A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand?

11 questions in accounting, needed by tomorrow. Questions are not related and answers should be separately with the correlating question number on top. References are required.

Q1

A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand?

Q2

In Enron’s financial fraud, lots of people were aware or should have been aware. Lawyers, bankers, auditors and many employees saw stuff that they knew was wrong or was suspicious and said little or nothing. We need to create the right incentives to keep people honest – or at least not afraid to speak out. The company’s 20,000 employees lost not only their jobs and medical insurance but retirement savings in company stock. In 2001 Enron employees lost $1.2 billion in retirement funds and $2 billion in pension funds while Enron’s top execs cashed in $116 million in stock. Although the Sarbanes Oxley Act created new standards for accounting firms, boards and management, we still had the shocking failures at AIG and other financial companies, such as Bernie Madoff’s.

Even the threat of lawsuits, sanctions, and bar to practice have not deterred the greed.  Any thoughts?

Q3

During the course to an audit the auditor assess whether or not there are control deficiencies that may increase the risk of fraud. One key aspect of this potential fraud is managements ability to override procedures designed to prevent fraud. Management is in a position that gives them the ability to perpetuate fraud by overriding the controls, therefore, the auditor must asses the risks of the potential management override.

To address the potential management override of controls the audit must examine the journal entries and any adjustments for for appropriateness in relation to the reporting process and the impact on financial statements. The auditor must also review the accounting estimate for intentional misstatement. Recording inappropriate estimates is a good sign of fraudulent activity and the auditor must look back to determine if estimate are consistent period over period. Lastly, the auditor must identify and evaluate unusual business activity, this is activity that is not part of the organizations normal course of business. This activity must be evaluated for understanding the purpose of such transactions, appropriate bookkeeping and financial reporting.

An auditors failure to assess and report such potential control overrides may subject them to liability by both the organization in which they are auditing and the user of the financial statements. Thoughts?

Q4

4-20 (Objectives 4-5, 4-6) The following situations involve the provision of nonaudit services. Indicate whether providing the service is a violation of AICPA rules or SEC rules including Sarbanes–Oxley requirements on independence. Explain your answer as necessary.

 

  1. Providing bookkeeping services to a public company. The services were preapproved by the audit committee of the company.
  2. Providing internal audit services to a public company that is not an audit client.
  3. Implementing a financial information system designed by management for a private company.
  4. Recommending a tax shelter to a client that is publicly held. The services were preapproved by the audit committee.
  5. Providing internal audit services to a public company audit client with the preapproval of the audit committee.
  6. Providing bookkeeping services to an audit client that is a private company.

Q5

4-21 (Objectives 4-6, 4-7) Each of the following situations involves a possible violation of the AICPA’s Code of Professional Conduct. For each situation, state the applicable section of the rules of conduct and whether it is a violation.

  1. Emrich, CPA, provides tax services, management advisory services, and bookkeeping services and conducts audits for the same nonpublic client. Because the firm is small, the same person often provides all the services.
  2. Franz Marteens is a CPA, but not a partner, with 3 years of professional experience with Roberts and Batchelor, CPAs. He owns 25 shares of stock in an audit client of the firm, but he does not take part in the audit of the client, and the amount of stock is not material in relation to his total wealth.
  3. A nonaudit client requests assistance of M. Wilkenson, CPA, in the installation of a local area network. Wilkenson had no experience in this type of work and no knowledge of the client’s computer system, so he obtained assistance from a computer consultant. The consultant is not in the practice of public accounting, but Wilkenson is confident of his professional skills. Because of the highly technical nature of the work, Wilkenson is not able to review the consultant’s work.
  4. In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, “Ask me no questions, and I will tell you no lies.” Milsaps completed the return on the basis of the information acquired from the client.
  5. Roberta Hernandez, CPA, serves as controller of a U.S. based company that has a significant portion of its operations in several South American countries. Certain 106107government provisions in selected countries require the company to file financial statements based on international standards. Roberta oversees the issuance of the company’s financial statements and asserts that the statements are based on international financial accounting standards; however the standards she uses are not those issued by the International Accounting Standards Board.
  6. Steve Custer, CPA, set up a casualty and fire insurance agency to complement his auditing and tax services. He does not use his own name on anything pertaining to the insurance agency and has a highly competent manager, Jack Long, who runs it. Custer often requests Long to review the adequacy of a client’s insurance with management if it seems underinsured. He believes that he provides a valuable service to clients by informing them when they are underinsured.
  7. Seven small Seattle CPA firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the audit files, including the tax returns and the financial statements of another CPA firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain authorization from the audit client before the review takes place.
  8. Archer Ressner, CPA, stayed longer than he should have at the annual Christmas party of Ressner and Associates, CPAs. On his way home he drove through a red light and was stopped by a police officer, who observed that he was intoxicated. In a jury trial, Ressner was found guilty of driving under the influence of alcohol. Because this was not his first offense, he was sentenced to 30 days in jail and his driver’s license was revoked for 1 year.

