Reference no: EM132198674

AUDITING ASSIGNMENT -

Learning Outcomes:

1. Explain the need and demand for auditing and assurance services and the ethical standards in performing such services.

2. Describe the different types of audit reports and the circumstances for their use.

3. Analyze the role of the audit risk model in conducting an audit.

4. Apply the cycle approach to an audit while evaluating management assertions within each audit.

5. Evaluate the role of sampling in achieving an effective and efficient audit and the role of audit evidence in achieving this goal.

6. Demonstrate an understanding of the importance of internal controls in reducing overall audit risk.

ASSIGNMENT DETAILS -

Module 1 -

Readings

Chapter 1: "Auditing and Assurance Services" in Auditing & Assurance Services

Chapter 2: "Professional Standards" in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Management Assertions & Auditors' Report

Please refer to problems 1.59 & 2.63 in textbook. Please complete BOTH exercises under this option for full credit for this assignment.

Management Assertions

Your audit manager has asked you to explain the PCAOB assertions by using an account on the balance sheet at your audit client.

Required: For the accounts receivable account, please define each of the PCAOB assertions, using the accounts receivable account to illustrate each assertion. You are encouraged to reference Exhibit 1.5 (located below) to help you answer this question.

Reporting Principle

The reporting principle requires auditors to express their opinion through the issuance of a written report.

Required: Based on your reading in the chapter, document your understanding of the following topics related to the auditors' report:

• What is the purpose of the auditors' opinion and report?
• What are the major paragraph(s) in the auditors' report on the examination of a public entity?
• What are the major contents of each of these paragraphs?
• What are the four types of opinions that auditors can issue?
• How does the concept of materiality influence the auditors' report?

Option 2: The Bernie Madoff Fraud

Please read the "Bernard L. Madoff: The Fraud of the Century" case study (C37 in the Case Study section near the end of textbook).

Required: After reading the case, please respond to the following questions:

1. Under the fundamental principles governing an audit covered in Chapter 2, we learned that auditors are required to exercise due care and maintain professional skepticism throughout the audit. Based on the case information, do you believe that the auditors from Friehling & Horowitz exercised due care and maintained professional skepticism throughout the audit? Why or why not?

2. After the Madoff case, the SEC instituted a number of reforms to its operations. Please visit the SEC's website (www.sec.gov) and search for Post-Madoff reforms. Next, please identify the two reforms that you believe will have the best chance of detecting illegal activity such as the activities of Madoff. Make sure to provide justification for your choices.

3. Consider section 24 of the Securities Act of 1933 and section 32 of the Securities Exchange Act of 1934 (see Module C in Part III of textbook). Based on the case information, do you believe that Madoff's auditor, Friehling, should be facing criminal charges? Why or why not?

Your written response paper should be 3-4 pages in length.

Option 1: Company Fraud: An evaluative report

This course includes a Portfolio Project that is due at the end of the last week of the course. During this first week of the course, be sure to review the Portfolio Project description on the Week 8 Assignment page along with the Portfolio Project grading rubric, which can be accessed from the Course Information page.

There are two (2) options to choose from, and the final Portfolio Project is due at the end of Week 8. Choose only one (1) of the options to complete the Portfolio Project. Do not do both assignments. Identify which assignment you are going to complete.

Each Portfolio Assignment option is a case study. During Week 2, you will submit a proposal to your instructor identifying which case study you are going to do.

Option 2: Audit Simulation: Workpaper Preparation

This course includes a Portfolio Project that is due at the end of the last week of the course. During this first week of the course, be sure to review the Portfolio Project description on the Week 8 Assignment page along with the Portfolio Project grading rubric, which can be accessed from the Course Information page.

There are two (2) options to complete the Portfolio Project which is due at the end of Week 8. Choose only one (1) of the assignments to complete the Portfolio Project. Do not do both assignments. Identify which assignment you are going to complete. Each Portfolio Assignment option is a case study. During Week 2, you will submit a proposal to your instructor identifying which case study you are going to do.

Module 2 -

Readings

Module B: "Professional Ethics" in Part III in Auditing & Assurance Services

Module C: "Legal Liability" in Part III in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: AICPA Professional Code of Conduct-Integrity and Objectivity Standard

Jon Williams, CPA, is in the middle of a quandary related to his audit and tax client Oneway Corporation. The three directors of Oneway are the officers and the only three stockholders, each owning exactly one-third of the shares.

President Raul Jack founded the company and is now nearing retirement. As an individual, he is also Williams' tax client.

