Week 2 Homework Questions
1) 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.
a) 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.
b) 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.
c) 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.
2) Assume that you encountered the following issues during several different auditing engagements during 2014. 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. However, all the firms are not publicly traded and not subject to SEC and PCAOB regulation.
a) 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 impact on its financial position and results of operations for 2014 in your audit report.
b) 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 2014 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.
c) 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.
d) 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.
e) You have completed your audit field work for you 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.
3) 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.
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