Q6

4-22 (Objectives 4-6, 4-7) Each of the following situations involves possible violations of the AICPA’s Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and the rationale for the existing rule.

  1. The audit firm of Miller and Yancy, CPAs has joined an association of other CPA firms across the country to enhance the types of professional services the firm can provide. Miller and Yancy share resources with other firms in the association, including audit methodologies and audit manuals, and common IT systems for billing and time reporting. One of the partners in Miller and Yancy has a direct financial interest in the audit client of another firm in the association.
  2. Bruce Sullivan, CPA, is the audit partner on the engagement of Xylium Corporation, which is a public company. In structuring the agreement with the audit committee for the audit of Xylium’s financial statements, Sullivan included a clause that limits the liability of Sullivan’s firm so that shareholders of Xylium are prohibited from suing Sullivan and the firm for performance issues related to the audit.
  3. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Jennifer’s nondependent parents also own shares in Polex and Polex is not an attest client of Jennifer’s firm. The amount of her parent’s ownership in Polex is not significant to Jennifer’s net worth.
  4. Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, Joe left the firm to become the chief operating officer of Lacy Foods, Inc., which is an audit client of Bass and Sims. In his new role, Joe has no responsibilities for financial reporting. Bass and Sims made significant changes to the audit plan for the upcoming audit.
  5. Odonnel Incorporated has struggled financially and has been unable to pay the audit fee to its auditor, Seale and Seale, CPAs, for the 2009 and 2010 audits. Seale and Seale is currently planning the 2011 audit.
  6. Connor Bradley is the partner in charge of the audit of Southern Pinnacle Bank. Bradley is in the process of purchasing a beach condo and has obtained mortgage financing from Southern Pinnacle.
  7. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth 107108extended her an offer of employment to join the internal audit department as an audit manager. When the discussions with Carolina BioHealth began, Jessica informed her office’s managing partner and was removed from the audit engagement.
  8. Lorraine Wilcox is a CPA and professor of accounting at a major state university. One of her former students recently sat for the Audit section of the CPA exam. One day, the student dropped by Lorraine’s office and told her about many of the questions and simulation content on the exam. Lorraine was grateful for the information, which will be helpful as she prepares the course syllabus for the next semester.
  9. Audrey Glover is a financial analyst in the financial reporting department of Technologies International, a privately held corporation. Audrey was asked to prepare several journal entries for Technologies International related to transactions that have not yet occurred. The entries are reflected in financial statements that the company recently provided to the bank in connection with a loan outstanding due to the bank.
  10. Austin and Houston, CPAs, is performing consulting services to help management of McAlister Global Services streamline it production operations. Austin and Houston structured the fee for this engagement to be a fixed percentage of costs savings that result once the new processes are implemented. Austin and Houston perform no other services for McAlister Global.

Q7

5-19 (Objectives 5-4, 5-5) Lauren Yost & Co., a medium-sized CPA firm, was engaged to audit Stuart Supply Company. Several staff were involved in the audit, all of whom had attended the firm’s in-house training program on effective auditing methods. Throughout the audit, Yost spent most of her time in the field planning the audit, supervising the staff, and reviewing their work.

A significant part of the audit entailed verifying the physical count, cost, and summarization of inventory. Inventory was highly significant to the financial statements, and Yost knew the inventory was pledged as collateral for a large loan to First City National Bank. In reviewing Stuart’s inventory count procedures, Yost told the president she believed the method of counting inventory at different locations on different days was highly undesirable. The president stated that it was impractical to count all inventory on the same day because of personnel shortages and customer preference. After considerable discussion, Yost agreed to permit the practice if the president would sign a statement that no other method was practical. The CPA firm had at least one person at each site to audit the inventory count procedures and actual count. There were more than 40 locations.

