Aidan Trotter Andrade

BUS 376
UMPI
09/05/2024

Problem 1: A financial statement audit covers 4 basic financial statements.

What are they listed in their natural order?
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Changes in Equity

Problem 2: CPA firms are required to have a peer review done if they are
members of the American Institute of Certified Public Accountants or the
Public Company Accounting Oversight Board. Define, in your own words,
the objective of a peer review and the process of completing one.
The objective of a peer review is to ensure that CPA firms maintain high standards
of quality in their accounting and auditing practices. The process involves another
CPA firm or qualified peer reviewer examining the reviewed firm's quality control
systems and a sample of their work. This includes looking at things like how the firm
trains its staff, how it accepts and continues client relationships, and how it
performs and documents its audit work. The reviewer then provides feedback,
pointing out any areas where the firm can improve. After the review, the firm
receives a report that may include recommendations for enhancing their practices.
This process helps maintain public trust in the accounting profession by ensuring
that firms are consistently delivering high-quality services.

Problem 3: Public Companies must file required forms through EDGAR.

What are the most important forms, subjected to the reporting provisions
of the Securities Act, required to be filed with the SEC? Give detail as to
what is included on/in the form.
• Form 10-K (Annual Report):
Filed annually within 60, 75, or 90 days after the fiscal year-end, depending on the
company's size. Includes:
 Detailed description of the company's business
 Risk factors
 Selected financial data
 Management's Discussion and Analysis (MD&A) of financial condition and
results of operations
  Audited financial statements
 Disclosure about market risk
 Information on executive compensation
 Corporate governance matters

• Form 10-Q (Quarterly Report):

 Filed quarterly (for the first three fiscal quarters)
 Due within 40 or 45 days after the quarter-end, depending on the company's
size
Contains:
 Unaudited financial statements
 MD&A section focusing on the quarter's results
 Disclosures about market risk
 Controls and procedures
 Updates on legal proceedings

Form 8-K (Current Report):

 Filed to report significant events as they occur
 Generally due within four business days of the event
Covers a wide range of events, including:
 Entry into or termination of a material agreement
 Completion of acquisition or disposition of assets
 Changes in control of the company
 Changes in the company's certifying accountant
 Bankruptcy or receivership
 Material impairments
 Departure or appointment of directors or principal officers

• Form S-1 (Registration Statement):

 Used for initial public offerings (IPOs)
Includes:
 Detailed business description
 Risk factors
 Use of proceeds
 Company's capital structure
 Management biographies
 Related-party transactions
 Financial statements (typically for the past three years)
 MD&A of financial condition and results of operations

• Forms 3, 4, and 5 (Insider Trading Reports):

 Form 3: Initial statement of beneficial ownership of securities
 Filed within 10 days of becoming an insider
 Form 4: Statement of changes in beneficial ownership
 Filed within two business days of the transaction
 - Form 5: Annual statement of changes in beneficial ownership
 Filed within 45 days after the fiscal year-end
 - These forms disclose:
 The amount and nature of an insider's holdings
 Transactions in the company's securities