Vice President Sandra Smith manages the day-to-day operations. She has been instrumental in increasing the business and its profits. Her individual tax work is done by a third party CPA.

Treasurer Chris Barnes has been a long-term, loyal employee responsible for many innovative financial transactions and reports of great benefit to the business. He is Williams's close personal friend and an individual tax client.

At his annual tax planning meeting with Williams, Raul Jack discussed the tax consequences of selling his one-third interest in Oneway Corporation to Sandra Smith. Raul believes that Sandra's business development efforts have contributed significantly to the growth of the business, so he would like to reward her with a majority ownership upon his retirement. He realizes this may be a challenge with Chris Barnes, so he wants to think more about possible incentives for Chris if this plan occurs.

Around the same timeframe, over an afternoon golf game with Chris Barnes, Barnes confides in Williams that he fears that Raul Jack and Sandra Smith will make a deal, put him in a minority position, and try to force him out of the company. Barnes says, "Jon, we've been friends a long time. Please keep me informed about Raul's plans. My interest in Oneway Corporation represents my life savings and I have a lot invested personally and professionally in the company."

Jon was clearly unsure of what to do given his roles in both relationships. He acknowledged to himself that he does not have a strong relationship with Sandra at this time, and she uses another CPA for her tax return. As such, he may lose the Oneway engagement if Sandra acquires Raul's shares and controls the corporation. On the other hand, Chris will probably suffer a great deal financially from the ownership change transaction if he does not know about Raul's plans, and Jon's unwillingness/inability to keep him informed will probably ruin their close friendship.

Jon ponders the problem.

Required: Give Williams advice about alternative actions, considering the constraints of the AICPA Code of Professional Conduct.

Your written response paper should be 3-4 pages in length.

Option 2: Legal Liability and Public Offerings

One of your firm's clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional funds would be available on a short-term basis from its bankers, they would represent only a temporary solution to the entity's need for capital to finance its expansion plans. In addition, the interest rates being charged are not appealing. Therefore, Chris Munster, Fancy's chairman of the board, in consultation with the other shareholders, has decided to explore the possibility of raising additional equity capital of approximately $15 million to $16 million. This will be Fancy's first public offering.

At a meeting of Fancy's major shareholders, its attorneys and a member of your firm spoke about the advantages and disadvantages of "going public" and registering a stock offering. One of the shareholders suggested that Regulation D under the Securities Act of 1933 might be a preferable alternative.

Required: Assume that Fancy makes a public offering for $16 million and, as a result, more than 1,000 persons own shares of the entity. Following the public offering, what are the implications with respect to the Securities Exchange Act of 1934?

What federal civil and criminal liabilities under the Securities Act of 1933 could apply if Fancy sells the securities without registration and a registration exemption is not available?

Using the SEC's website as a reference, define "accredited investor" and discuss the exemption applicable to offerings made under Regulation D for accredited investors. Your written response paper should be 3-4 pages in length.

Option 1:

Select the company that will serve as the basis of your Portfolio Project case study (see the list Portfolio Project description, found in the Week 8 folder) and submit a statement indicating your choice for approval to your instructor. On your statement, please also provide a high-level timeline plan for the stages of completion of your project.

Option 2:

Review the Portfolio Project Description, which can be accessed in the Week 8 folder. Additionally, take time to review the Portfolio Project Grading Rubric.

Review the Apollo Shoes case study portions focusing on preliminary analytics (located in planning section) and cash. If you select this option for your portfolio project, review the relevant case study documents including work paper templates. Note that this option requires Excel to complete the assignments. Please refer to www.lynda.com video tutorials for assistance working with Excel.

Submit a statement to your instructor indicating that you have selected this project option and have reviewed and are comfortable with the Excel templates necessary to complete the assignment. Also provide on your statement a high-level timeline plan for the stages of completion of your project.

Module 3 -

Readings

Chapter 3: "Engagement Planning" in Auditing & Assurance Services

Chapter 4: "Management Fraud and Audit Risk" in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Analytical Procedures and Interest Expense

You must use the computer-based Electronic Audit Documentation in Excel on the textbook's website for this problem. Please refer to www.lynda.com video tutorials for assistance working with Excel.

Weyman Z. Wannamaker is the chief financial officer of Cogburn Company. He prides himself on being able to manage the company's cash resources to minimize the interest expense. Consequently, on the second business day of each month, Weyman pays down or draws cash on Cogburn's revolving line of credit at First National Bank in accordance with his cash requirements forecast.

