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Chapter: 12 -Problem: 6 >> A 2017 Gallup Poll1 survey regarding Americans’ concerns about environmental issues revealed the following:Given results of surveys like the one above, it shouldn’t be surprising that more and more business leaders are concerned with how their business is impacting the environment and increasingly want to demonstrate that they are being good stewards of the environment. REQUIRED[1] Go to the Globa
Answer Preview: 1. a. The standards offer two options to an organization when preparing its sustainability report in accordance with the Guidelines: the Core option and the Comprehensive option. Each option can be ap…

, Chapter: 5 -Problem: 1 >> Tina is an audit manager with a national public accounting firm and one of her clients is Simply Steam, Co. Simply Steam provides industrial and domestic carpet steam-cleaning services. This is the first time Simply Steam has been audited. Thus, Tina does not have any prior-year audit files to review. Tina recently conducted a preliminary interview with Doug Dosio, who along with his brother, Phil
Answer Preview: Solution: Overall Evaluation of the Control Environment 1. Inte…

, Chapter: 3 -Problem: 1 >> Brent Dorsey graduated six months ago with a master’s degree in accounting. Immediately after graduation, Brent began working with a large accounting firm in Portland, Oregon. He is now on his second audit engagement—a company called Northwest Steel Producers. Working day to day with Brent on the audit are two other staff auditors, Han Choi and Megan Mills, along with the senior auditor, John Pete
Answer Preview: 1. a) Pro: Skipping audit steps will allow Brent to complete the work in less time, thus allowing him to come in under budget and to spend some time with his wife. Con: Skipping audit steps can lead t…

, Chapter: 12 -Problem: 3 >> Spencer and Loveland, LLP is a medium-sized, regional accounting firm based in the western part of the United States. A new client of the firm, K&K, Inc., which manufactures a variety of picture frames, recently contracted with Spencer and Loveland to perform an audit of the company’s financial statements for the year ended December 31, 2018. K&K, which is privately owned, expects to use the audit
Answer Preview: 1. The primary risk in the inventory segment is the inventory of metal frames that didnt sell as well as K&K anticipated. K&Ks inventory may include a number of these frames that may or may not be abl…

, Chapter: 11 -Problem: 1 >> The Runners Shop (TRS) was a family-owned business founded 17 years ago by Robert and Andrea Johnson. In July of 2018, TRS found itself experiencing a severe cash shortage that forced it to file for bankruptcy protection. Prior to shutting down its operations, TRS was engaged in the retail sale of athletic footwear and related products for runners. TRS’s 2017 audited financial statements reported
Answer Preview: 1. Properly prepared audit documentation should provide 1) A basis for planning the audit, 2) A record of evidence collected and results of tests, 3) …

, Chapter: 7 -Problem: 1 >> Anne Aylor, Inc. (Anne Aylor) is a leading national specialty retailer of high-quality women’s apparel, shoes, and accessories sold primarily under the “Anne Aylor” brand name. Anne Aylor is a highly recognized national brand that defines a distinct fashion point of view. Anne Aylor merchandise represents classic styles, updated to reflect current fashion trends. Company stores offer a full range
Answer Preview: 1. a. Materiality is a relative rather than an absolute concept. The materiality threshold that will influence users of the financial statements will vary depending on the context in which the entity …

, Chapter: 9 -Problem: 5 >> The Financial Accounting Standard Board’s Accounting Standards Codification Topic 820, Fair Value Measurement, (ASC 820) provides a framework for measuring or estimating the fair value of certain assets and liabilities. It provides a hierarchy with three levels that are differentiated by the inputs used to derive estimates. Level 1 valuations are based on quoted prices in active markets for identi
Answer Preview: 1. According to FASB ASC 820-10-35-2, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measu…

, Chapter: 9 -Problem: 4 >> Confirmations of accounts receivable play an important role in the accumulation of sufficient, appropriate audit evidence. One of the principal strengths of confirmations is that they provide evidence obtained directly from third-parties. Auditing Standards provide guidance to auditors on how and when to use confirmations. Generally Accepted Auditing Standards require accounts receivable (A/R) to
Answer Preview: 1. The auditor should consider (see AU-C 505, paragraphs .A12-.A31): . The reliability of responses to confirmation requests; . Disclaimers and other restrictions in confirmation responses; . Unreliab…