Problem 4: Explain the purpose of the Code of Professional Conduct for

the accounting profession. What are the six principles, described in detail,
with an example of how it applies to the auditor?
The Code of Professional Conduct for the accounting profession serves as a guide
for accountants to maintain high ethical standards and professional integrity in their
work and it outlines the fundamental principles that accountants should adhere to in
order to protect the public interest and maintain trust. The six principles of the
AICPA Code of Professional Conduct are:
1. Responsibilities: Accountants must exercise professional and moral
judgments in all their activities. For example, an auditor must take
responsibility for identifying and addressing any potential conflicts of interest
before accepting an engagement.
2. The Public Interest: Members should act in a way that serves the public trust
and demonstrates commitment to professionalism. For example an auditor
might refuse to alter financial statements at a client's request if doing so
would mislead investors.
3. Integrity: Accountants must perform their duties honestly and maintain public
confidence. This could involve an auditor reporting fraudulent activities
discovered during an audit, even if it means losing the client.
4. Objectivity and Independence: Accountants must remain impartial,
intellectually honest, and free from conflicts of interest. An auditor might
decline gifts or favors from a client to maintain their independence.
5. Due Care: This principle requires competence and diligence in all professional
activities. An auditor might invest time in continuing education to stay
current with new accounting standards and audit procedures.
6. Scope and Nature of Services: Accountants should observe the principles of
the Code of Professional Conduct in determining the scope and nature of
 services provided. An auditor might refuse to provide certain consulting
services to an audit client to avoid compromising their independence.
Problem 5: Identify the correct description to the Presentation and
Disclosure-Related Audit Objective
1. Occurrence and rights and obligations - C. The information related to
the accounts, as described in the note disclosures, does exist and represent
the rights and obligations of the company.
2. Completeness - D. All disclosures that are required are included in the
financial statement footnotes.
3. Accuracy and valuation - A. The note disclosures are accurate, and their
values are correct.
4. Classification and understandability - B. The account balances are
correctly classified and the related financial statement disclosures are easy to
understand.
Problem 6: Planning the audit is essential for a. obtaining sufficient,
appropriate evidence b. keeping costs reasonable to the client c. avoiding
a misunderstanding with a client. Elaborate on each step below for the
auditor’s objective in achieving the above essential elements. Discuss in
detail what each step consists of and give an example for each.
1. Accept the client and perform initial audit planning: This involves evaluating
the client's integrity, assessing the firm's ability to perform the audit, and
identifying potential conflicts of interest. For example, checking the client's
reputation and financial stability.
2. Understand the client's business and industry: Gain knowledge about the
client's operations, industry trends, and regulatory environment. For
example, reviewing industry reports and discussing with management.
3. Assess client business risk: Evaluate risks that could lead to material
misstatements in financial statements. For example, identifying risks
associated with new product launches or market expansions.
4. Perform preliminary analytical procedures: Analyze financial and non-financial
data to identify unusual fluctuations or relationships. For example, comparing
current year ratios to prior years or industry benchmarks.
5. Set materiality levels and assess acceptable audit risk and inherent risk:
Determine the threshold for material misstatements and evaluate the overall
risk of the audit. For example, setting a materiality threshold based on a
percentage of net income.
6. Understand internal control and assess control risk: Evaluate the
effectiveness of the client's internal control system. For example, testing the
approval process for large purchases.
7. Gather information to assess fraud risks: Consider potential areas for
fraudulent activities. For example, examining unusual journal entries or
interviewing employees about pressure to meet financial targets.
 8. Develop overall audit plan and program: Create a comprehensive strategy
outlining the nature, timing, and extent of audit procedures. For example,
determining which areas to focus on and assigning tasks to team members.

Problem 7: Auditing Sales/Revenue Transactions

When an auditor needs to obtain an understanding of the overall internal control of
a company, the auditor first needs to consider the elements of the control
environment. To assist the auditor in assessing the level of control risk, the
following tests of controls were designed to allow the auditor to determine if the
company’s related controls were operating effectively in the revenue cycle.

Determine which of the four-management assertion(s) apply to each individual

sales (revenue) control being discussed. Hint: many have more than one assertion.

Management Assertions:

Existence & Occurrence Rights

Completeness Valuation

1. The company segregates the duties for authorizing, approving customer credit,
shipping merchandise, and accounting for all sales transactions. They have different
employees for each duty noted. Which management assertions apply to this
control?
Existence & Occurrence, Completeness
2. Every month, the accounting manager reconciles the accounts receivable master
file to the general ledger. Which management assertions apply to this control?

Completeness, Valuation
3. The computer is programmed to verify the customer order clerk's assigned
password before any sales data can be inputted. Which management assertions
apply to this control?
Existence & Occurrence
4. Years ago, the company purchased a software package that was used by other
companies in the same industry (it was not a specially made software). It was sold
by a leading software company known for their highly rated products. Which
management assertions apply to this control? Completeness, Valuation

5. The computer assigns a number to every sales invoice. Which management

assertions apply to this control?
Existence & Occurrence, Completeness
6. Input validation checks (application controls) are applied to every bill to ensure
the accuracy of the billing process. Which management assertions apply to this
control?
Valuation
7. The accounts receivable employee matches every invoice with the delivery
receipts and accounts for them in numerical sequence. Which management
assertions apply to this control? Existence & Occurrence, Completeness

8. Monthly statements are mailed to customers. Which management assertions

apply to this control?
Existence & Occurrence, Completeness, Valuation
9. The computer assigns a number to every delivery receipt. Which management
assertions apply to this control?
Existence & Occurrence, Completeness

10. All sales returns are approved by the vice president of sales. Which
management assertions apply to this control?
Existence & Occurrence, Valuation