You are the auditor. You find the information on this line of credit in the following table. You inquired at First National Bank and learned that Cogburn Company's loan agreement specifies payment on the first day of each month for the interest due on the previous month's outstanding balance at the rate of "prime plus 1.5 percent." The bank gave you a report that showed the prime rate of interest was 8.5 percent for the first six months of the year and 8.0 percent for the last six months.

Cogburn Company Notes Payable Balances

Date	Balance
1-Jan	$150,000
1-Feb	$200,000
1-Apr	$225,000
1-May	$285,000
1-Jun	$375,000
1-Aug	$430,000
1-Sep	$290,000
1-Oct	$210,000
1-Nov	$172,000
1-Dec	$95,000

Required:

1. Prepare an audit estimate of the amount of interest expense you expect to find as the balance of the interest expense account related to these notes payable.

2. Which of the types of analytical procedures did you use to determine this estimate?

3. Suppose that you find that the interest expense account shows expense of $23,650 related to these notes. What could account for this difference?

4. Suppose that you find that the interest expense account shows expense of $24,400 related to these notes. What could account for this difference?

5. Suppose that you find that the interest expense account shows expense of $25,200 related to these notes. What could account for this difference?

Utilize the audit workpaper template found in the additional student resources section of the online textbook. Submit the Excel working paper and add in bulleted format below the workpaper answers to the prompts above.

Option 2: Auditing Standards & Risk Management

Management fraud is not the expected norm, but it happens from time to time. In the United States, several cases have been widely publicized. They happen when motives and opportunities overwhelm managerial integrity.

Required: Please respond to the following questions.

a. What distinguishes management fraud from a defalcation?

b. What are an auditor's responsibilities under auditing standards to detect management fraud?

c. What are some characteristics of management fraud that an audit team should consider to fulfill the responsibilities under auditing standards?

Audit risks for accounts and disclosures can be conceptualized in the model: Audit risk (AR) = Inherent risk (IR) x control risk (CR) x detection risk (DR). Use this model as a framework for considering the following situations and deciding whether the auditor's conclusion is appropriate.

a. Paul, CPA, has participated in the audit of Tordik Cheese Company for five years, first as an assistant accountant and the last two years as the senior accountant. Paul has never seen an accounting adjustment recommended and believes the inherent risk must be zero.

b. Fields, CPA, is lazy and does not like audit jobs in Philadelphia. On the audit of Philly Manufacturing Company, Fields decided to use substantive procedures to audit the year-end balances very thoroughly to the extent that the risk of failing to detect material errors and irregularities should be 0.02 or less. Fields gave no thought to inherent risk and conducted only a very limited review of Philly's internal control system.

Your written response paper should be 3-4 pages in length.

Module 4 -

Readings

Chapter 5: "Risk Assessment: Internal Control Evaluation" in Auditing & Assurance Services

Module H: "Auditing and Information Technology" in Part III in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Public vs. Private Company Controls Standards

Your long-time client, Central Office Supply, has been rapidly expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a public company have increased significantly as a result of the Sarbanes-Oxley Act. Puckett is particularly concerned with reports that audit fees have doubled because of internal control provisions of the act and PCAOB Auditing Standard No. 2201. Puckett has asked you to explain the possible effects on the audit of complying with the requirements of Sarbanes-Oxley.

Required: Outline for yourself your thoughts on the changes in the company's responsibilities for internal control and changes in the audit due to Sarbanes-Oxley and PCAOB Auditing Standard No. 2201. Then use your outline to create:

1. a PowerPoint presentation that summarizes your findings for Puckett to educate him on the requirements, and

2. a Word document with your talking points that elaborate on the PowerPoint slides.

Option 2: Tests of Controls: Processing and Output Controls

Mark Company's audit team is evaluating the controls that Mark has implemented over the automated processing of payroll transactions. During the understanding and assessment stages of the audit, the following processing and output controls have been identified as being important in this processing:

1. To detect unauthorized access to payroll programs and processing, a system log is generated and reviewed on a weekly basis. This log identifies the programs that have been accessed during the past week, the individual(s) who have accessed those programs, and the time(s) during which the programs have been accessed. This log is reviewed, and any unexpected or unauthorized access is investigated immediately.

2. Control totals are determined prior to the input of data and compared to computer-generated totals following transaction processing.

3. Any gross pay calculations in excess of $25,000 per month are identified and written to a rejected transaction file for separate investigation because Mark's highest paid employee whose salary is processed through the system earns $300,000 per year.