, Chapter: 9 -Problem: 6 >> Your audit firm, Garrett and Schulzke LLP, is engaged to perform the annual audit of Hooplah, Inc., for the year ending December 31, 2017. Hooplah is a privately-held company that sells electronics components to companies that manufacture various appliances. The company hires a public accounting firm to provide an audit of its financial statements in order to get favorable terms on its bank loans.
Answer Preview: Part A 1. a. Auditors often establish one sample size for all controls tested within a business process. This is efficient because each transaction often passes through all of the controls, and the au…

, Chapter: 5 -Problem: 2 >> Ted is an audit manager with a national public accounting firm and one of his clients is Easy Clean, Co. Easy Clean provides industrial and domestic carpet steam-cleaning services. This is the first time Easy Clean has been audited. Thus, Ted does not have any prior-year audit files to review. Ted recently conducted a preliminary interview with Doug Dosio, who along with his brother, Phil, owns Ea
Answer Preview: The overall evaluation of the control environment of Easy Clean is strong . Integrity and et…

, Chapter: 3 -Problem: 1 >> The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, to provide guidance for publicly traded companies. Review SAB No. 101, which is available on the SEC’s website (www.sec.gov) and determine how the company violated revenue recognition criteria?
Answer Preview: The determination of whether a company is reporting transactions within the confines of GAAP (aggres…

, Chapter: 5 -Problem: 4 >> St. James Clothiers is a high-end clothing store located in a small Tennessee town. St. James has only one store, which is located in the shopping district by the town square. St. James enjoys the reputation of being the place to buy nice clothing in the local area. The store is in its twentieth year of operation. The owner, Sally St. James, recently decided to convert from a relatively simple man
Answer Preview: [1] [a] Cloud computing is a type of Internet-based computing that allows secure access and provision of virtually unlimited computing capacity to a user at a relatively low cost. Cloud systems are de…

, Chapter: 4 -Problem: 7 >> “It was like riding a tiger, not knowing how to get off without being eaten,” according to Satyam Computer Services Limited (Satyam) former Chairman, B. Ramalinga Raju, soon after massive fraud involving the company’s financial statements was revealed. For over five years, Raju was at the top of a massive fraud scheme orchestrated by senior executives at the Hyderabad, India information technology
Answer Preview: 1. For asset accounts, such as cash and accounts receivable, confirmations generally provide appropriate evidence for the existence and accuracy assertions. A returned confirmation from a recipient wh…

, Chapter: 4 -Problem: 3 >> One can only imagine the high expectations of investors when the boards of directors of CUC International, Inc. (CUC) and HFS, Inc. (HFS) agreed to merge in May 1997 to form Cendant Corporation. The $14 billion stock merger of HFS and CUC, considered a marriage of equals, united two large service organizations. CUC was a direct marketing giant with shopping, travel, automobile, and entertainment c
Answer Preview: [ 1 ] ( a ) The auditor has a responsibility to obtain an understanding of the internal control structure , evaluate the design of the internal controls , assess the operating effectiveness of the int…

, Chapter: 6 -Problem: 1 >> Town and Country Hardware (T&CH) is a closely owned business founded six years ago by Caleb and Jasmine Wright. T&CH has retail hardware stores located at three lake communities along the Virginia and North Carolina border. T&CH sells products for home improvement and recreational fishing that include building materials, plumbing supplies, electrical supplies, cleaning products, paint products, la
Answer Preview: 1. Technology general controls are controls that relate to the information technology environment within which computer-based application systems are developed, maintained and operated, and thus are r…

, Chapter: 9 -Problem: 2 >> Henrico Retail, Inc. is a first year audit client. The audit partner obtained the following description of the sales system after recently meeting with client personnel at the corporate office. REQUIRED You are the audit senior assigned to the audit of Henrico Retail Inc. The audit partner recently asked you to assist in planning the audit of the sales system based on your review of the client-pre
Answer Preview: 1. While the customer receives a paper receipt showing the details of a single transaction, the company retained record of a single customer transaction is strictly in electronic form initially stored …

