3-24 (Objectives 3-1 , 3-2, 3-4, 3-6, 3-7) Patel, CPA, has complet.docx

3-24 (Objectives 3-1 , 3-2, 3-4, 3-6, 3-7) Patel, CPA, has
completed the audit of the financial statements of Bellamy
Corporation as of and for the year ended December 31, 2016.
Patel also audited and reported on the Bellamy financial
statements for the prior year. Patel drafted the following report
for 2016.
© 2017 DeVry/Becker Educational Development Corp. All
rights reserved.
We have audited the balance sheet and statements of income and
retained earnings of Bellamy Corporation as of December 31,
2016. We conducted our audit in accordance with generally
accepted accounting standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of misstatement.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly the financial position of Bellamy Corporation as
of December 31, 2016, and the results of its operations for the
year then ended in conformity with generally accepted auditing
standards, applied on a basis consistent with those of the
preceding year.
Patel, CPA
(Signed)
Other Information
· Bellamy is a private corporation and is presenting comparative
financial statements.
· During 2016, Bellamy acquired Stockard Inc. and the effects
of that transaction are reflected in the current year financial
statements. Information about this transaction is disclosed in
footnote 12.
· Patel was unable to perform normal accounts receivable
confirmation procedures for accounts that are material, but not
pervasive, to the financial statements. Unfortunately, Patel was

not able to perform alternative procedures to support the
existence of the receivables.
· Bellamy Corporation is the defendant in litigation where there
is a reasonable possibility that Bellamy may be required to pay
a substantial amount of cash, which might require the sale of
certain fixed assets. Because management does not want to
provide any information that the plaintiff might use against
Bellamy, the case is not discussed in the financial statements.
· Bellamy issued debentures on January 31, 2015, in the amount
of $10 million. The funds obtained from the issuance were used
to finance the expansion of plant facilities. The debenture
agreement restricts the payment of future cash dividends to
earnings after December 31, 2020. Bellamy has disclosed this in
the footnotes to the financial statements.
Required
a. Identify and explain any items included in “Other
Information” that need not be part of the auditor’s report.
b. Explain the deficiencies in Patel’s report as drafted.*
*Based on AICPA question paper, American Institute of
Certified Public Accountants.
3-26( Objectives 3-4 , 3-5, 3-6, 3-7, 3-8) For the following
independent situations, assume that you are the audit partner on
the engagement:
1. A number of frozen yogurt stores have opened in the last few
years and your client, YogurtLand, has experienced a noticeable
decline in customer traffic over the past several months that has
caused you to have substantial doubt about YogurtLand’s ability
to continue as a going concern.
2. Intelligis Electronics is a manufacturer of advanced electrical
components. During the year, changes in the market resulted in
a significant decrease in the demand for their products, which
are now being sold significantly below cost. Management
refuses to write-off the products or to increase the reserve for
obsolescence.

3. In the last 3 months of the current year, Oil Refining
Company decided to change direction and go significantly into
the oil drilling business. Management recognizes that this
business is exceptionally risky and could jeopardize the success
of its existing refining business, but there are significant
potential rewards. During the short period of operation in
drilling, the company has had three dry wells and no successes.
The facts are adequately disclosed in footnotes.
4. Your client, Harrison Automotive, has changed from straight-
line to sum-of-the-years’ digits depreciation. The effect on this
year’s income is immaterial, but the effect in future years may
be highly material. The change is not disclosed in the footnotes.
5. Marseilles Fragrance, Inc., is based in New York but has
operations throughout Europe. Because users of the audited
financial statement are international, your audit firm was
engaged to conduct the audit in accordance with U.S. auditing
standards and International Standards on Auditing (ISAs).
6. Circumstances prevent you from being able to observe the
counting of inventory at Brentwood Industries. The inventory
amount is material in relation to Brentwood Industries’
financial statements. But, you were able to perform alternative
procedures to support the existence and valuation of the
inventory at year-end.
7. Approximately 20% of the audit of Lumberton Farms, Inc.,
was performed by a different CPA firm, selected by you. You
have reviewed their audit files and believe they did an excellent
job on their portion of the audit. Nevertheless, you are
unwilling to take complete responsibility for their
work.Required
For each situation, do the following:
a. Identify which of the conditions requiring a deviation from a
standard unmodified opinion audit report is applicable, if any.
b. State the level of materiality as immaterial, material, or
highly material. If you cannot decide the level of materiality,
state the additional information needed to make a decision.
c. Given your answers in parts a. and b., state the appropriate

