Homework Chapter 1, 2, 4, & 26

1-18 (Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the reporting of the results of the tests in Consumer Reports, a monthly publication. Examples of the types of products it tests are middle-sized automobiles, residential dehumidifiers, flat-screen TVs, and boys’ jeans.


a. In what ways are the services provided by Consumers Union similar to assurance services provided by CPA firms?

b. Compare the concept of information risk introduced in this chapter with the information risk problem faced by a buyer of an automobile.

c. Compare the four causes of information risk faced by users of financial statements as discussed in this chapter with those faced by a buyer of an automobile.

d. Compare the three ways users of financial statements can reduce information risk with those available to a buyer of an automobile.

 2-19 (Objective 2-7) For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4 on page 38.

a. Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm’s Internet Web site to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data.

  1. Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing. Procedures to be undertaken by the reviewers are illustrated by the office review program.
  1. All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement.
  1. Each audit engagement must include a concurring partner review of critical audit decisions.


  1. Audit engagement team members enter their electronic signatures in the firm’s engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed.


  1. At all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit.


  1. No employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm’s best interest.


  1. Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned.


  1. Through our continuing employee evaluation and counseling program and through the quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm’s director of personnel.


  1. The firm’s mission statement indicates its commitment to quality, and this commitment is emphasized in all staff training programs.


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.


  1. 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.


  1. 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.


  1. 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.


  1. 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.


  1. 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.


  1. 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 extended 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.


  1. 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.


  1. 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.
  1. 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.


26-25 (Objectives 26-25, 26-1, 26-4) Weston Corporation has an internal audit department operating out of the corporate headquarters. Various types of audit assignments are performed by the department for the eight divisions of the company. The following findings resulted from recent audits of Weston Corporation’s White Division:

  1. One of the departments in the division appeared to have an excessive turnover rate. Upon investigation, the personnel department seemed to be unable to find enough workers with the specified skills for this department. Some workers are trained on the job. The departmental supervisor is held accountable for labor efficiency variances but does not have qualified staff or sufficient time to train the workers properly. The supervisor holds individual workers responsible for meeting predetermined standards from the day they report to work. This has resulted in a rapid turnover of workers who are trainable but not yet able to meet standards.
  2. The internal audit department recently participated in a computer feasibility study for this division. It advised and concurred on the purchase and installation of a specific computer system. Although the system is up and operating, the results are less than desirable. The software and hardware meet the specifications of the feasibility study, but there are several functions unique to this division that the system has been unable to accomplish. Linking of files has been a problem. For example, several vendors have been paid for materials not meeting company specifications. A revision of the existing software is probably not possible, and a permanent solution probably requires replacing the existing computer system with a new one.
  3. One of the products manufactured by this division was recently redesigned to eliminate a potential safety defect. This defect was discovered after several users were injured. At present, there are no pending lawsuits because none of the injured parties has identified a defect in the product as a cause of the injury. There is insufficient information to determine whether the defect was a contributing factor.

The director of internal auditing and assistant controller is in charge of the internal audit department and reports to the controller in corporate headquarters. Copies of internal audit reports are sent routinely to Weston’s board of directors.


  1. Explain the additional steps in terms of field work, preparation of recommendations, and operating management review that ordinarily should be taken by Weston Corporation’s internal auditors as a consequence of the audit findings in the first situation (excessive turnover).

a. Discuss whether there are any objectivity problems with Weston Corporation’s internal audit department as revealed by the audit findings. Include in your discussion any recommendations to eliminate or reduce an objectivity problem, if one exists.

b. The internal audit department is part of the corporate controllership function, and copies of the internal audit reports are sent to the board of directors.

c. The internal audit department is part of the corporate controllership function, and copies of the internal audit reports are sent to the board of directors.

(1) Evaluate the appropriateness of the location of the internal audit department within Weston’s organizational structure.

(2)        Discuss who within Weston should receive the reports of the internal audit department.*

26-26 (Objectives 26-4, 26-5) Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest. The evaluation of proposed capital expenditures became increasingly difficult for management as the company became geographically dispersed and diversified its product line. Thus, the Capital Budgeting Group was organized in 2010 to review all capital expenditure proposals in excess of $100,000.

*CMA adapted.

The Capital Budgeting Group conducts its annual planning and budget meeting each September for the upcoming calendar year. The group establishes a minimum return for investments (hurdle rate) and estimates a target level of capital expenditures for the next year based on the expected available funds. The group then reviews the capital expenditure proposals that have been submitted by the various operating segments. Proposals that meet either the return on investment criterion or a critical need criterion are approved to the extent of available funds.

The Capital Budgeting Group also meets monthly, as necessary, to consider any projects of a critical nature that were not expected or requested in the annual budget review. These monthly meetings allow the Capital Budgeting Group to make adjustments during the year as new developments occur.

Haskin’s profits have been decreasing slightly for the past 2 years despite a small but steady sales growth, a sales growth that is expected to continue through 2012. As a result of the profit stagnation, top management is emphasizing cost control and all aspects of Haskin’s operations are being reviewed for cost reduction opportunities.

Haskin’s internal audit department has become involved in the companywide cost reduction effort. The department has already identified several areas where cost reductions could be realized and has made recommendations to implement the necessary procedures to effect the cost savings. Tom Watson, internal audit director, is now focusing on the activities of the Capital Budgeting Group in an attempt to determine the efficiency and effectiveness of the capital budgeting process.

In an attempt to gain a better understanding of the capital budgeting process, Watson decided to examine the history of one capital project in detail. A capital expenditure proposal of Haskin’s Burlington Plant that was approved by the Capital Budgeting Group in 2011 was selected randomly from a population of all proposals approved by the group at its 2010 and 2011 annual planning and budget meetings.

The Burlington proposal consisted of a request for five new machines to replace equipment that was 20 years old and for which preventive maintenance had become expensive. Four of the machines were for replacement purposes, and the fifth was for planned growth in demand. Each of the four replacement machines was expected to result in annual maintenance cost savings of $20,000. The fifth machine was exactly like the other four and was expected to generate an annual contribution of $30,000 through increased output. Each machine had a cost of $110,000 and an estimated useful life of 8 years.


  1. Identify and discuss the issues that Haskin Company’s internal audit department must address in its examination and evaluation of Burlington Plant’s 2011 capital expenditure project.

b.            Recommend procedures to be used by Haskin’s internal audit department in the audit review of Burlington Plant’s 2011 capital expenditure project.*


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