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AC 410 Unit 1 Homework Assignment
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1–20
Public accounting firms are sometimes grouped into categories of local
firms, regional firms, nationalfirms, and international firms. Explain
briefly the characteristics of each. Include in your answer the types of
services stressed in each group.
1–26
The Sarbanes-Oxley Act of 2002 created the Public Company
Accounting Oversight Board. Explain the major responsibilities of this
board.
2–7
Evaluate the following quotation:“If a CPA firm completes a nonpublic
company audit of Adam Company’s financial statements following
AICPA generally accepted auditing standards and is satisfied with the
results of the audit, an unmodified audit report may be issued. On the
other hand, if no audit is performed of the current year’s 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 year’s financial statements, a qualified
report may be issued.”

Do you agree? Give reasons to support your answer.
2–28
Reed, CPA, accepted an engagement to audit the financial statements of
Smith Company. Reed’s discussions with Smith’s new management and
the predecessor auditor indicated the possibility that Smith’s financial
statements may be misstated due to the possible occurrence of errors,
fraud, and illegal acts.
a. Identify and describe Reed’s responsibilities to detect Smith’s errors
and fraud. Do not identify specific audit procedures.
b. Describe Reed’s responsibilities to detect Smith’s material
noncompliance with laws. Do not identify specific audit procedures.
c. Identify and describe Reed’s responsibilities to report Smith’s
noncompliance with laws.
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3-31

Ron Barber, CPA, is auditing the financial statements of DGF, Inc., a
publicly held company. During the course of the audit, Barber
discovered that DGF has been making illegal bribes to foreign
government officials to obtain business, and he reported the matter to
senior management and the board of directors of DGF.
Required:
If management and the board of directors take appropriate remedial
action, should Barber be required to report the matter outside the
company?
Describe Barber's appropriate response if management and the board of
directors fail to take appropriate remedial action.
3-43
Thomas Gilbert and Susan Bradley formed a professional corporation
called “Financial Services Inc.—A Professional Corporation,” each
taking 50 percent of the authorized common stock. Gilbert is a CPA and
a member of the AICPA. Bradley is a CPCU (Chartered Property
Casualty Underwriter). The corporation performs auditing and tax
services under Gilbert's direction and insurance services under
Bradley's supervision.
One of the corporation's first audit clients was Grandtime Company.
Grandtime had total assets of $600,000 and total liabilities of $270,000.
In the course of his examination, Gilbert found that Grandtime's
building with a carrying value of $240,000 was pledged as collateral for
a 10-year term note in the amount of $200,000. The client's financial
statements did not mention that the building was pledged as collateral
for the 10-year term note. However, as the failure to disclose the lien did
not affect either the value of the assets or the amount of the liabilities,
and his examination was satisfactory in all other respects, Gilbert
rendered an unqualified opinion on Grandtime's financial statements.
About two months after the date of his opinion, Gilbert learned that an

insurance company was planning to loan Grandtime $150,000 in the
form of a first-mortgage note on the building. Realizing that the
insurance company was unaware of the existing lien on the building,
Gilbert had Bradley notify the insurance company of the fact that
Grandtime's building was pledged as collateral for a term note.
Shortly after the events described above, Gilbert was charged with
several violations of professional ethics.
Required:
Identify and discuss at least four ethical implications of those acts by
Gilbert that were in violation of the AICPA Code of Professional
Conduct.
4-21
Jensen, Inc., filed suit against a public accounting firm, alleging that the
auditors' negligence was responsible for failure to disclose a large
defalcation that had been in process for several years. The public
accounting firm responded that it may have been negligent, but that
Jensen, Inc., was really to blame because it had completely ignored the
public accounting firm's repeated recommendations for improvements in
internal control.
Required:
If the public accounting firm was negligent, is it responsible for the loss
sustained by the client? Does the failure by Jensen, Inc., to follow the
auditors' recommendation for better internal control have any bearing
on the question of liability? Explain.
4-26
The international CPA firm of Arthur Andersen faced significant liability
in conjunction with its audits of Enron Corporation.

Required:
From a legal liability perspective, describe the unique features of this
audit case.
Describe the important implications of this audit case for a firm of
public accountants.
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5–36
Comment on the reliability of each of the following examples of audit
evidence. Arrange your answer in the form of a separate paragraph for
each item. Explain fully the reasoning employed in judging the
reliability of each item.
5-49

Audit risk should be considered when planning and performing an audit
of financial statements in accordance with generally accepted auditing
standards.
6–25
Mary Deming has been asked to accept an engagement to audit a small
financial institution. Deming has not previously audited a financial
institution.
6–26
Assume that you have been assigned to the audit of Lockyer
Manufacturing Company. You have completed the procedures for
gathering information about the company and its environment, including
internal control.
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Questions Requiring Analysis: 7-28
Problem 7-28.

