ACC 410 Entire Course Material- Auditing

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ACC 410 Entire Course Material- Auditing
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.
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