4. The system generates a report of any errors or unusual situations identified during transaction processing. This report is reviewed, and any items are resolved in a timely manner, and the resolution is documented by notations made on the report.

5. Any changes to employee master file information since the last payroll period are evaluated to ensure that they have been properly authorized by the appropriate personnel.

6. The output is reviewed for reasonableness prior to distribution to users.

Required: Consider the four methods of testing the operating effectiveness of controls (inquiry, observation, document examination, and re-performance). For each of the preceding controls, provide an example of how Mark's audit team might choose to test the operating effectiveness of the control using the four methods of test of controls (e.g., how would the audit team use inquiry, observation, document examination, and re-performance to test control #1, the generation and review of the system log?). [Note: Not all types of tests of controls will be appropriate for testing all the controls.]

Imagine that you will be presenting to your audit partner on how you will conduct the audit of this section of controls. Prepare the following deliverables:

1. a PowerPoint presentation summarizing your testing methods for each of the controls listed above and high-level advantages or limitations to such tests for that particular control, and

2. a Word document with your talking points to support the PowerPoint slides.

Module 5 -

Readings

Module E: "Overview of Sampling" in Part III in Auditing & Assurance Services

Module F: "Attributes Sampling" in Part III in Auditing & Assurance Services

Module G: "Variables Sampling" in Part III in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Sample Size Determination

Jule Phillips is examining the internal control of Cowboy Company and has identified the mathematical verification of sales invoices as an important control and decided to test this control. Based on a discussion with Cowboy's management, Phillips determined that Cowboy Company's employees were required to indicate their compliance with this control by writing their initials in an appropriate place on the invoice copy.

Assume that Phillips established an acceptable risk of overreliance of 5 percent, an expected population deviation rate of 3 percent, and a tolerable rate of deviation of 9 percent.

Required:

1. Using AICPA sample size tables in the back of your textbook, determine the appropriate sample size.

2. Indicate how Phillips would assess the three parameters that are used to determine sample size (risk of overreliance, expected population deviation rate, and tolerable rate of deviation).

3. Use the original parameters but now assume that Phillips is willing to increase the acceptable risk of overreliance to 10 percent. Using AICPA sample size tables in the back of your textbook, determine the new sample size to examine.

4. Provide an explanation for the change in sample size noted in part (c).

Your written response paper should be 3-4 pages in length.

Option 2: Sample Selection: Monetary Unit Sampling

Emerson Washburn is examining the accounts receivable of Anaheim Company and has decided to use MUS to select a sample of customer accounts for confirmation. Anaheim's accounts receivable totaled $3,500,000 and comprised 3,000 different customer accounts ranging in amount from $200 to $125,000. Based on the characteristics of the population and acceptable risk of incorrect acceptance, tolerable misstatement, and expected misstatement, Washburn determined a sample size of 20 accounts.

Required:

1. Without making any calculations, briefly describe how Washburn would select a sample of customer accounts from the population of accounts receivable.

2. If Washburn selected a random starting point of 172,600, what are the first four dollars that would be selected? How would Washburn proceed to evaluate these items?

3. What would Washburn do if two of the dollars selected are contained within the same customer account?

4. Anaheim maintains its accounts receivable balances in a computerized file that has the following information: (1) customer number, (2) customer name, (3) total account balance, and (4) account status (current versus past due). For each of these elements, comment on any procedures that Washburn should perform before selecting the sample if the population were arranged based on these elements (for example, arranged numerically by customer number, alphabetically by customer name).

Your written response paper should be 3-4 pages in length.

Module 6 -

Readings

Chapter 6: "Employee Fraud and the Audit of Cash" in Auditing & Assurance Services

Chapter 7: "Revenue and Collection Cycle" in Auditing & Assurance Services

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Proof of Cash

You must use the computer-based Electronic Audit Documentation in Excel on the textbook's website to prepare the proof of cash required in this problem. Please refer to www.lynda.com video tutorials for assistance working with Excel. The auditors of Steffey Ltd. decided to study the cash receipts and disbursements for the month of July of the current year under audit. They obtained the bank reconciliations and the cash journals prepared by the company accountants, which revealed the following:

June 30: Bank balance, $355,001; deposits in transit, $86,899; outstanding checks, $42,690; general ledger cash balance, $399,210.

July 1: Cash receipts journal, $650,187; cash disbursements journal, $565,397.

July 31: Bank balance, $506,100; deposits in transit, $51,240; outstanding checks, $73,340; general ledger cash balance, $484,000. Bank statement record of deposits: $835,846; of payments: $684,747.

