Auditing 1 Homework

Homework Chapter 1 & 2

Kenyetta Corson

Auditing 1

April 11, 2016

Dawn Carter

Chapter 1 Problems

Problem 1-17 (a-e)

1. Due to lower information risk, the interest rate is lower for the loan that required review report rather than the one that did not. Since the review report intends to moderately provide assurance to the financial statement users, it lowers the information risks attached which makes the interest rate to be reduced too for the loan of the audit report.
2. The annual loan cost is calculated by adding the annual interest and the cost of CPA service.

1. So for the United National Bank, the annual costs is = $35,000 review charge + $300,000 annual interest = $335,000
2. Existing Loan= $0 service charge + $360,000 = $360,000
3. First City Bank= $60,000 audit charge + $240,000 interest = $300,000

This makes First City Bank the most suitable option since it offers the loan at the lowest rate. The additional auditing costs charged are still less than the reduction in interest due to lower information risk.

1. The calculation are as follows:

1. Existing loan = $0 service charge + $360,000 interest = $360,000
2. UNB= $35,000 review charges +$270,000 interest = $305,000
3. FCB= $80,000 audit charges +$ 240,000 interest = $320,000

According to this situation, Busch must go with UNB as the lower interest rate makes annual loan cost to be the lowest.

1. The reasons why Busch may require an audit are:

1. Audit will provide the management with assurance for the financial information
2. The audit procedure enables detection of frauds and material misstatements thus improving on the quality of internal controls
3. It gives opinion and recommendations of improving the efficiency or effectiveness of the system

1. The strategic understanding of client’s business helps the auditor improve on the service as:

1. It enables auditor estimate the risks associated with the client’s strategies affecting the fair presentation of the financial reports
2. It also helps the auditor in identifying ways to improve the client’s operational system thus leading to value added to the audit function

Problem 1-19 (a-b)

1. The following are the narratives involving the required auditing definitions:

1. Since Altman has been asked to give qualitative and the quantitative information on the trucks, so it is the information that the auditors must be concerned about.
2. The criteria for evaluation by Altman must be to check:

1. Trucks existing on June 30, 2013
2. Ownership of each truck by Regional Delivery Service
3. Physical condition of each of the trucks
4. Fair market value of each of the trucks

1. The evidences accumulated and evaluated by Altman shall be:

1. Counting the trucks for their relative existence
2. Confirming the ownership status by counterchecking it with the documents held by Burrow
3. Examining the trucks for their physical conditions
4. Examining blue book to determine fair market value of the trucks

1. Samantha Altman is a competent independent person as being a CPA she has spent a lot of time auditing the used automobile and truck dealership that has added in to her knowledge that is required by the nature of engagement
2. The results include:

1. Identification of the 25 trucks parked at the lot on 30th June
2. Confirmation of the ownership by Regional delivery service of all the trucks
3. By using the established guidelines, the condition of the trucks
4. Fair market value of each current by using current Blue books

1. The difficulty for Altman will be in:

1. Evaluation of condition using the criteria from poor to excellent to match the criterion stated in the Blue Book so that the analysis is meaningful
2. Determining the fair market value unless it is clearly stated in the Blue book for each condition

Problem 1-22(a-c)

1. The ways in which financial statement audit provides value to the client are:

1. It reduces information risk which in turn lowers down the borrowing costs
2. Moderate assurance is provided which enables in quality decision-making
3. Recommendations are made to enhance the efficiency and effectiveness of the operations

1. Services provided will be:

1. Tax services
2. Accounting services
3. Management advisory services
4. Attestation services
5. Assurance services

1. At least one additional service I believe firm should provide is corporate social responsibility service. This is because nowadays the trend of indulging firms in socially responsible behaviour has been gaining attention by investors, as they believe it to be an integral part of company’s operations. Providing this service will be beneficial for CPA firms in growing as not every other firm focuses on this.

Chapter 2 Problems

Problem 2-18(a-e)

1. The objective for conducting financial statement auditing is to provide reasonable assurance that the statements are free from error and any material misstatements. This helps the auditor in giving an opinion on the fairness of the statements and also an assurance regarding all material aspects with respect to the relevant accounting framework.
2. No the CPA firm does not guarantee the accuracy of the financial statement, they just provide reasonable assurance regarding the statements if they are free from material misstatements. The level of assurance varies but still even for the highest level of assurance, it cannot be categorized as a guarantee
3. No the auditor’s responsibility is not to detect all kind of frauds. Fraud is a broad legal concept that means intentional deceit to deprive another person or party of their property or rights. Not all the frauds impact the financial statements and the auditor is only responsible for providing reasonable assurance regarding the material misstatements of the financial reports either by error or by fraud. If it does not affect the material misstatement, auditor will not report it.
4. Every company is different in nature and the operations, which results in different types of risks attached to the firm. Understanding the client’s business in terms of size, operations, nature of accounts and statements etc all result in identification of different risks which might be directly or indirectly leading to material misstatement in the financial statements. In addition, there are unique accounting standards industries that impact how transactions, accounts, and disclosures are reported in financial statements. Thus, a thorough understanding of the client’s business is critical to assessing the risk of material misstatements in the financial statements when planning the audit.
5. Other than identifying the numerical accuracy of the accounts, auditors

1. Obtain relevant information to support the transactions are valid
2. Obtain evidence to support the ownership of assets held and the obligations to repay the liabilities are sound
3. Obtain information which helps them in deducing that financial statements discloses accurate information according to the accounting standards

Problem 2-20 (a-e)

1. AICPA auditing standard board is responsible for issuing U.S. standards to be used by the auditors to conduct tests for U.S. publically traded firms. The Public Company Accounting Oversight Board (PCAOB), on the other hand is responsible for issuing standards to be used by auditors when auditing a U.S. public company.
2. IAASB of International Federation of Accountants issues international Auditing standard that does not override the specific company’s rules and regulation for the respective auditing of statements
3. Most of the ASB’s standards have been revised to converge with the international standards which have resulted in consistency between each of them except for few that specifically are unique for U.S. environment
4. When developing a new SAS, the ASB uses the ISAs as the base standard and then modifies that base standard only when appropriate for the U.S. environment.
5. The PCAOB develops and issues its own standards that do not start with the ISA standard as the base.

Problem 2-22(a-h)

1. U.S. generally accepted auditing standards.
2. International auditing standards
3. PCAOB auditing standards
4. PCAOB auditing standards
5. U.S. generally accepted auditing standards
6. U.S. generally accepted auditing standards
7. International auditing standards
8. PCAOB auditing standards