, Chapter: 4 -Problem: 6 >> In December 1995, the flamboyant entrepreneur, Michael “Mickey” Monus, formerly president and chief operating officer (COO) of the deep-discount retail chain Phar-Mor, Inc., was sentenced to 19 years and seven months in prison. Monus was convicted for the accounting fraud that inflated Phar-Mor’s shareholder equity by $500 million, resulted in over $1 billion in losses, and caused the bankruptcy o
Answer Preview: 1. [a] A company may desire to hire a member of its audit teams for a number of reasons: (i) the auditor is familiar with the company, (ii) the auditor is typically highly competent and has experience …

, Chapter: 2 -Problem: 1 >> After being in business for only two years, Your1040Return.com has quickly become a leading provider of online income tax preparation and filing services for individual taxpayers. Steven Chicago founded the company after a business idea came to him while shopping for individual tax preparation software. As he stared at all the software packages on the shelves at a local computer supply store, the
Answer Preview: 1. a. The bank that has provided Your1040 com with a bank line of credit has requested that Your1040. com submit audited financial statements annually as part of the financing arrangement. Knowledge a…

, Chapter: 2 -Problem: 1 >> Go to Dell’s web site (http://www.dell.com) and click on the “About Dell” link. Review background and investor information provided about Dell. Click on the “Investor” link in the About Dell section and read the most recent SEC Form 10-K provided for Dell?
Answer Preview: Selected information from Dells web site is presented below. Products and Services Dell offers a broad range of product categories, including servers …

, Chapter: 9 -Problem: 1 >> Wally’s Billboard & Sign Supply, Inc. was founded four years ago by Walter Johnson. The company specializes in providing locations for sign and billboard advertising and has recently begun to enter the sign design market. After working several years in the marketing department of a large corporation, Wally decided that there was a need in his area for a company specializing in signs and billboards
Answer Preview: 1. Auditing cash is usually seen as a routine part of the audit, and is often assigned to new hires or even interns. Although it seems routine, the audit of cash is very important. Investors rely on t…

, Chapter: 6 -Problem: 13 >> Using the Trust Services Principles and Criteria for the “Online Privacy Principle,” develop an online privacy policy for Alltel Stadium that could be posted on the stadium’s website for customers to review before using the Spot Card technology?
Answer Preview: The Trust Services Principle for Online Privacy states the following: Online Privacy. Personal information obtained as a result of e-commerce is collected, used, disclosed, and retained as committed o…

, Chapter: 12 -Problem: 1 >> The information below relates to the audit of EyeMax Corporation, a client with a calendar year-end. EyeMax has debt agreements associated with publicly traded bonds that require audited financial statements. The company is currently, and historically has been, in compliance with the covenants in the debt agreements. Further, management believes that having audited financial statements prepared in
Answer Preview: 1. Having students identify the correct solution before the classroom discussion is not as critical as the learning that takes place in the classroom. Furthermore, there is not one absolutely correct …

, Chapter: 5 -Problem: 2 >> What features, if any, of the proposed IT-based sales accounting system will help minimize the risks identified in question 1? If a deficiency exists that is expected to persist under the new system, indicate that "no computer controls reduce this risk."
Answer Preview: The following features, proposed based on IT based sales ac…

, Chapter: 2 -Problem: 2 >> Apple Inc. (Apple) is a worldwide provider of innovative technology products and services. Apple’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple Watch®, Apple TV®, a portfolio of consumer and professional software applications, iOS, macOSTM, watchOS® and tvOSTM operating systems, iCloud®, Apple Pay® and a variety of accessory, service and support offerings. The Company sells and
Answer Preview: 1. a. Sales - $215 6 billion Net income - $45 7 billion Cash flow from operating activities - $65 8 billion Total assets - $321 7 billion Number of employees - Approximately 116,000 full-time employee…

