’s responsibility for such misstatements?

Audit standards require the auditor to accumulate sufficient appropriate evidence to support the opinion issued.

The specific methods of gathering evidence depend largely on the type of account in question an the auditor’s judgment.

Now, it’s your turn to put this into practce. From the cases that we have gone over with Lakeside Company, do the following:

Choose 3 accounts that you need to gather evidence for

For each account, name, describe and defend evidence-gathering techniques that in your opinion are appropriate for the accounts you are testing.

Describe the relative significance and reliability of each technique.

 

ACC522 Advanced Audit Issues

Unit 7 Discussion

Read Case #10 – Sampling for Attributes

From the case above, let’s discuss the following:

1) Auditors must evaluate an entire set of financial statements to express an opinion. Considering that risk is always involved in selecting only a sample, why are auditors willing to accept less than a complete review and analysis when accumulating evidence?

2) Mitchell has indicated that she assumes Luck has made some mistakes in allocating year-end expenses. How can the auditor tolerate using work that is known to be incorrect? Why might Luck or other individuals in his position commit errors like these?

Read Case #9 – Resolving Audit Problems

In this case study, you will read through common audit issues that auditors discuss with the management as the audit is winding down. Items to be included in the notes to financial statements “disclosures” are always challenging issues between the auditor and the client.

What are considered “related party transactions” in preparing audit financial statements?

In this post, find an audited financial statement online with disclosures concerning “related parties,” share the link to the article then describe the related party transactions disclosed. Do you agree or disagree with the inclusion of the disclosure? Justify the importance of the disclosure and how this disclosure impacts the users of the financial statements.

Do auditors have any ethical obligations as to what is disclosed on the client’s financial statements? Why or why not?

 

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].

 

Ratio	2010	2011	Significance of Change
Current	1.35	1.35	No significant fluctuation, indicating a stable liquidity position (based on this measure of liquidity)
Average Days Inventory on Hand
Average Days to Collect Receivables
Debt-to-Total Assets Ratio
Times Interest Earned
Profit Margin
Return on Assets
Return on Equity

 

               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.

Ratio	Industry Ave.	Lakeside 2011	Significance of Change
Current	2.16	1.35	Lakeside is below the industry average.  This may indicate short-term solvency problems
Average Days Inventory on Hand
Average Days to Collect Receivables
Debt-to-Total Assets Ratio
Times Interest Earned
Profit Margin
Return on Assets
Return on Equity

                                            

               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:

Procedure	Findings	Significance
Scan the trial balance.	1. A debit balance appears in the “Allowance for Doubtful Accounts” account.  2.	1. Bad accounts may be increasing or a debit entry may have been misposted. 2.
Scan the income statement.
Scan the balance sheet.
Scan the statement of cash flows.

              

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:   

 

 

Notes	Sales Division	Inventory Department	Assistant to President	Controller’s Office
A: Record telephone order on pre-numbered sales invoices.	Sales Invoice 2   3 4 5  Note A From Customers

 

 

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:

 

	Questions	Comments on Current System	Significance	Suggestions
1	Does an independent party on a regular basis reconcile the subsidiary ledger?
2	Are appropriate, established criteria in place for writing off doubtful accounts?
3	Are accounts to be written off properly reviewed and authorized by an independent party?
4	Is an appropriate follow up made on accounts that are written off?
5	Does the company periodically re-evaluate the method in use for estimating bad accounts?
6	Are customers billed regularly by a party separate from the subsidiary ledger?
7	Is an independent verification made of complaints from customers concerning their bills?
8	Was the company’s policy of granting credit changed over the past year?
9	Can a credit sale possibly be made without prior credit approval?
10	Are credit files complete and periodically reviewed?
11	Are invoices verified as to agreement with goods shipped and price of goods?
12	Are extensions and footing recalculated?
13	Are cash discounts recomputed and verified as to actual days?
14	Can a sale possibly be made and goods shipped without an invoice being recorded or mailed?

 

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 recent