ACC 209 Auditing Exam 1 1

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ACC 209 Auditing Exam 1Exam 1AuditingACC 209Name _____________________________________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 eachindependent situation following (1-8), indicate the appropriate action (a-g) to betaken. 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.Issueanunqualifiedopinionwithmodifiedwording(noexplanatoryparagraph).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, andequipmentaccountsatcurrentmarketvalues.Currentmarketvalues exceed historical cost by a highly material amount, and theeffects are pervasive throughout the financial statements.Disclaim an opinion.2.Management of Becker Corporation refuses toallow you to observe, or make, any counts ofinventory. The recorded bookvalue of inventory is highly material.Issue a standard unqualified report3.Youwereunabletoconfirmaccounts receivable with Becker’s customers. However, because ofdetailed sales and cash receipts records, you were able to performreliable alternative audit procedures.

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Disclaim an opinion.4.Oneweekbeforetheendoffieldwork,youdiscover that the audit manager on the Becker engagement owns amaterial amount of Becker’s common stock.Issueanunqualifiedopinionwithmodifiedwording(noexplanatoryparagraph).5.You relied upon another CPA firm to performpart of the audit. Although you were the principal auditor, the otherfirm audited a material portion of the financial statements. Youwish to refer to (but not name) the other firm in your report.Issue an unqualified opinion with an explanatory paragraph.6.Youhavesubstantial doubt about Becker’s ability to continue as a goingconcern.Issue an unqualified opinion with anexplanatory paragraph.7.BeckerCorporation changed its method of computing depreciation in2007. You concur with the change and the change is properlydisclosed in the financial statement footnotes.Qualify the opinion paragraph.8.Ten days after the balance sheet date, oneof Becker’s buildings was destroyed by a fire. Becker refuses todisclose this information in a footnote to the financial statements,but you believe disclosure is required to conform with GAAP. Theamount of the uninsured loss was material, but not highly material.2.The following is a portion of a qualifiedaudit report issued for a private company:Independent Auditor’s ReportTo the shareholders of TamarakCorporationWehaveauditedtheaccompanyingbalancesheetofTamarakCorporation as of October 31, 2007, and the related statements of income,retained earnings, and cash flows for the year then ended. These financialstatements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based

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on our audit.Weconductedourauditinaccordancewithauditingstandardsgenerally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting theamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonablebasis for our opinion.The company has included in property and debt in the accompanyingbalance sheet certain lease obligations that, in our opinion, should beexpensedinordertoconformwithgenerallyacceptedaccountingprinciples. If these lease obligations were capitalized, property would bedecreased by $4,000,000, long-term debt by $2,000,000, and retainedearnings by $180,000 as of October 31, 2005, and net income andearningspersharewouldbedecreasedby$180,000and$.62,respectively, for the year then ended.In our opinion,except for the effects of the Company's incorrecttreatmentof expense,the financial statement referred to in the first paragraphpresents fairly, in all material respects, the financial position ofTamarakCorporation as of October 31, 2007, and the results of its operations andits cash flows for the year then ended in accordance with U.S. generallyaccepted accounting principlesRequired:Complete the above qualified audit report by preparing the opinionparagraph. Do not dateor sign the report.3.

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The following situations involve a possible violation of the AICPA’sCodeof Professional Conduct. For each situation, (1) determine the applicablerule number or name from theCode, (2) decide whether or not theCodehasbeen violated, and (3) briefly explain how the situation violates (or does notviolate) theCode.a.In 2004, Freeman and Johnson, both CPAs, decided to form a CPA practice. In2007, Freeman and Johnson approached Bill Delaney, a physician and medicalexpert, and asked him to assist them with their growing medical consultingpractice. Delaney agreed, but only after he was given an ownership interest inthe firm. Delaney does not intend to quit his private medical practice.RuleForm of Organization and NameViolation?YesNoExplanation:Non CPA can become an owner in the firm subject to they arededicated for the services to the clients of firm as their principal occupation. Here isis missing, so it is a violation.b.Brian DePaliehas a successful dentistry practice in Charleston. Brian hasrecommended one of his patients to Katie Walton, CPA. To show gratitude forthe referral, Katie has agreed to pay Brian a token gift of $50. Katie disclosesthe payment arrangement to her new clients.Rule:Commissions and Referral Fees ruleViolation?YesNoExplanation:Payment can be made for the referral by a CPA if he/shediscloses it to its clients. So no violation as he discloses to his client.c.Theaccounting firm of Bayer & Peng, CPAs, is negotiating a fee with a newaudit client. They agree the client will pay $50,000 if Bayer & Peng issues aclean, unqualified opinion, $40,000 if a qualified opinion is issued, and only$20,000 if an adverse opinion is issued.Rule:Contingent Fees ruleViolation?YesNoExplanation:This is a contingent fee contract which is prohibited under Rule302.d.Don Smith, CPA, is a member of the engagement team that performs the audit

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