Eighteen months later, Yost found out that the worst had happened. Management below the president’s level had conspired to materially overstate inventory as a means of covering up obsolete inventory and inventory losses resulting from mismanagement. The misstatement occurred by physically transporting inventory at night to other locations after it had 135136been counted in a given location. The accounting records were inadequate to uncover these illegal transfers.

Both Stuart Supply Company and First City National Bank sued Lauren Yost & Co.

Required

Answer the following questions, setting forth reasons for any conclusions stated:

  1. What defense should Lauren Yost & Co. use in the suit by Stuart?
  2. What defense should Lauren Yost & Co. use in the suit by First City National Bank?
  3. Is Yost likely to be successful in her defenses?
  4. Would the issues or outcome be significantly different if the suit was brought under the Securities Exchange Act of 1934?

Q8

5-20 (Objective 5-5) The CPA firm of Bigelow, Barton, and Brown was expanding rapidly. Consequently, it hired several junior accountants, including a man named Small. The partners of the firm eventually became dissatisfied with Small’s production and warned him they would be forced to discharge him unless his output increased significantly.

At that time, Small was engaged in audits of several clients. He decided that to avoid being fired, he would reduce or omit some of the standard auditing procedures listed in audit programs prepared by the partners. One of the CPA firm’s clients, Newell Corporation, was in serious financial difficulty and had adjusted several of the accounts being audited by Small to appear financially sound. Small prepared fictitious audit documentation in his home at night to support purported completion of auditing procedures assigned to him, although he in fact did not examine the adjusting entries. The CPA firm rendered an unqualified opinion on Newell’s financial statements, which were grossly misstated. Several creditors, relying on the audited financial statements, subsequently extended large sums of money to Newell Corporation.

Required

Will the CPA firm be liable to the creditors who extended the money because of their reliance on the erroneous financial statements if Newell Corporation should fail to pay them? Explain.

Q8

5-21 (Objectives 5-3, 5-5) Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20 copies of the audited financial statements. The firm knew in a general way that Regal Jewelry wanted that number of copies of the auditor’s report to furnish to banks and other potential lenders.

The balance sheet in question was misstated by approximately $800,000. Instead of having a $600,000 net worth, the corporation was insolvent. The management of Regal Jewelry had doctored the books to avoid bankruptcy. The assets had been overstated by $500,000 of fictitious and nonexisting accounts receivable and $300,000 of nonexisting jewelry listed as inventory when in fact Regal Jewelry had only empty boxes. The audit failed to detect these fraudulent entries. Thompson, relying on the audited financial statements, loaned Regal Jewelry $200,000. She seeks to recover her loss from Doyle and Jensen.

Required

State whether each of the following is true or false and give your reasons:

  1. If Thompson alleges and proves negligence on the part of Doyle and Jensen, she will be able to recover her loss.
  2. If Thompson alleges and proves constructive fraud (that is, gross negligence on the part of Doyle and Jensen), she will be able to recover her loss.
  3. Thompson does not have a contract with Doyle and Jensen.
  4. Unless actual fraud on the part of Doyle and Jensen can be shown, Thompson cannot recover.
  5. Thompson is a third-party beneficiary of the contract Doyle and Jensen made with Regal Jewelry.

Q9

5-26 (Objective 5-5) Sarah Robertson, CPA, had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2010, Herb Majestic told her that he needed a large bank loan to “tide him over” until sales picked up as expected in late 2011.

In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will “be his solution”—he was sure he will get it as long as the financial statements don’t look too bad.

Robertson stated that she believed the statements will have to include a going concern explanatory paragraph. Majestic said that this wasn’t needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan.

Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2011.

The bank sued Sarah Robertson for fraud.

Required

Indicate whether or not you think the bank will succeed. Support your answer.

*AICPA adapted.

Q10

11-19 (Objective 11-7) You have identified a suspected fraud involving the company’s controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing a public company?

Q11

11-23 (Objective 11-2) During audit planning, an auditor obtained the following information:

  1. Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons.
  2. The company’s board of directors includes a majority of directors who are independent of management.
  3. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate.
  4. The company is marginally able to meet exchange listing and debt covenant requirements.
  5. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry.
  6. The company has experienced low turnover in management and its internal audit function.
  7. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist.
  8. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
  9. The company’s financial performance is threatened by a high degree of competition and market saturation.

 

Required

  1. Indicate whether the information indicates an increased risk for fraud.
  2. If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated.

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