ACC 410 Entire Course Material- Auditing

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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 Companys 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 years 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 years 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 Companys financial
statements. The students followed Jones 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 Udens 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. Udens 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 clients 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 representa 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 Corporations management to examine his working
papers. Some of the working papers consisted of adjusting journal entries and supporting
analysis. Wilson Corporations 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 clients 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 years 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 entitys 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 entitys 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.