audit report from the following alternatives (if you have not
decided on one level of materiality in part b., state the
appropriate report for each alternative materiality level):
1. Unmodified opinion—standard wording
2. Unmodified opinion—explanatory paragraph
3. Unmodified opinion—nonstandard report wording
4. Qualified opinion only—GAAP departure
5. Qualified opinion—scope limitation
6. Disclaimer
7. Adverse*
3-29 (Objectives 3-1 , 3-3, 3-7, 3-9) The International Auditing
and Assurance Standards Board (IAASB) recently revised its
standards related to audit reporting. ISA 700
(Revised), Forming an Opinion and Reporting on Financial
Statements, requires the auditor’s report to include the
following paragraphs under the headings “Basis for Opinion”
and “Auditor’s Responsibilities for the Audit of the Financial
Statements”:Basis for Opinion
We conducted our audit in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report.
We are independent of the Company in accordance with the
International Ethics Standards Board for Accountants’ Code of
Ethics for Professional Accountants (IESBA Code) together
with the ethical requirements that are relevant to our audit of
the financial statements in [the home country] and we have
fulfilled our other ethical responsibilities in accordance with
these requirements and the IESBA Code. We believe that the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.Auditor’s Responsibilities for
the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an

auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud
or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
financial statements.Required
Read the preceding paragraphs to answer the following:
a. How does the information in the preceding paragraphs
compare to the information in the paragraphs under the
“Auditor’s Responsibility” heading in the standard unmodified
opinion audit report example for a nonpublic company shown
in Figure 3-1?
b. How does the information in the preceding paragraphs
compare to the information in the scope paragraph in the
standard unmodified opinion audit report example for a public
company shown in Figure 3-3 ?
c. Discuss whether you believe these paragraphs in the ISA
audit report improve auditor communications to users of the
4-21 (Objectives 4-5 , 4-6) The following situations involve the
provision of nonaudit services. Indicate whether providing the
service is a violation of AICPA rules or SEC rules including
Sarbanes–Oxley requirements on independence. Explain your
answer as necessary.
a. Providing bookkeeping services to a public company. The
services were preapproved by the audit committee of the
company.
b. Providing internal audit services to a public company audit
client with the preapproval of the audit committee.
c. Providing advice to a private company client on accounting
for a merger with another private company.
d. Providing bookkeeping services to a private company. The
source documents were prepared and authorized by the client.

e. Providing internal audit services to a public company that is
not an audit client.
f. Implementing a financial information system designed by
management for a private company.
g. Recommending a tax shelter to a client that is publicly held.
The services were preapproved by the audit committee.
4-22 (Objectives 4-5 , 4-7) Each of the following situations
involves a possible violation of the AICPA Code of Professional
Conduct. For each situation, state the applicable rule of conduct
and whether it is a violation.
a. Emrich, CPA, provides tax services, management advisory
services, and bookkeeping services and also conducts audits for
the same nonpublic client. Because the firm is small, the same
person often provides all the services.
b. Steve Custer, CPA, set up a casualty and fire insurance
agency to complement his auditing and tax services. He does
not use his own name on anything pertaining to the insurance
agency and has a highly competent manager, Jack Long, who
runs it. Custer often requests Long to review the adequacy of a
client’s insurance with management if it seems underinsured.
He believes that he provides a valuable service to clients by
informing them when they are underinsured.
c. Seven small Seattle CPA firms have become involved in an
information project by taking part in an interfirm working paper
review program. Under the program, each firm designates two
partners to review the audit files, including the tax returns and
the financial statements, of another CPA firm taking part in the
program. At the end of each review, the auditors who prepared
the working papers and the reviewers have a conference to
discuss the strengths and weaknesses of the audit. They do not
obtain authorization from the audit client before the review
takes place.
d. Franz Marteens is a CPA, but not a partner, with three years
of professional experience with Roberts and Batchelor, CPAs.
He owns 25 shares of stock in an audit client of the firm, but he