Required: In Excel, prepare a four-column proof of cash (see Exhibit 6.13 for an example) covering the month of July of the current year. Identify problems, if any.

Option 2: Manipulated Bank Reconciliation

You must use the computer-based Electronic Workpapers in Excel on the textbook website to prepare the bank reconciliation solution. Please refer to www.lynda.com video tutorials for assistance working with Excel.

Caulco Inc. is the audit client. The February bank statement is shown in Exhibit 6.3 in the text. You have obtained the client-prepared bank reconciliation as of February 28 (see the following).

Required:

Check 2231 was the first check written in February. All earlier checks cleared the bank, some during January and some during February. Assume that the only February-dated cancelled checks returned in the March bank statement are 2239 and 2240 showing the amounts listed in the February bank reconciliation. They cleared the bank on March 3 and March 2, respectively. The first deposit on the March bank statement was $1,097.69 credited on March 3. Assume also that all checks entered in Caulco's cash disbursements journal through February 29 have either cleared the bank or are listed as outstanding checks in the February bank reconciliation.

Determine whether any errors exist in the bank reconciliation. If errors exist, use Excel to prepare a corrected reconciliation and explain the problem. You should provide your explanation in the Excel document at the bottom of the workpaper.

Module 7 -

Readings

Chapter 8: "Acquisition and Expenditure Cycle" in Auditing & Assurance Services

Chapter 10: "Finance and Investment Cycle" in Auditing & Assurance Services

Option 1 - Company Fraud: An evaluative report

The Portfolio Project Option 1 for ACT450 is a research report that identifies and analyzes a company that has been indicted for fraud. The report also will evaluate the auditor's role in relation to the fraud.

1. To conduct your research, choose as a case study one of the companies listed below, or obtain approval from your instructor to use a public company not on the list.

• Bankrate Inc.
• Children's Cancer Fund of America
• Health Management, Inc.
• Jamaica Water Properties
• The Leslie Fay Companies
• NextCard, Inc.
• Crazy Eddie
• ZZZZ Best

2. Your report must describe the issues surrounding the company and any company policies in relationship to the impact those might have on public audits/accounting.

3. Provide the following elements in your paper:

a. An executive summary identifying the company, the fraud, the affected stakeholders, and the ultimate resolution

b. A brief history of the company

c. An analysis of the auditor's role in the fraud, including any auditing standards that the auditors did not follow

d. Identification of internal controls that were circumvented or lacking and that could have prevented the fraud

e. Identification of accounting policies currently in effect that are designed to prevent similar problems from occurring again, or, if no policy exists, a proposal for a solution that would prevent a recurrence.

Your written response paper should be 8-10 pages in length.

Option 2 - Audit Simulation: Workpaper Preparation

For the ACT450 Portfolio Project assignment Option 2, you will apply your knowledge of audit procedures to a fictitious company-Apollo Shoes. This will require you to take the knowledge you have obtained in the course thus far in conjunction with critical thinking to review client evidence and document your results in audit workpapers.

To access the Apollo Shoes audit, you will need to navigate to the additional student resource section of the textbook.

You will be required to complete the audit testwork for the following areas:

1. Planning Analytics: Starting on page 50, you will find instructions and supporting client documents to perform preliminary analytics. Please note that you will need to refer to the trial balance, which is a few pages prior to page 50.

You will submit via Excel and/or Word all completed workpapers with appropriate supporting client documents all properly referenced and tied to each other. Your deliverables for the preliminary analytics should include:

i) Common-size financial statements and dollar amount and percent changes. (You will need to make this from the trial balance.)

ii) Financial Ratios for Apollo (Current Ratio, Debt-Equity Ratio, Asset Turnover, Days Sales in Inventory, Days Sales in AR).

iii) A comparison of Apollo's numbers with those of its closest competitors: Nike and Reebok. You can get those companies' numbers from EDGAR.

iv) A memorandum to the audit manager outlining any amounts/ratios calculated above that may warrant further interest. Do these preliminary analytics raise any interesting questions that might need to be investigated further in the audit? Make sure to discuss those questions in the memo.

2. Cash: Starting on page 70 of the Word document, you will find the instructions and supporting client documents to complete the audit of cash.

You will submit via Excel and/or Word all completed workpapers with appropriate supporting client documents, all properly referenced and tied to each other. Your deliverables for the audit of cash should include:

i) Cash Lead Schedule,

ii) Bank Reconciliation, and Supporting documentation (bank statements, confirmations, etc.).

Attachment:- Assignment File.rar