1. Match the following definitions to the appropriate terms.
Potential Matches:
1 : Due professional care
2 : Sufficient understanding of internal control
3 : Adequacy of informative disclosures
Answer
: Standards of fieldwork
: General standards
: Standards of reporting
2. The following is a portion of a qualified scope and opinion report due to a scope restriction. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.)
To the shareholders of Fast Times Corporation,
We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2009, and the related statements of income, retained earnings, and cash flows for the past year. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements. Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures.
Required: Complete the above report by preparing the opinion paragraph. Do not date or sign the report.
3. The following situation involves a possible violation of the AICPA's code of professional conduct. For this situation, (1) determine the applicable rule number from the code, (2) decide whether or not the code has been violated, and (3) briefly explain how the situation violates (or does not violate) the code. Your answer should be set up something like this:
Rule # _____ Violation? Yes or No.
Provide a one- or two-line explanation.
Auditor Tex Gato of the CPA firm Smackey and Smackey, CPAs, enjoyed auditing his favorite client, Super Pup Dog Food, because the client would allow him to take home to his dog a variety of dog food samples that amounted to a year's worth of dog food.
4. The following situation involves a possible violation of the AICPA's code of professional conduct. For this situation, (1) determine the applicable rule number from the code, (2) decide whether or not the code has been violated, and (3) briefly explain how the situation violates (or does not violate) the code. Your answer should be set up something like this:
Rule # _____ Violation? Yes or No.
Provide a one- or two-line explanation.
Howard Cunningham & Co., CPAs, designates its firm as Members of the American Institute of Certified Public Accountants. All of the partners of the firm are CPAs. However, one of the partners has recently chosen to allow her membership to lapse because of personal reasons.
5. Brandt CPAs has obtained Big-Bucks, a new publicly-held client. Big-Bucks has various accounting-related needs that Brandt CPAs would like to fulfill. Partner-in-charge D. Brandt has discussed with Big-Bucks the possibility of performing the annual audit of Big-Bucks, as well as preparing the tax returns, business plan, and quarterly write-up services and providing consultation on the viability and valuation of mining gas reserves in Tennessee. An outside expert would be hired by Brandt CPAs to provide expert advice to the CPA firm on mining gas reserves. Additionally, Brandt CPA's audit manager, who will be assigned to this audit, has previously been approached by Big-Bucks to come work for the company as chief financial officer. The audit manager has refused the offer, because his cousin's sister-in-law is a 10% shareholder in Big-Bucks, and he does not want her to have any say in his employment. Under the Sarbanes-Oxley Act of 2002, what issues do you see, and how would you advise Brandt CPAs? Is there ever a time when Brandt CPAs could perform any of these services for Big-Bucks?
6. Discuss some of the steps the AICPA and the accounting profession as a whole can and are taking to reduce practitioners' exposure to lawsuits. You answer should provide at least five steps.
7. Below are 10 documents typically examined during an audit. Classify each document as either internal or external.
_____ 1: Canceled checks for payments of accounts payable
_____ 2: Payroll time cards
_____ 3: Duplicate sales invoices
_____ 4: Vendors invoices
_____ 5: Bank statements
_____ 6: Minutes of the board of directors meetings
_____ 7: Signed lease agreements
_____ 8: Notes receivable
_____ 9: Subsidiary accounts receivable records
_____ 10: Remittance advices
8. Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit. Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.