does not take part in the audit of the client, and the amount of
stock is not material in relation to his total wealth.
e. A nonaudit client requests assistance of M. Wilkenson, CPA,
in the installation of a local area network. Wilkenson has no
experience in this type of work and no knowledge of the client’s
computer system, so he obtains assistance from a computer
consultant. The consultant is not in the practice of public
accounting, but Wilkenson is confident of his professional
skills. Because of the highly technical nature of the work,
Wilkenson is not able to review the consultant’s work.
f. In preparing the personal tax returns for a client, Sarah
Milsaps, CPA, observed that the deductions for contributions
and interest were unusually large. When she asked the client for
backup information to support the deductions, she was told,
“Ask me no questions, and I will tell you no lies.” Milsaps
completed the return on the basis of the information acquired
from the client.
g. Roberta Hernandez, CPA, serves as controller of a U.S.-based
company that has a significant portion of its operations in
several South American countries. Certain government
provisions in selected countries require the company to file
financial statements based on international standards. Roberta
oversees the issuance of the company’s financial statements and
asserts that the statements are based on international financial
accounting standards; however, the standards she uses are not
those issued by the International Accounting Standards Board.
h. Archer Ressner, CPA, stayed longer than he should have at
the annual holiday party of Ressner and Associates, CPAs. On
his way home he drove through a red light and was stopped by a
police officer, who observed that he was intoxicated. In a jury
trial, Ressner was found guilty of driving under the influence of
alcohol. Because this was not his first offense, he was sentenced
to 30 days in jail and his driver’s license was revoked for one
year.
4-24 (Objective 4-5 ) Marie Janes encounters the following

situations in doing the audit of a large auto dealership. Janes is
not a partner.
1. The sales manager tells her that there is a sale (at a
substantial discount) on new cars that is limited to long-
established customers of the dealership. Because her firm has
been doing the audit for several years, the sales manager has
decided that Janes should also be eligible for the discount.
2. The auto dealership has an executive lunchroom that is
available free to employees above a certain level. The controller
informs Janes that she can also eat there any time.
3. Janes is invited to and attends the company’s annual holiday
party. When presents are handed out, she is surprised to find her
name included. The present has a value of approximately
$200.Required
Use the three-step process in the AICPA conceptual framework
to assess whether Janes’ independence has been impaired.
a. Describe how each of the situations might threaten Janes’
independence from the auto dealership.
b. Identify a safeguard that Janes’ firm could impose that would
eliminate or mitigate the threat of each situation to Janes’
independence.
c. Assuming no safeguards are in place and Janes accepts the
offer or gift in each situation, discuss whether she has violated
the rules of conduct.
d. Discuss what Janes should do in each situation.
5-17 (Objectives 5-2 , 5-3) The following are five independent
situations.
1. Joanie Brogan is a partner in an audit firm that operates as a
limited liability partnership (LLP). The firm has been sued for
an alleged audit failure related to an audit engagement handled
by a different partner in the firm. While Brogan had no
involvement in the engagement, she is concerned that the
plaintiff may successfully sue her seeking restitution from her
personal assets.
2. A lawsuit has been filed against Carter Hockaday, CPA,

charging him with constructive fraud in the audit of Broughton
Company’s financial statements. Hockaday has examined all the
audit documentation in his files and reviewed all relevant
auditing standards. He is convinced that his audit fully complies
with standards of the profession but is uncertain what he should
use as his primary defense tactic.
3. West Camera Co. filed for bankruptcy in January 2015. A
recent blog suggested that West’s external auditors should be
sued for failing to include a going concern explanatory
paragraph in the firm’s opinion on the financial statements
issued before the bankruptcy, even though the fair presentation
of the financial statements is not being disputed.
4. The audit firm Weaver and Jones, LLP, received a subpoena
for its documentation related to the audit of Westbrook
Corporation’s financial statements. The firm has refused to
respond, alleging that the documentation is considered
privileged communication between the firm and its client.
5. Spencer Cullen, CPA, is a defendant in a lawsuit alleging that
Cullen should be held legally liable for gross negligence for a
fraud involving the valuation of securities included in the
financial statements of one of his clients. Cullen was uncertain
how to establish a correct valuation for the securities and
decided to rely on the price estimation supplied by
management.Required
Analyze each situation and provide your assessment of the
potential resolution of each scenario, including potential
liability for the auditor or audit firm involved.
1. 5-19 (Objectives 5-3 , 5-7) The following independent
scenarios describe auditor behavior on an audit engagement.
1. Chad Lewis is the lead audit partner on the audit engagement
of a publicly traded company. Chad followed auditing standards
on the audit engagement and issued an unmodified opinion. It
was subsequently discovered that the financial statements
contained a material misstatement that had been undetected by
the management of the company and by the audit team.