, Chapter: 5 -Problem: 3 >> How does the IT-based system create new risks for material misstatements?
Answer Preview: New Risks Introduced by New IT-Based Accounting System While the new IT-based accounting system provides numerous features that reduce many of the man…

, Based on the results of the analytical procedure, how likely is it that 2011 interest income is materially misstated? Transcribed Image Text: 20% 40% 100% 0% 10% Definitely not 30% 50% 60% 70% 80% 90% Definitely Misstated Misstated
Answer Preview: The objectives of the auditor are: (a) To obtain relevant and reliable audit evidence when using sub…

, Chapter: 5 -Problem: 7 >> On January 24, 2008, Société Générale, France’s second largest bank announced the largest trading loss in history, a staggering 4.9 billion Euro ($7.2 billion U.S.), which it blamed on a single rogue trader. The trader, Jérôme Kerviel, worked at what Société Générale considered a low-level, low-risk trading desk. The announcement sent a shock wave through the global financial services community an
Answer Preview: 1. They should include a negative or weak view of the control environment. Some of the factors in the case linked to control environment are listed below. . The banks leadership knew that controls wer…

, Chapter: 12 -Problem: 5 >> Murchison Technologies, Inc. recently developed a patient-billing software system that it markets to physicians and dentists. Jim Archer and Janice Johnson founded the company in Austin, Texas five years ago after working at IBM for more than 15 years. Jim worked as a software programmer and Janice worked as a sales representative, frequently calling on stand-alone medical practices. Together, the
Answer Preview: 1. ASC 450, "Contingencies" describes these three ranges of loss contingencies, which range from probable to remote: Probable The future event or events are likely to occur. Reasonably possible The ch…

, Chapter: 4 -Problem: 8 >> John C. Koss started his first company, J.C. Koss Hospital Television Rental Company, in 1953, based in Milwaukee, Wisconsin, but John had greater ambitions. Eventually he partnered with Martin Lange, an engineer, and by 1958 the two had founded Koss Electronics, Inc. Their first product, the SP/3 Stereophone (the world’s first high-fidelity headset) wasn’t even intended to be a major product. Rat
Answer Preview: 1. Managements of public companies owe a duty to the investing public to design, implement, and maintain a system of internal control over financial reporting that protects the investing publics inter…

, Chapter: 3 -Problem: 3 >> The following requirements relate to Ms. Stitt’s testimony about the CanWest non-compete payments: (a) The concept of a “related party” is defined by generally accepted accounting principles (GAAP). Provide a brief overview of the concept of “related party transactions.”(b) Based on your understanding of the concept of “related party transactions,” why would the non-compete payments described in t
Answer Preview: (a) AU Section 230, Audit Documentation, and PCAOB Standard No. 3, Audit Documentation, require the auditor to prepare audit documentation in connection with each engagement in sufficient detail to pr…

, Chapter: 5 -Problem: 5 >> Describes deficiencies in the Collins Harp IT system development and program change process?
Answer Preview: Following are the deficiencies in the C IT system developm…

, Chapter: 11 -Problem: 3 >> Review the audit documentation prepared by Green and Brown, LLP, related to TRS’s Notes Payable and list deficiencies on the enclosed schedules?
Answer Preview: A company filed for bankruptcy after five years of operations. One of the reasons for filing the ban…

, Chapter: 3 -Problem: 6 >> Banking regulators announced in early 2015 a greater focus on evaluating ethical culture as part of their regulatory examination of a bank’s health. In a February 2015 speech, Thomas Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York, announced that the Federal Reserve was making ethical culture a priority for financial services in its efforts to prevent t
Answer Preview: [ 1 ] The alleged inappropriate sales practices would have had a negative effect on Wells Fargo 's performance and financial position from 2011 - 201…

, Chapter: 1 -Problem: 1 >> As you prepare for a professional career, have you ever wondered what characteristics distinguish an exceptional professional from one who is just average? One key distinguishing feature is the ability to consistently make high-quality professional judgments. Professional judgment, which is the bedrock of the accounting and auditing professions, is referenced throughout the professional literature
Answer Preview: 1. Rush to Solve and Judgment Triggers. Rush to solve occurs when professionals want to get to a solution quickly and as a result tend to skip the first step of the judgment process, which involves id…

