acc 555 midterm

1.

Question :

(TCO A) Match the following definitions to the terms.

____ Public Company Accounting Oversight Board Auditing
Standards
____ Generally Accepted Auditing Standards
____ Statements on Auditing Standards

a. Pronouncements providing specific guidance on auditing
matters for all entities except public companies
b. The standards used for public company audits
c. Standards used by non-public companies and for interim audits for
public companies as initially adopted by the PCAOB

2.

Question :

(TCO B) 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, 2009, and the related statements of income,
retained earnings, and cash flows for the past year. 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, as 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, 2009, and net income
and earnings per share would be decreased by $180,000 and $0.62,
respectively, for the past year.

Required: Complete the above
qualified audit report by preparing the opinion paragraph. Do not date or
sign the report.

3.

Question :

(TCO C) The following situation involves a possible
violation of the AICPA’s Code of Professional Conduct. For each
situation, (1) determine the applicable rule number 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.

Your answer should be set up something like this:
Rule # __________ Violation? Yes or No
1 or 2 line explanation:

Brad Heist, CPA, was traveling from Dallas to Houston,
Texas, when he was pulled over by a police officer on suspicion of
driving under the influence. The breath-a-lyzer and a subsequent blood
test revealed that Brad was definitely impaired. He was convicted in
court of driving while under the influence of alcohol (DUI). This was
Brad’s fourth conviction of DUI in less than a year, a felony under
current Texas law. Accordingly, Brad was sentenced to 18 months in
prison.

4.

Question :

(TCO C) The following situation involves a possible
violation of the AICPA’s Code of Professional Conduct. For each
situation, (1) determine the applicable rule number 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.

Your answer should be set up something like this:
Rule # __________ Violation? Yes or No
1 or 2 line explanation:

Jim is the audit partner for the small CPA firm of Jim, CPA,
PA. Jim’s neighbor Duffy has a financial advisement practice whereby she
sells mutual funds to individuals for their retirement. Jim’s firm is
performing the audit for a privately held company Jim’s best friend
Cressy owns. Jim refers Cressy to Duffy for retirement advice. Cressy
buys 10 units of ABC Mutual Fund which generates Duffy a fat little
commission fee. Duffy buys Jim a $25 gift certificate to the local movie
theater.

5.

Question :

(TCO C) Brandt, CPAs has obtained Big-Bucks, a new
publicly-held client. Big-Bucks has various accounting-related needs that
Brandt, CPAs would like to fulfill. Partner-in-charge D. Brandt has
discussed with Big-Bucks the possibility of performing the annual audit
of Big-Bucks as well as preparing the tax returns, business plan,
quarterly write-up services, and providing consultation on the viability
and valuation of mining gas reserves in Tennessee. An outside expert
would be hired by Brandt CPAs to provide expert advice to the CPA firm on
mining gas reserves. Additionally, Brandt, CPA’s audit manager who will
be assigned to this audit has previously been approached by Big-Bucks to
come work for the company as Chief Financial Officer. The audit manager
has refused the offer, since his cousin’s sister-in-law is a 10 percent
shareholder in Big-Bucks and does not want her to have any say in his
employment.

Under the Sarbanes-Oxley Act of 2002, what issues do you see
and how would you advise Brandt, CPAs? Is there ever a time when Brandt,
CPAs could perform any of these services for Big-Bucks?

6.

Question :

(TCO D) There are four major sources of an auditor’s legal
liability. One source is liability to the audit client under common law.
Briefly summarize the other three sources.

7.

Question :

(TCO F) Below are 10 documents typically examined during an
audit. Classify each document as either internal or external.

Type of Document Documents

________________ 1. Canceled checks for payments of accounts
payable
________________ 2. Payroll time cards
________________ 3. Duplicate sales invoices
________________ 4. Vendors’ invoices
________________ 5. Bank statements
________________ 6. Minutes of the board of directors’ meetings
________________ 7. Signed lease agreements
________________ 8. Notes receivable
________________ 9. Subsidiary accounts receivable records
________________ 10. Remittance advices

8.

Question :

(TCO G) Discuss the essential activities involved in the
initial planning of an audit.