ACC 209 Auditing Exam 1 Exam 1 Auditing ACC 209 Name _____________________________________ 1. Assume you are the partner in charge of the 2007 audit of Becker Corporation, a private company. The audit report has not yet been prepared. In each independent situation following (1 - 8), indicate the appropriate action (a - g) to be taken. The possible actions are as follows: a. Issue a standard unqualified report. b. Qualify both the scope and opinion paragraphs. c. Qualify the opinion paragraph. d. Issue an unqualified opinion with an explanatory paragraph. e. Issue an unqualified opinion with modified wording (no explanatory paragraph). f. Issue an adverse opinion. g. Disclaim an opinion. The situations are as follows: Issue an adverse opinion. 1. Becker Corporation carries its property, plant, and equipment accounts at current market values. Current market values exceed historical cost by a highly material amount, and the effects are pervasive throughout the financial statements. Disclaim an opinion. 2. Management of Becker Corporation refuses to allow you to observe, or make, any counts of inventory. The recorded book value of inventory is highly material. Issue a standard unqualified report 3. You were unable to confirm accounts receivable with Becker’s customers. However, because of detailed sales and cash receipts records, you were able to perform reliable alternative audit procedures. Disclaim an opinion. 4. One week before the end of fieldwork, you discover that the audit manager on the Becker engagement owns a material amount of Becker’s common stock. Issue an unqualified opinion with modified wording (no explanatory paragraph). 5. You relied upon another CPA firm to perform part of the audit. Although you were the principal auditor, the other firm audited a material portion of the financial statements. You wish to refer to (but not name) the other firm in your report. Issue an unqualified opinion with an explanatory paragraph. 6. You have substantial doubt about Becker’s ability to continue as a going concern. Issue an unqualified opinion with an explanatory paragraph. 7. Becker Corporation changed its method of computing depreciation in 2007. You concur with the change and the change is properly disclosed in the financial statement footnotes. Qualify the opinion paragraph. 8. Ten days after the balance sheet date, one of Becker’s buildings was destroyed by a fire. Becker refuses to disclose this information in a footnote to the financial statements, but you believe disclosure is required to conform with GAAP. The amount of the uninsured loss was material, but not highly material. 2. The following is a portion of a qualified audit report issued for a private company: Independent Auditor’s Report To the shareholders of Tamarak Corporation We have audited the accompanying balance sheet of Tamarak Corporation as of October 31, 2007, and the related statements of income, retained earnings, and cash flows for the year then ended. 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. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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, a s well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The company has included in property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be expensed in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be decreased by $4,000,000, long - term debt by $2,000,000, and retained earnings by $180,000 as of October 31, 2005, and net income and earnings per share would be decreased by $180,000 and $.62, respectively, for the year then ended. In our opinion, except for the effects of the Company's incorrect treatment of expense , the financial statement referred to in the first paragraph presents fairly, in all material respects, the financial position of Tamarak Corporation as of October 31, 2007, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles Required: Complete the above qualified audit report by preparing the opinion paragraph. Do not date or sign the report. 3. The following situations involve a possible violation of the AICPA’s Code of Professional Conduct . For each situation, (1) determine the applicable rule number or name 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 . a. In 2004, Freeman and Johnson, both CPAs, decided to form a CPA practice. In 2007, Freeman and Johnson approached Bill Delaney, a physician and medical expert, and asked him to assist them with their growing medical consulting practice. Delaney agreed, but only after he was given an ownership interest in the firm. Delaney does not intend to quit his private medical practice. Rule Form of Organization and Name Violation? Yes No Explanation: Non CPA can become an owner in the firm subject to they are dedicated for the services to the clients of firm as their principal occupation. Here is is missing, so it is a violation. b. Brian DePalie has a successful dentistry practice in Charleston. Brian has recommended one of his patients to Katie Walton, CPA. To show gratitude for the referral, Katie has agreed to pay Brian a token gift of $50. Katie discloses the payment arrangement to her new clients. Rule: Commissions and Referral Fees rule Violation? Yes No Explanation: Payment can be made for the referral by a CPA if he/she discloses it to its clients. So no violation as he discloses to his client . c. The accounting firm of Bayer & Peng, CPAs, is negotiating a fee with a new audit client. They agree the client will pay $50,000 if Bayer & Peng issues a clean, unqualified opinion, $40,000 if a qualified opinion is issued, and only $20,000 if an adverse opinion is issued. Rule : Contingent Fees rule Violation? Yes No Explanation: This is a contingent fee contract which is prohibited under Rule 302. d. Don Smith, CPA, is a member of the engagement team that performs the audit