2. Maria Marquez, CPA, is a sole proprietor. She recently
accepted a new audit client who was applying for a bank loan
and needed to present audited financial statements to the bank.
Maria was not able to complete the audit engagement by herself,
so she hired several college students to assist her. The students
completed the audit procedures without much guidance, and
Maria issued an unmodified opinion on the client’s financial
statements.
3. On a recent audit engagement, the client firm neglected to
inform the audit firm that a significant percentage of inventory
was stored at an outside warehouse. As a result, the auditors did
not observe the physical inventory count for that inventory,
which represented 20% of the client’s inventory balance. The
auditors were able to satisfy themselves that the inventory
existed through alternative procedures, and issued an
unmodified opinion on the financial statements as a whole.
4. The audit engagement partner, Marc Johnson, recently
received a subpoena for workpapers related to an audit
engagement on which his audit firm has been named as a
defendant. Marc asked the staff auditor to remove and discard
two memos from the workpaper files documenting
communication between the engagement partner and the CFO
regarding the goodwill impairment analysis.
5. Melissa Louis is the lead engagement partner on a publicly
traded company. The company’s CEO recently approached
Melissa and informed her that they had identified a material
misstatement in the prior year’s financial statements, which had
been audited by Melissa’s firm and submitted to the SEC. The
CEO suggested they correct the misstatement by recording a
journal entry in the current year for half of the amount of the
misstatement, and in the following year for the remaining half.
Melissa agreed to this plan to avoid a public announcement of a
restatement and a potential lawsuit, since the amount of the
journal entries recorded in the current and subsequent years
would be considered immaterial to the financial
statements.Required

For each of the scenarios listed above, discuss whether the
auditor’s behavior would be considered nonnegligence, ordinary
negligence, gross negligence, constructive fraud, fraud, or
criminal behavior.
5-23 (Objectives 5-5 , 5-6) In order to expand its operations,
Barton Corp. raised $5 million in a public offering of common
stock, and also negotiated a $2 million loan from First National
Bank. In connection with this financing, Barton engaged
Hanover & Co., CPAs, to audit Barton’s financial statements.
Hanover knew that the sole purpose of the audit was so that
Barton would have audited financial statements to provide to
First National Bank and the purchasers of the common stock.
Although Hanover conducted the audit in conformity with its
audit program, Hanover failed to detect material acts of
embezzlement committed by Barton Corp.’s president. Hanover
did not detect the embezzlement because of its inadvertent
failure to exercise due care in designing the audit program for
this engagement.
After completing the engagement, Hanover issued an
unmodified opinion on Barton’s financial statements. The
financial statements were relied upon by the purchasers of the
common stock in deciding to purchase the shares. In addition,
First National Bank approved the loan to Barton based on the
audited financial statements. Within sixty days after the sale of
the common stock and the issuance of the loan, Barton was
involuntarily petitioned into bankruptcy. Because of the
president’s embezzlement, Barton became insolvent and
defaulted on the loan from the bank. Its common stock became
virtually worthless. Actions have been brought against Hanover
by:
· The purchasers of the common stock, who have asserted that
Hanover is liable for damages under Section 10(b) and Rule
10b-5 of the Securities Exchange Act of 1934.
· First National Bank, based upon Hanover’s negligence.
· Trade creditors who extended credit to Barton based upon

