Justin Kealey, CPA, is auditing Tustin Companies, Inc. Kealey has accumulated known and likely misstatements for the current year to evaluate whether there is a sufficiently low risk of material misstatement of the financial statements to issue an opinion. However, Kealey notes that there are several misstatements that have been carried over from prior years.
A .Distinguish between the iron curtain and the rollover approaches to considering the misstatements from prior years. In consideration of an auditor’s approach for considering the effects of misstatements from prior years are the iron curtain and the rollover approach.
The iron curtain approach reveals the effect of correcting the misstatements whole amount in the present year irrespective of when the misstatements occurred. The rollover approach reflects only the amount of misstatement originating in the existing income statements. It ignores the effect of misstatements caused within the balance sheet.
B. Describe how SEC Staff Accounting Bulletin No. 108 requires auditors to consider misstatements carried over from prior periods.
SEC, Staff Accounting Bulletin No. 108 in reference to materiality states that auditors consider both the iron curtain and rollover approach. Auditors suggest whenever making corrections of material misstatements in financial statements that corrections are made with the iron curtain or rollover approach. The following are typical questions that might appear on an internal control questionnaire for payroll activities:
1. Is there adequate separation of duties between employees who maintain human resources records and employees who approve payroll disbursements? It is important that originations separate human resources and support function as it enables prevention of payments to fictitious employees and overpayment of payroll amounts. Therefore, distribution of payroll accounts involve things such as scheduling, time sheet verification, employee information, and tax obligations just to name a few responsibilities.
2. Is there adequate separation of duties between personnel who maintain timekeeping or attendance records for employees and employees who distribute payroll checks? When utilizing the same employees executing the timekeeping and distribution, the organization is providing these individuals to report attendance of employees that have resigned and write their own checks. The thought of combining the timekeeper and payroll employees should never be done. Separating responsibilities as management and supervisors create scheduling and time management should be electronically formatted to maintain and avoid fraud. a. Describe the purpose of each of the above controls.
Separating responsibilities as management and supervisors create scheduling and time management should be electronically formatted to maintain and avoid fraud. b. Describe the manner in which each of the above controls might be tested. The separation of duties is established by inquiring for which employees perform particular tasks during year, and become aware of the personnel carrying out such tasks. The auditors should inquire upon which personnel accomplished their assigned tasks under uncommon circumstances, for example during the prolonged illness of a worker. c. Assuming that the operating effectiveness of each of the above controls is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of control risk. The testing of fictitious payroll transactions brings the auditors to analyze the distribution of paychecks on a random basis. Analytical procedures performed in reference to payroll expenses may involve comparing the amount budgeted for the year to the comparable amounts of previous years and could reveal a substantial overstatement of staff payroll expenses.
While performing your audit of Williams Paper Company, you discover evidence that indicates that Williams may not have the ability to continue as a going concern. a. Discuss types of information that may indicate substantial doubt about a client’s ability to remain a going concern. Circumstances presenting doubt in the client’s ability to achieve and maintain business performance begin with working capital deficiencies. More problems for concern may be recurring operating lost, arrears in dividend, defaulting on loans and adverse financial ratios. The economy can cause business lost as loosing principal customers, work stoppages, legal problems, and inside staff members affecting the business meeting its standards. b. Explain the auditors’ obligation in such situations.
Information contradictory to an assumption that a CPA firm’s client remains a growing concern is generally relates to the company’s ability to satisfy its financial commitments For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition: Unless stated otherwise, assume the matter involved is material. Thomas Bros. Construction is involved in a hazardous trade on a work project and has obtained insurance coverage related to the hazard. Although the probability is remote, a material portion of the company’s assets could be destroyed by a serious work related accident. A standard unqualified report is issued.
If the problem does not state that a misstatement (or possible misstatement) is pervasive, assume that it may or may not be pervasive (thus, the appropriate reply may include two possible reports). The Lowes’ own considerable amount property that has gained significantly in value since the date of purchase. The properties were appraised and reported in the balance sheet at the appraised values that materially exceed costs with related disclosures. The certified public accountants believe that the appraised values reported in the balance sheet are a realistic value of the assets. This scenario can receive either an adverse or a qualified judgment. Valuation of assets at appraised values is not in the standards presented in the general accepted accounting principles (GAAP). The appraised value and cost is important, an unqualified opinion is not be appropriate. Do not read more into the circumstance than what is presented. While conducting an audit of Armstrong Co. the CPA firm encountered a major scope limitation relating to inventory report availability and cannot gather sufficient qualifying audit evidence for that area. A scope limitation will result in a qualified opinion or a disclaimer of opinion. Do not consider an auditor discretionary circumstance for modification of the audit report unless the situation explicitly suggests that the auditors wish to emphasize a particular matter. Noble Co. has material investments in stocks pertaining to subsidiary companies while are not actively traded in the market.
The participating CPA firm performing the engagement does not extend to any subsidiary company. The CPA firm is able to determine that all investments are carried at the original cost, but it has no idea of the actual market value. Although the difference between cost and market could be material, it may not have a pervasive effect on the overall financial statements. Here is a scope limitation therefore; either a qualified opinion or a disclaimer of opinion is appropriate. Report Types may be used once, more than once, or not at all. Williams Co. also has material investments in stocks of subsidiary companies however; the stocks for in this scenario are of subsidiary companies which are actively traded in the market. Management insists that all investments are carried at the original costs, and the CPA firm is satisfied that the original costs are accurate. The CPA firm believes that the client does not realize a substantial portion of the investments because the market value is much lower than the cost. The client disclosed the facts in notes accompanying the financial statements. A qualified opinion is necessary. The CPA firm attained sufficient evidence stating investments in subsidiary companies are overstated and the note disclosure does not compensate for inappropriate balance sheet presentation.
Whittington and Pany, Chapter 16, Auditing Operations and Completing the Audit, Chapter 17, Auditor’s Reports, Principles of Auditing & Other Assurance Services, 18th edition, T, Legal Liability of CPAs McGraw-Hill Irwin
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