Discuss the advantages to CPAs of documenting internal control by
using:
Problem 7-33.
Required:
Identify the weaknesses in Randall'ssystem of corporate governance and
provide suggestions for improvement in the system. Organize your
answer as follows:
Problem 9-29.
Problem 9-38.
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Refer to Chapter 11 of the textbook, Objective Question 11-38.
Assume that fraud has been discovered in the “Possible Errors and
Fraud” list, shown as A through O in the problem. Select two of the
fraud items from the list and note them here:
Following the scientific method, answer the following questions below:
Do background research in relationship to the issue to get a more in-
depth understanding of the situation.
Construct your hypotheses concerning the issue which we will use to test
our data against.
Test your Hypotheses by doing experiments.
Analyze your data and draw a conclusion concerning the population
under study.
Communicate your results.
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Questions Requiring Analysis 12-21
Nolan Manufacturing Company retains you on April 1 to perform an
audit for the fiscal year ending June 30. During the month of May, you
make extensive studies of internal control over inventories.
All goods purchased pass through a receiving department under the
direction of the chief purchasing agent. The duties of the receiving
department are to unpack, count, and inspect the goods. The quantity
received is compared with the quantity shown on the receiving
department’s copy of the purchase order. If there is no discrepancy, the
purchase order is stamped “OK—Receiving Dept.” and forwarded to
the accounts payable section of the accounting department. Any
discrepancies in quantity or variations from specifications are called to
the attention of the buyer by returning the purchase order to him with an
explanation of the circumstances. No records are maintained in the
receiving department, and no reports originate there.
As soon as goods have been inspected and counted in the
receiving department, they are sent to the factory production area and
stored alongside the machines in which they are to be processed.
Finished goods are moved from the assembly line to a storeroom in the
custody of a stock clerk, who maintains a perpetual inventory record in
terms of physical units, but not in dollars.
What weaknesses, if any, do you see in the internal control over
inventories?
Problem 12-35
Described below are potential financial statement misstatements that
are encountered by auditors.
Inventory is understated because warehouse personnel overlooked
several racks of parts in taking the physical inventory.

Inventory is overstated because warehouse personnel included inventory
items received subsequent to year-end while recording the purchase in
the subsequent year to hide inventory shortages.
Inventory is overstated because management instructed computer
personnel to make changes in the file used to price inventories.
You are part of the audit team that is auditing Happy Chicken, Inc., a
company that franchises Happy Chicken family restaurants. During the
current year, management of Happy Chicken purchased for $2 million
one of its franchised locations, a store that was having financial
difficulties. In performing its analysis for impairment of assets at year-
end, management of Happy Chicken determined that the carrying value
of the asset may not be recoverable. As a result, management developed
an estimate of the fair value of the location using a discounted cash flow
model. The estimated fair value of the location was determined to be
$1.5 million, which resulted in an impairment loss of about $500,000.
The undiscounted future cash flows are equal to $1.7 million.
Problem 13-34
The following are typical questions that might appear on an internal
control questionnaire relating to plant and equipment:
Are subsidiary ledgers for plant and equipment regularly reconciled
with general ledger controlling accounts?
State the purpose of each of the above controls.
Describe the manner in which each of the above procedures might be
tested.
Assuming that the operating effectiveness of each of the above
procedures is found to be inadequate, describe how the auditors might

alter their substantive procedures to compensate for the increased level
of risks of material misstatements.
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Early in your first audit of Star Corporation, you notice that sales and
year-end inventory are almost unchanged from the prior year. However,
cost of goods sold is less than in the preceding year, and accounts
payable also are down substantially. Gross profit has increased, but this
increase has not carried through to net income because of increased
executive salaries. Management informs you that sales prices and
purchase prices have not changed significantly during the past year, and
there have been no changes in the product line. Star Corporation relies
on the periodic inventory system. Your initial impression of internal
control is that several weaknesses may exist.
Suggest a possible explanation for the trends described, especially the
decrease in accounts payable while sales and inventory were constant
and gross profit increased. Explain fully the relationships involved.

