05 Jun Question Auditing Course Policy on Collaboration and Individual Work
Question
Auditing
Course Policy on Collaboration and Individual Work
This is an individual assignment and you are not to seek help from anyone else other than me.
I have engineered the test around the text and so you should not need to do any outside research. However, this is hard to prohibit. Thus, if you use any outside sources, cite them to avoid a charge of plagiarism. By cite, I mean be clear about exactly what material you took from what source and don’t just include a “Works Cited” section at the end of the test. This is inadequate. Also, if you copy exact words from an outside source, make sure you put them in quotation marks as well as including a citation.
Questions
1) Sullivan and Peters, CPAs have audited the financial statements of XYZ, Inc. as of December 31, 2014 and gave them a clean opinion on their financial statements. Since XYZ is publicly traded, they also audited the firm’s internal controls. They identified material weaknesses related to the method of accounting for sales commissions and separation of duties related to purchasing transactions. Sullivan and Peters was able to gather sufficient evidence and did not encounter any scope limitations. Review their draft audit report attached to the end of this exam and identify five deficiencies. Group your deficiencies by paragraph in the report and provide a brief explanation of why you feel they were deficiencies. (Read on page 7 below)
2) PRQ’s management identified a material weakness in the company’s internal controls during its assessment process. They corrected this weakness about a month prior to the end of the annual reporting period. Management reassessed controls in the area, and believes they were effective as of the end of the reporting period. After reevaluating and retesting the relevant controls, you agree that the new controls are well designed, but since the controls over this particular area are applied only once at the end of each month (i.e., the controls have only operated two times since being corrected), you do not believe you have sufficient audit evidence to assess their operating effectiveness. Management’s written assessment concludes that the company’s internal control was effective as of the report date. The transaction stream over which these controls operate process a relatively minor amount of money each year.
Assume that you are the partner in charge of the PRQ audit engagement. Explain all the modifications you would make to your audit report on internal controls and explain why you recommend the changes, if any. If you don’t recommend any changes, explain why not.
3) Your audit of HIJ, Inc. followed the following time line of events:
• HIJ’s fiscal year ended 12/31/2013.
• Event 1 – On 1/15/14 HIJ’s management informed you that a major competitor had just introduced a new product that made a substantial portion of their inventory obsolete and only resalable for a fraction of the cost shown on the balance sheet as of 12/31/13.
• Event 2 – On 2/25/14 HIJ sold the line of business that produced that obsolete inventory items to another firm. The sale represented approximately 25% of HIJ’s product line.
• You completed your fieldwork and dated you audit report as of 3/1/14.
• HIJ distributed their financial statements and your report on 3/15/14.
• Event 3 – HIJ’s internal audit department contacted you to tell you that they had discovered massive fraud that their CFO had perpetrated during 2013 that led to a material overstatement of the firm’s accounts receivable and sales as of 12/31/2013. These errors were clearly material to the financial statements taken as a whole.
Describe what actions you would need to take, if any, based on each of the three events. Be complete and describe any changes you would require in HIJ’s financial statements for 2013, your audit report for 2013, and any additional actions, if any, required by GAAS. Also, justify your selections by stating why you would take them based on the type of each event.
a) Event 1 –
b) Event 2 –
c) Event 3 –
4) You are auditing a major consumer products manufacturer. You are building your audit plan and trying to determine your approach to auditing their ending inventory balance as well as the long-term debt balance. Their inventory consists of a large number of items that are similar in value. Your assessment of the design of internal controls over inventory recording and valuation is that these controls are well-designed and haven’t changed since you audited them last year and found they were working properly. However, you have not been able to retest the controls yet for this year. They only have three major bond issues that make up the long-term debt account balance and each bond issue contains complex provisions like conversion features and debt covenants.
a) Would you use a sampling technique to test their inventory balance and, if so, would you use statistical or non-statistical sampling? Explain your answer.
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