Week 2 Homework Questions
Rename your file with your first name, last name, and “HW2.” Reminder – I do not allow direct quotes in student’s work in this class. You need to paraphrase and cite your outside sources. “Outside sources” do not include the text and so you don’t need to cite it. Type your answers into this document, rename it, and upload it to the Homework assignment for Week 2.
Each of the following situations involves a possible violation by a CPA and member of the AICPA of the AICPA’s Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why. Cite the paragraph number to be clear on which rule you think applies. I also want you to pick the rule that is most directly related to the situation. For example, the Acts Discreditable is more or less a catchall that might apply to a lot of situations also covered by the other rules. However, I want to you find the rule that most specifically applies. If you don’t think any rule has been violated, state the rule that most likely might apply and state why it doesn’t.
Hint – make you name the specific rule by name from the text (e.g., Independence Rule) you think applies and find the rule that the most specific to the scenario. Also, make sure you explain why the scenario violates the rule so you are clear about how the rule applies to the scenario. Finally, keep in mind that many of these rules apply to both auditors and CPAs working for firms while some only apply to auditor or attest engagements. For example, the Independence Rule only applies to auditors performing audits and other attest engagements.
You are the controller of ABC, Inc. ABC’s’ external auditors have asked you to sign the management representation letter. You signed the management representation letter even though you know that full disclosures have not been made to ABC’s external auditors.
You were hired by XYZ, Inc. to supervise its accounting department in preparing financial statements and presenting them to senior management. Due to considerable time incurred on other financial activities, you were unable to supervise the accounting staff adequately. It is later discovered that XYZ’s financial statements contain false and misleading information.
You are a sole CPA practitioner in private practice and you have provided extensive advisory services for you audit client, HIJ, Inc. You have helped management interpret their financial statements, provided forecasts and other analyses, counseled on potential expansion plans, and counseled on banking relationships. HIJ is a publicly traded firm subject to SEC regulation.
Assume that you encountered the following issues during several different auditing engagements during 2015. Discuss how each situation would affect your audit report on financial statements. Be thorough in covering all sections of the audit report that would be affected. Also, include an explanation as to why the report would be changed, or not if change isn’t required. Each item is from a different audit and is independent of the other items.
Hint – the key to this question is precision and completeness. Be very clear on exactly how the wording of the standard report would change and why. Cover all changes to all paragraphs or sections of the report, not just the opinion. Also be sure to cover why you are suggesting the changes based on the guidance provided in the text. Finally, make clear references to the scenario so that I can tell that you understand how to apply the guidance from the text to each specific scenario.
One of your clients is a real estate investment firm. It experienced a significant decline in the value of its investment properties during the past year because of a downturn in the economy and has appropriately recognized that decline in market value under GAAP. You wish to emphasize the decline in the economy and its effect on the client’s financial position and results of operations for 2015 in your audit report.
For the past five years, you have conducted the audits of OPQ, a company that provides technology consulting services, and you have always issued unqualified opinions on its financial statements. Based on its 2015 audit, you believe that an unqualified opinion is appropriate; however, you did note that OPQ reported its third consecutive operating loss and has experienced negative cash flows because of the inability of some of its customers to promptly pay for services received.
In your audit of ABC, Inc. you found that their supplies inventory had been materially misstated. The firm’s management has refused to restate the inventory because the supplies inventory is a relatively small percentage of their total assets. You agree that the supplies inventory isn’t a very large percentage of their total, but you still believe that it is materially misstated and that the client should correct the account balance.
DEF, Inc. is a manufacturing firm with substantial raw materials, work in progress, and finished goods inventories. Inventories make up 75% of their current assets and 25% of their total assets. DEF’s management refused to let you audit these inventories in any way because they felt their internal audit department did an adequate job of staying on top if inventory valuations and counts. They wanted to reduce the audit fees. You have been unable to perform any alternative procedures that you believe would provide sufficient evidence for you to confirm the ending inventory balances.
You have completed your audit field work for your audit of GHI, Inc. and are in the process of drafting your audit report. However, the audit manager in charge of the GHI audit just informed you that his wife was GHI’s chief financial officer.
Changes in an auditee’s financial reporting that create differences from the prior year are classified into two categories – those that effect consistency and those that affect comparability. Describe these two categories and differentiate between them. Provide an example of each. Discuss the effect on the audit report of each.
Hint – Make sure you include definitions or descriptions for each category and a clear example of each. This is a fairly descriptive question that can be answered directly from the text. You are free to paraphrase the text without citation, but don’t directly quote it. Restate the points in your own words.