Problem 8: Distinguish between an actual liability and a contingent

liability. Give an example of 3 different types of contingent liabilities and
how they may exist in a company.
An actual liability is a definite obligation that a company owes and must pay, while
a contingent liability is a potential obligation that may or may not occur depending
on future events.
Three types of contingent liabilities could exist in a company:
1. Probable Contingencies: These have a high likelihood of occurring (over 50%
chance). Example: A company is facing a lawsuit where they are likely to
 lose. The estimated loss amount should be recorded in the financial
statements.
2. Possible Contingencies: These have a moderate chance of occurring (less
than 50% but more than remote). Example: A company provides product
warranties. While not all products will need repair, there's a possibility some
will. This should be disclosed in the financial statement footnotes.
3. Remote Contingencies: These have a very low chance of occurring. Example:
A frivolous lawsuit against a company with little merit. This typically doesn't
need to be recorded or disclosed.
Problem 9: Describe the 8 parts of the standard unmodified opinion audit
report (standards set by the AICPA ASB (Accounting Standards Board) for
nonpublic entities) and describe the substance of the content related to
each part (define each part).
1. Title: Must include the word "Independent" to indicate the auditor's
objectivity.
2. Addressee: Typically addressed to the company's board of directors or
stockholders.
3. Opinion: States the auditor's opinion on whether the financial statements are
fairly presented in accordance with the applicable financial reporting
framework.
4. Basis for Opinion: Explains that the audit was conducted in accordance with
auditing standards generally accepted in the United States (GAAS) and states
the auditor's independence.
5. Responsibilities of Management: Describes management's responsibility for
preparing and fairly presenting the financial statements.
6. Auditor's Responsibilities: Outlines the auditor's responsibilities in conducting
the audit and forming an opinion.
7. Signature: The audit firm's name or the individual auditor's signature.
8. Auditor's Address and Date: Includes the city and state where the auditor's
report is issued and the date of the report.

Problem 10: For the following scenarios, assume you are the CPA
reporting on the client's financial statements. Determine the circumstance
that applies to the situation and the type of opinion that needs to be
issued for this nonpublic company. You may use all, some, or none of the
circumstances and opinions.

1. A client has departed from GAAP for what you, the auditor, considers to be not
justifiable. It has caused the financial statements to be materially misstated.
Circumstance: Unjustified departure from GAAP
Type of Opinion: Adverse
2. A client has departed from GAAP for what you, the auditor, considers to be
justifiable. The financial statements
would have been misleading if the client had not departed from GAAP.
Circumstance: Justified departure from GAAP
Type of Opinion: Unmodified

3. While auditing the long term investments for a new client, you the auditor, are
unable to
obtain the audited financial statements for the investee located in Dubai. You have
concluded
that it is impossible to obtain sufficient, appropriate evidence regarding the specific
investment.
Circumstance: Scope limitation
Type of Opinion: Qualified

4. The client is involved in a major lawsuit. This leads you to believe that there is
substantial
doubt about the client's ability to continue as a going conern for a reasonable
period of time.
You feel that the financial statement disclosures related to the lawsuit are
adequate. This leads you
to not issue a disclaimer of opinion.
Circumstance: Going Concern
Type of Opinion: Unmodified

5. You have chosen to take responsibility for the work of another CPA firm who
audited a 60%
owned subsidiary and issued an unmodifed opinion. The total assets and revenue of
the subsidiary are
 4 % and 7%, respectively of the total assets & revenues of the company being
audited.
Circumstance: Other auditors
Type of Opinion: Unmodified

6. The client is involved in a major lawsuit. It is probable that the company is going
to loase
a material amount when paying out to the defendant. It is impossible to calculate
the amount
though. The financial statements have included the note disclosure adequately
describing the
matter. You feel that everything has been properly reported.
Circumstance: Emphasis of Matter or other-matter paragraph
Type of Opinion: Unmodified
7. The client has refused to depreciate their equipment this year because they said
that the
depreciation expense would reduce this year's already small net profit to a a loss.
They don't
want to give the negative news of a loss to their board of directors, so they are not
going to
take the expense per your very strong advice.
Circumstance: Unjustified departure from GAAP
Type of Opinion: Adverse
8. The company changed their remaining life on a piece of equipment from 14 years
to 11 years.
You feel that the change is reasonable.
Circumstance: Consistency
Type of Opinion: Unmodified

Problem 11: List the Summary of the Audit Process in correct phases (from
beginning to end of audit):
Phase 1: c. Plan and design an audit approach Phase 2: d. Perform tests of
controls and substantive tests of transactions Phase 3: a. Perform analytical
procedures and tests of details of balances Phase 4: b. Complete the audit and
issue an audit report.
Examples:
Phase 1: Plan and design an audit approach Example: The auditor assesses the
client's business risks, sets materiality levels, and develops an overall audit
strategy. This might include deciding to focus more on inventory procedures for a
retail client.
Phase 2: Perform tests of controls and substantive tests of transactions Example:
The auditor tests the effectiveness of the client's internal controls over sales
transactions by selecting a sample of sales and tracing them through the system to
ensure proper authorization and recording.
Phase 3: Perform analytical procedures and tests of details of balances Example:
The auditor compares the current year's gross profit margin to previous years and
investigates any significant fluctuations. They might also confirm a sample of
accounts receivable balances directly with customers.
Phase 4: Complete the audit and issue an audit report Example: The auditor reviews
all gathered evidence, ensures all planned procedures were completed, evaluates
any misstatements found, and prepares the final audit report expressing their
opinion on the financial statements.