Hanover’s negligence.Required
a. Discuss whether you believe Hanover will be found liable to
the purchasers of common stock.
b. Indicate whether you believe First National Bank will be
successful in its claim against Hanover.
c. Indicate whether you believe the trade creditors will be
successful in their claim against Hanover.*
1. 6-26 (Objectives 6-1, 6-3) Auditors provide “reasonable
assurance” that the financial statements are “fairly stated, in all
material respects.” Questions are often raised as to the
responsibility of the auditor to detect material misstatements,
including misappropriation of assets and fraudulent financial
reporting.Required
a. Discuss the concept of “reasonable assurance” and the degree
of confidence that financial statement users should have in the
b. What are the responsibilities of the independent auditor in
the audit of financial statements? Discuss fully, but in this part
do not include fraud in the discussion.
c. What are the responsibilities of the independent auditor for
the detection of fraud involving misappropriation of assets and
fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the
detection of fraud is appropriate.
1. 6-27 (Objective 6-4) The following information was obtained
from several accounting and auditing enforcement releases
issued by the Securities and Exchange Commission (SEC) after
its investigation of fraudulent financial reporting involving Just
for Feet, Inc.:
Just for Feet, Inc., was a national retailer of athletic and
outdoor footwear and apparel based in Birmingham, AL. The
company incurred large amounts of advertising expenses and
most vendors offered financial assistance through unwritten
agreements with Just for Feet to help pay for these advertising
expenses. If Just for Feet promoted a particular vendor’s

products in one of its advertisements, that vendor typically
would consider agreeing to provide an “advertising co-op
credit” to the Company to share the costs of the advertisement.
Just for Feet offset this co-op revenue against advertising
expense on its income statement, thereby increasing its net
earnings. Although every vendor agreement was somewhat
different, Just for Feet’s receipt of advertising co-op revenue
was contingent upon subsequent approval by the vendor. If the
vendor approved the advertisement, it would usually issue the
co-op payment to Just for Feet in the form of a credit memo
offsetting expenses on Just for Feet’s merchandise purchases
from that vendor. The company’s CFO, controller, and VP of
Operations directed the company’s accounting department to
book co-op receivables and related revenues that they knew
were not owed by certain vendors, including Asics, New
Balance, Nike, and Reebok. These fraudulent practices resulted
in over $19 million in fictitious pretax earnings being reported,
out of total pretax income of approximately $43 million. The
SEC ultimately brought charges against a number of senior
executives at Just for Feet and some vendor
representatives.Required
a. What does it mean to approach an audit with an attitude of
professional skepticism?
b. What circumstances related to the accounting treatment of the
vendor allowances should increase an auditor’s professional
skepticism?
c. What factors might have caused the auditor to inappropriately
accept the assertions by management that the vendor allowances
should be reflected in the financial statements?
d. Develop three probing questions related to the vendor
allowances that the auditor should have asked in the audit of
Just for Feet’s financial statements.
6-30 (Objective 6-8) The following are various management
assertions (a. through m.) related to sales and accounts
receivable.Management Assertion

a. Receivables are appropriately classified as to trade and other
receivables in the financial statements and are clearly described.
b. Sales transactions have been recorded in the proper period.
c. Accounts receivable are recorded at the correct amounts.
d. Sales transactions have been recorded in the appropriate
accounts.
e. All required disclosures about sales and receivables have
been made.
f. All accounts receivable have been recorded.
g. Disclosures related to receivables are at the correct amounts.
h. Sales transactions have been recorded at the correct amounts.
i. Recorded accounts receivable exist.
j. Disclosures related to sales and receivables relate to the
entity.
k. Recorded sales transactions have occurred.
l. There are no liens or other restrictions on accounts
receivable.
m. All sales transactions have been recorded.Required
a. Explain the differences among management assertions about
classes of transactions and events, management assertions about
account balances, and management assertions about presentation
and disclosure.
b. For each assertion, indicate whether it is an assertion about
classes of transactions and events, an assertion about account
balances, or an assertion about presentation and disclosure.
c. Indicate the name of the assertion made by management.
1. Interview: Interview a member of a military family or a
helping professional working with military families.
· Provide details of that person’s experiences and what you
consider critical elements that provide insight into the needs of
military families.
· Explain what you learned as a result of the interview.
2. Describe your experiences, benefits, limitations, and what

you learned or gained from the activity.
· Explain how the information you gained can help you in your
role as a helping professional.
Summary: Explain how your chosen project may help you
understand the stressors, family dynamics, challenges, and
advantages of military families.
The Final Project will be a 10- to 12-page paper and must
include the following:
· Identification of your chosen assignment
· A minimum of 5 scholarly articles
· Adherence to APA style and format
· Include an Abstract page
· Include a conclusion page
********** No Plagarism **********

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