, Chapter: 4 -Problem: 5 >> Xerox Corporation (Xerox), once a star in the technology sector of the economy, found itself engulfed in an accounting scandal alleging that it was too aggressive in recognizing equipment revenue.1 The complaint filed by the Securities and Exchange Commission (SEC) alleged that Xerox used a variety of accounting manipulations over the period 1997 through 2000 to meet Wall Street expectations and d
Answer Preview: 1. a. Auditors are required to plan and perform audit engagements to provide reasonable assurance that the financial statements are free of material misstatement, whether the result of error or fraud. …

, Chapter: 4 -Problem: 2 >> All appeared well at Comptronix Corporation, a Guntersville, Alabama based electronics company, until word hit the streets November 25, 1992 that there had been a fraud. When reports surfaced that three of the company’s top executives had inflated company earnings for the past three years, the company’s stock price plummeted 72% in one day, closing at $61/8 a share down from the previous day’s clo
Answer Preview: 1. Auditing standards note that three fraud conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to comm…

, Chapter: 9 -Problem: 21 >> As of September 30, 2012, Magicon had only submitted the order letter. Document your conclusion about the impact on the accounting for the transaction if Longeta and Magicon(a) Sign the reseller agreement within 30 days or(b) Do not sign the reseller agreement within 30 days?
Answer Preview: As noted in the case, negotiations surrounding the order letter issued by Magico…

, Chapter: 1 -Problem: 2 >> The accounting firm of Barnes and Fischer, LLP, is a medium-sized, national CPA firm. The partnership, formed in 1954, now has over 4,000 professionals on the payroll. The firm mainly provides auditing and tax services, but it has recently had success building the information systems consulting side of the business for non-audit clients and for audit clients that are not publicly traded. It is mid
Answer Preview: 1. There are many activities that are reasonable for an auditor to perform in making the client acceptance decision. Relevant standards (see prior listing) require that the audit firm establish qualit…

, Chapter: 5 -Problem: 4 >> What recommendations do you have related to plans for the actual conversion to this new system?
Answer Preview: Concerns About the Proposed Implementation of the IT-based System The selection of the proposed IT-based sales system was made solely by the store owner (St. James) based on information she obtained a…

, Chapter: 4 -Problem: 41 >> A 2002 editorial in Business Week raised issues with compensation received by corporate executives even when the company does not perform well. In 1980 corporate executive compensation was 42 times the average worker compensation while in 2000 it was 531 times the average worker compensation.(a) Do you believe executive compensation levels are reasonable?(b) Explain your answer.(c) What type of pr
Answer Preview: The idea of reasonableness of executive compensation may vary with person to person. Some person may …

, Chapter: 2 -Problem: 2 >> Based on the information obtained from the web site and your knowledge of the industry prepare a memo discussing the following items:(a) Dell’s information for fiscal year ended 1/28/2011:Sales -Net income -Cash flow from operating activities - Total assets -Number of employees -(b) What are Dell’s products?(c) Who are Dell’s competitors?(d) Who are Dell’s customers?(e) Who are Dell’s suppliers?(f
Answer Preview: (a) Sales - $61 4 billion Net income - $2 6 billion Cash flow from operating activities - $4 0 billion Total assets - $38 6 billion Number of employees - Approximately 103,300 regular employees (b) Th…

, Chapter: 6 -Problem: 6 >> According to the CICA Web site indicated in question number four, what professional standards must a CPA follow when providing assurance services that result in the expression of a WebTrust or SysTrust opinion?
Answer Preview: When providing assurance from SysTrust or WebTrust engagement…

, Chapter: 5 -Problem: 9 >> What do you believe were the three most serious control deficiencies at Société Générale? For each deficiency listed, indicate whether the deficiency related to poor design or poor operating effectiveness. Describe how you would remediate or fix each of the deficiencies listed.
Answer Preview: Some of the more important deficiencies are outlined in the table that follows. Control Deficiency Lack of appropriate follow-up on alerts: The internal report found the bank's controls did properly t…