Problem 12: Describe the stages of an audit from beginning to end. Detail
all steps in a comprehensive summary outlining individual steps and
examples of how those steps would be displayed/observed/etc. in a
company. Be sure to elaborate on each section by detailing, in simple
terms, the objective of the specific stage.
Step 1: Plan the Audit Objective: Establish the scope and strategy of the audit.
a) Establish an understanding with the client: The auditor prepares an audit
engagement letter that outlines the terms of the audit, including responsibilities,
timeline, and fees.
b) Obtain an understanding of the client's business: Research the company's
industry, operations, and key business processes. For example, for a retail
company, understand their inventory management system
c) Perform preliminary analytical procedures: Compare current year financial data
with prior years to identify unusual fluctuations. For instance, notice if the gross
profit margin has significantly changed.
d) Assess risk and set materiality: Determine areas of high risk and set materiality
levels. For example, for a tech company, intellectual property might be a high-risk
area.
Step 2: Understand and Evaluate Internal Controls Objective: Assess the
effectiveness of the client's internal control system.
a) Document the client's internal control system: Create flowcharts or narratives of
key processes. For example, document the cash receipts process from customer
payment to bank deposit.
b) Perform walkthrough tests: Trace a few transactions through the entire system to
confirm understanding. For instance, follow a single sale from order to cash receipt.
c) Assess control risk: Determine the likelihood of material misstatements occurring
due to control failures. For example, assess the risk of inventory theft if physical
count procedures are weak.
Step 3: Perform Substantive Procedures Objective: Gather evidence about the
accuracy and validity of transactions and account balances.
a) Perform tests of controls: Test the effectiveness of key controls. For example,
check if all journal entries over a certain amount are approved by a supervisor.
b) Conduct substantive tests of transactions: Examine supporting documents for a
sample of transactions. For instance, verify a sample of sales by examining invoices
and shipping documents.
c) Perform analytical procedures: Analyze trends and ratios to identify unusual
fluctuations. For example, compare monthly sales figures to detect seasonal
patterns or anomalies.
d) Conduct tests of details of balances: Verify ending balances of significant
accounts. For instance, send confirmation requests to a sample of customers to
verify accounts receivable balances.
Step 4: Complete the Audit Objective: Evaluate evidence, form conclusions, and
communicate results.
a) Perform final analytical procedures: Compare final numbers to expectations and
investigate significant differences. For example, compare final inventory balance to
previous years and sales trends.
b) Review for subsequent events: Check for events after the balance sheet date that
might affect the financial statements. For instance, identify any major lawsuits filed
against the company after year-end.
c) Obtain management representations: Get written confirmation from management
about their responsibilities and the completeness of information provided. This
typically involves a formal management representation letter.
d) Evaluate results: Assess whether sufficient appropriate evidence has been
obtained to form an opinion. For example, determine if all planned audit procedures
were completed satisfactorily.
e) Prepare audit report: Draft the audit report, including the opinion on the financial
statements. The opinion could be unmodified, qualified, adverse, or a disclaimer
based on the audit findings.
f) Communicate with those charged with governance: Discuss significant findings
with the board of directors or audit committee. This might include reporting on any
material weaknesses in internal control identified during the audit.
Step 5: Follow-up Objective: Ensure audit findings are addressed and prepare for
future audits.
a) Review management's response to audit findings: Assess the adequacy of
management's plans to address any issues identified. For example, review
management's plan to improve inventory control procedures.
b) Plan for next year's audit: Identify areas for improvement in the audit process
and note any changes in the client's business that might affect future audits. For
instance, if the client is planning to implement a new ERP system, consider how this
will affect next year's audit approach.

References:
 Appendix C: Matters included in the Audit Engagement Letter. (n.d.). Default.
https://pcaobus.org/oversight/standards/archived-standards/details/
Auditing_Standard_16_Appendix_C
 Bragg, S. (2024, February 14). Audit strategy definition — AccountingTools.
https://www.accountingtools.com/articles/audit-strategy.html
 Cisa, I. C. |. C. (2023, November 14). Effective internal control environment &
risk assessment. Linford & Company LLP. https://linfordco.com/blog/internal-
control-environment/
 Kenton, W. (2024, June 18). Internal Controls: Definition, types, and importance.
Investopedia. https://www.investopedia.com/terms/i/internalcontrols.asp