For this question, you’ll need to look at the ratios presented and analyze
the trends. What do the trends mean?
Problem 14-38
The following are typical questions that might appear on an internal
control questionnaire for accounts payable.
1. Are monthly statements from vendors reconciled with the accounts
payable listing?
Monthly statements from vendors should be reconciled to the payables
ledger.
2. Are vendors’ invoices matched with receiving reports before they are
approved for payment?
The two procedures are test controls that provides auditors the evidence
to access control risk of financial statements.
Required:
a. Describe the purpose of each of the above internal control activities.
b. Describe the manner in which each of the above procedures might be
tested.
c. Assuming that the operating effectiveness of each of the above
procedures is found to be inadequate, describe how the auditors might
alter their substantive procedures to compensate for the increased level
of the risk of material misstatement.

You are retained by Columbia Corporation to audit its financial
statements for the fiscal year ended June 30. Your consideration of
internal control indicates a fairly satisfactory condition, although there
are not enough employees to permit an extensive separation of duties.
The company is one of the smaller units in its industry, but it has
realized net income of about $500,000 in each of the last three years.
Near the end of your fieldwork, you overhear a telephone call received
by the president of the company while you are discussing the audit with
him. The telephone conversation indicates that on May 15 of the current
year the Columbia Corporation made an accommodation endorsement
of a 60-day $430,000 note issued by a major customer, Brill
Corporation, to its bank. The purpose of the telephone call from Brill
was to inform your client that the note had been paid at the maturity
date. You had not been aware of the existence of the note before
overhearing the telephone call.
Valley Corporation established a stock option plan for its officers and
key employees this year. Because the options granted have a higher
option price than the stock’s current market price, the company has not
recognized any cost for the options in the financial statements. However,
a note to the financial statements includes all required disclosures.
a. Do you believe that Valley’s management has appropriately
accounted for the stock option plan? Explain your answer.
b. What responsibility do the auditors have for the information in the
notes to the financial statements?
c. List the audit procedures, if any, which you believe should be applied
to the stock option plan.

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AC 410 Unit 8 Alternate Assignment
The types of subsequent events and their importance to the audit
The procedures auditors cannot perform before the end of the audit
The different types of audit reports and the conditions under which each
is issued
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Questions Requiring Analysis: 16–31
The auditor's opinion on the fairness of financial statements may be
affected by subsequent events.
Required:
- Define what is commonly referred to in auditing as a subsequent event,
and describe the two general types of subsequent events.
- Identify those auditing procedures that the auditor should apply at or
near the completion of fieldwork to disclose significant subsequent
events.
Required:
- Using the iron curtain approach, describe how Tanner would consider
whether an adjustment is required.
- Using the rollover approach, describe how Tanner would consider
whether an adjustment is required.
- Describe what SEC Staff Accounting Bulletin No. 108 requires in this
situation.
While performing your audit of Williams Paper Company, you discover
evidence that indicates that Williams may not have the ability to
continue as a going concern.

- Discuss types of information that may indicate substantial doubt about
a client's ability to remain a going concern.
- Explain the auditors' obligation in such situations.
Objective Questions: 17–26
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AC 410 Unit 9 Chapter 18 Assignment

AC 410 AC/410 AC 410 Unit 9 Chapter 18 Assignment
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18–29. The CPA firm of Carson & Boggs LLP is performing an internal
control audit in accordance with PCAOB Standard No. 5.The partner in
charge of the engagement has asked you to explain the process of
determining which controls to test. Describe the process, presenting
each of the links in this process and a short summary of how the
auditors approach each of them.
18–34. Simulation

Bill Jensen, a staff member of Zhan & Co., CPAs, has given you the
following list of what he refers to as “internal control deficiencies” for
the Zabling Co. audit and has asked you to review each point and make
certain that you agree that each is an internal control deficiency. For
each of the following items, reply A (Agree) or D (Disagree) indicating
whether the item represents an internal control deficiency.
18–35. Match the following definitions (or partial definitions) to the
appropriate term. Each term may be used once or not at all.
18–36. Your working papers for an integrated audit being performed
under PCAOB Standard No. 5 include the narrative description below of
the cash receipts and billing portions of internal control of Slingsdale
Building Supplies, Inc. Slingsdale is a single-store retailer that sells a
variety of tools, garden supplies, lumber, small appliances, and
electrical fixtures to the public, although about half of Slingsdale’s sales
are to construction contractors on account. Slingsdale employs 12
salaried sales associates, a credit manager, three full-time clerical
workers, and several part-time cash register clerks and assistant
bookkeepers. The full-time clerical workers perform such tasks as cash
receipts, billing, and accounting and are adequately bonded. They are
referred to in the narrative as “accounts receivable supervisor,”
“cashier,” and “bookkeeper.”
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AC 410 Unit 10 Assignment

Reflect and describe which key concepts and topics in this course have
made you a stronger candidate to enter the business world.
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