DEPARTMENT OF ACCOUNTING, TAXATION, AND LEGAL STUDIES IN BUSINESS chapter 3 homework

E. Why does the auditor not use the same tolerable misstatement or percentage of account balance for all financial statement accounts?

each element in your Question 1 pro forma profit and loss statement. Are there any items that

Consider journal entry that recognized $35 million of revenue in 2001 from the EDS contract based on WorlCom’s expectation that the five-year required cumulative minimum payment would not be met. Based on your own analysis of GAAP, explain the propriety to impropriety of this journal entry.

Issue: Have the directors of the company breached their duties mainly related to the company’s insolvent trading.

1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability?

f) To evaluate the material misstatement in the accounts, I think both of the consolidated income statement and the three financial statements are useful. We need to use the information properly from all the financial statements. However the consolidated income statement is the most useful one. If there is a significant change in an account balance comparing with preceding two years, the auditor will examine whether there a material misstatement exists. For instance, the bad debt expense as a percent of net sales in 2011, 2010 and 2009 are 0.56%, 0.70% and 0.69%, respectively. There should

Evaluating the Reasonableness of the Accounting Estimates, and Determining Misstatements: the auditor shall evaluate, based on the audit evidence, whether the accounting estimates in the financial statements are either

It is common industry knowledge that an audit plan provides the specific guidelines auditors must follow when conducting an external audit. External public accounting firms conduct external audits to ensure outside stakeholders that the company’s financial statements are prepared in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) standards.

1a) What should the auditor consider when determining whether an account should be considered significant?

Because the auditor has substantial doubt about the client’s ability to continue as a going concern, the auditor should include add an explanatory paragraph to the unqualified opinion.

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

d. “The auditor's reliance on substantive tests to achieve an audit objective related to a particular assertion may be derived from tests of details, from analytical procedures, or from a combination of both. The decision about which procedure or procedures to use to achieve a particular audit objective is based on the auditor's judgment on the expected effectiveness and efficiency of the available procedures. For significant risks of material misstatement, it is unlikely that audit evidence obtained from substantive analytical procedures alone will be sufficient (PCAOB, AS 2305.09).”

B) I think the auditors should have equal responsibility for detecting material misstatements due to error and fraud. It’s their job to make sure the financial statements are as accurate as possible. Although it may be hard to check all the information from a company it’s the responsibility of the auditor to sign off that everything is in check.

The financial statements of the current year and of the previous year did not include any provision for penalty interest and financial guarantees due by the Company to the licensed banks. This is not in compliance with the requirements of FRS 137 Provisions, Contingent Liabilities and Contingent Assets which require such provision for penalty interest and financial guarantees to be recognised in the financial statements of the Company.

a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,