ACCT 444 Week 2
Homework
Chapter 5
5-23 (Objectives 5-4,
5-5, 5-7) Chen, CPA, is
the auditor for Greenleaf Manufacturing Corporation, a privately owned company
that has a June 30 fiscal year. Greenleaf arranged for a substantial bank loan
that was dependent on the bank’s receiving, by September 30, audited financial
statements that showed a current ratio of at least 2 to 1. On September 25,
just before the audit report was to be issued, Chen received an anonymous
letter on Greenleaf’s stationery indicating that a 5-year lease by Greenleaf,
as lessee, of a factory building accounted for in the financial statements as
an operating lease was, in fact, a capital lease. The letter stated that there
was a secret written agreement with the lessor modifying the lease and creating
a capital lease.
Chen confronted the
president of Greenleaf, who admitted that a secret agreement existed but said
it was necessary to treat the lease as an operating lease to meet the current
ratio requirement of the pending loan and that nobody would ever discover the
secret agreement with the lessor. The president said that if Chen did not issue
his report by September 30, Greenleaf would sue Chen for substantial damages
that would result from not getting the loan. Under this pressure and because
the audit files contained a copy of the 5-year lease agreement that supported
the operating lease treatment, Chen issued his report with an unqualified
opinion on September 29.
Despite the fact that
the loan was received, Greenleaf went bankrupt within 2 years. The bank is
suing Chen to recover its losses on the loan, and the lessor is suing Chen to
recover uncollected rents.
Required
Answer the following
questions, setting forth reasons for any conclusions stated:
1.
Is Chen liable to the bank?
1.
Is Chen liable to the lessor?
1.
Is there potential for criminal action against Chen?
5-24 (Objective 5-6) Under Section 11 of the Securities Act
of 1933 and Section 10(b), Rule 10b-5, of the Securities Exchange Act of 1934,
a CPA may be sued by a purchaser of registered securities. The following items
relate to what a plaintiff who purchased securities must prove in a civil
liability suit against a CPA.
The plaintiff security
purchaser must allege or prove:
1.
Material misstatements
were included in a filed document.
2.
A monetary loss
occurred.
3.
Lack of due diligence
by the CPA.
4.
Privity with the CPA.
5.
Reliance on the
financial statements.
6.
The CPA had scienter
(knowledge and intent to deceive).
Required
For each of the items
1 through 6 listed above, indicate whether the statement must be proven under
1.
Section 11 of the Securities Act of 1933 only.
1.
Section 10(b) of the Securities Exchange Act of 1934 only.
1934.
Both Section 11 of the Securities Act of 1933 and Section 10(b)
of the Securities Exchange Act of 1934.
1934.
Neither Section 11 of the Securities Act of 1933 nor Section
10(b) of the Securities Exchange Act of 1934.*
Chapter 6
6-23 (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
1.
Discuss the concept of “reasonable assurance” and the degree of
confidence that financial statement users should have in the financial
statements.
1.
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.
.
1.
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.
.
6-27 (Objectives 6-6,
6-7) The following
are specific transaction-related audit objectives applied to the audit of cash
disbursement transactions (a through f), management assertions about classes of
transactions (1 through 5), and general transaction-related audit objectives (6
through 11).
Specific
Transaction-Related Audit Objective
1.
Recorded cash
disbursement transactions are for the amount of goods or services received and
are correctly recorded.
2.
Cash disbursement
transactions are properly included in the accounts payable master file and are
correctly summarized.
3.
Recorded cash
disbursements are for goods and services actually received.
4.
Cash disbursement
transactions are properly classified.
5.
Existing cash
disbursement transactions are recorded.
6.
Cash disbursement
transactions are recorded on the correct dates.
Required
1.
Explain the differences among management assertions about
classes of transactions and events, general transaction-related audit
objectives, and specific transaction-related audit objectives and their
relationships to each other.
1.
For each specific transaction-related audit objective, identify
the appropriate management assertion.
2.
For each specific transaction-related audit objective, identify
the appropriate general transaction-related audit objective.
Chapter 11
11-30 (Objective 11-1) The following are activities that
occurred at Franklin Manufacturing, a nonpublic company.
1.
Franklin’s accountant
did not record checks written in the last few days of the year until the next
accounting period to avoid a negative cash balance in the financial statements.
2.
Franklin’s controller
prepared and mailed a check to a vendor for a carload of material that was not
received. The vendor’s chief accountant, who is a friend of Franklin’s
controller, mailed a vendor’s invoice to Franklin, and the controller prepared
a receiving report. The vendor’s chief accountant deposited the check in an
account he had set up with a name almost identical to the vendor’s.
3.
The accountant
recorded cash received in the first few days of the next accounting period in
the current accounting period to avoid a negative cash balance.
4.
Discounts on checks to
Franklin’s largest vendor are never taken, even though the bills are paid
before the discount period expires. The president of the vendor’s company
provides free use of his ski lodge to the accountant who processes the checks
in exchange for the lost discounts.
5.
Franklin shipped and
billed goods to a customer in New York on December 23, and the sale was
recorded on December 24, with the understanding that the goods will be returned
on January 31 for a full refund plus a 5 percent handling fee.
6.
Franklin’s factory
superintendent routinely takes scrap metal home in his pickup and sells it to a
scrap dealer to make a few extra dollars.
7.
Franklin’s management
decided not to include a footnote about a material uninsured lawsuit against
the company on the grounds that the primary user of the statements, a small
local bank, will probably not understand the footnote anyway.
Required
1.
Identify which of these activities are frauds.
1.
For each fraud, state whether it is a misappropriation of assets
or fraudulent financial reporting…
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