, Chapter: 8 -Problem: 13 >> (a) How close does the Bees’ reported ticket revenue for 2011 have to be to your expectation for you to consider reported ticket revenue reasonable or fairly stated?(b) If reported ticket revenues were outside your “reasonableness range,” what could explain the difference?
Answer Preview: (a) For substantive analytical procedures, the tolerable difference can be no greater than overall materiality. The case provides pre-tax net income a…

, Chapter: 6 -Problem: 4 >> Research the SysTrust and WebTrust services from the information on the following web page (or search the Internet or within the AICPA’s Information Technology Center Web site for “Trust Services”): http://www.webtrust.org. Describe how WebTrust services differ from SysTrust services. Describe how they are related.
Answer Preview: WebTrust and SysTrust are two specific services developed by the AICPA and Canadian Institute of Chartered Accountants (CICA) based on the Trust Servi…

, Chapter: 5 -Problem: 1 >> What aspects of the current manual sales accounting system create risks that increase the likelihood of material misstatements in the financial statements? Specifically identify each risk and how it might lead to a misstatement. For example, don't just put "Risk: Sales tickets are manually prepared by the cashier." Rather, you should state why this increases risks of material misstatements by addi
Answer Preview: The current manual sales accounting system creates …

, Chapter: 9 -Problem: 16 >> Research required accounting treatment criteria related to revenue recognition to make sure you have a clear understanding of the explicit criteria that must be satisfied before revenue can be recognized. The Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, provides a good summary of the key required elements. Read the SEC's
Answer Preview: The determination of whether a company is reporting transactions within the confines o…

, Chapter: 6 -Problem: 8 >> To become more familiar with these assurance services opportunities, obtain a copy of the Trust Services Principles and Criteria, which can be located on the Internet. Use your internet browser to locate a copy of the framework by conducting a search for “Trust Services Principles and Criteria.” Most likely you will find a link to the framework posted on the AICPA’s web site by entering "trust ser
Answer Preview: (a) The AICPA defines Trust Services as professional assurance and advisory services based on a common framework to address the risks and opportunities associated with information technology (IT). The …

, Chapter: 2 -Problem: 5 >> For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures?
Answer Preview: Business Risks and their Impact on the Financial Statements Not all business risk gives rise to the …

, Chapter: 4 -Problem: 12 >> Another component of the audit risk model is control risk. Describe the five components of internal control. What characteristics of Comptronix’s internal control increased control risk for the audits of the 1989-1992 year-end financial statements?
Answer Preview: As stated in the solution to question 1, control risk reflects the auditors assessment of the likelihood a material misstatement could occur and not be prevented or detected on a timely basis by the c…

, Chapter: 12 -Problem: 23 >> 1. Go to the web site http://www.globalreporting.org and read the G3.1 Application Levels. What are the major differences between the three application levels?2. The G3.1 Application Levels identifies six key qualities for having external assurance provided on the sustainability report. What are the six key qualities and how do they compare to the ten generally accepted auditing standards for audi
Answer Preview: 1. The application level framework allows reporting organizations to declare the level to which they have applied the GRI Reporting Framework. The lowest application level, "level C," requires informa…

, Chapter: 4 -Problem: 10 >> Professional auditing standards present the audit risk model, which is used to determine the nature, timing, and extent of audit procedures. Describe the components of the model and discuss how changes in each component affect the auditor’s need for evidence?
Answer Preview: The audit risk model is used to determine the nature, timing, and extent of substantive audit proced…

, Chapter: 12 -Problem: 30 >> The 2010 GRI Sustainability Reporting Statistics publication indicates that 47 percent of the GRI sustainability reports obtained external assurance and that the majority of the external assurance was provided by the GRI. What are the advantages of having accountants as compared to other third party groups like the GRI provide assurance services on corporate sustainability reports?• What are the a
Answer Preview: The advantage of issuing an integrated report is that it emphasizes the importance of economic, envi…

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13 Reviews for Auditing Cases An Interactive Learning Approach Textbook Questions And Answers