ACCT 444 Week 2 Homework
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ACCT
444 Week 2 Homework
Chapter
5
5-23
(Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf Manufacturing
Corporation, a privately owned company that has a June 30 fiscal year.
Greenleaf arranged for a substantial bank loan that was dependent on the bank’s
receiving, by September 30, audited financial statements that showed a current
ratio of at least 2 to 1. On September 25, just before the audit report was to
be issued, Chen received an anonymous letter on Greenleaf’s stationery
indicating that a 5-year lease by Greenleaf, as lessee, of a factory building
accounted for in the financial statements as an operating lease was, in fact, a
capital lease. The letter stated that there was a secret written agreement with
the lessor modifying the lease and creating a capital lease.
Chen confronted the president of
Greenleaf, who admitted that a secret agreement existed but said it was
necessary to treat the lease as an operating lease to meet the current ratio
requirement of the pending loan and that nobody would ever discover the secret
agreement with the lessor. The president said that if Chen did not issue his
report by September 30, Greenleaf would sue Chen for substantial damages that
would result from not getting the loan. Under this pressure and because the
audit files contained a copy of the 5-year lease agreement that supported the
operating lease treatment, Chen issued his report with an unqualified opinion
on September 29.
Despite the fact that the loan was
received, Greenleaf went bankrupt within 2 years. The bank is suing Chen to recover
its losses on the loan, and the lessor is suing Chen to recover uncollected
rents.
Required
Answer the following questions,
setting forth reasons for any conclusions stated:
1.
Is
Chen liable to the bank?
1.
Is
Chen liable to the lessor?
1.
Is
there potential for criminal action against Chen?
5-24
(Objective 5-6) Under Section 11 of the Securities Act of 1933 and Section
10(b), Rule 10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by
a purchaser of registered securities. The following items relate to what a
plaintiff who purchased securities must prove in a civil liability suit against
a CPA.
The plaintiff security purchaser
must allege or prove:
1.
Material misstatements were included
in a filed document.
2.
A monetary loss occurred.
3.
Lack of due diligence by the CPA.
4.
Privity with the CPA.
5.
Reliance on the financial
statements.
6.
The CPA had scienter (knowledge and
intent to deceive).
Required
For each of the items 1 through 6
listed above, indicate whether the statement must be proven under
1.
Section
11 of the Securities Act of 1933 only.
1.
Section
10(b) of the Securities Exchange Act of 1934 only.
1934.
Both
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934.
1934.
Neither
Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities
Exchange Act of 1934.*
Chapter
6
6-23
(Objectives 6-1, 6-3) Auditors provide “reasonable assurance” that the financial statements
are “fairly stated, in all material respects.” Questions are often raised as to
the responsibility of the auditor to detect material misstatements, including
misappropriation of assets and fraudulent financial reporting.
Required
1.
Discuss
the concept of “reasonable assurance” and the degree of confidence that
financial statement users should have in the financial statements.
1.
What
are the responsibilities of the independent auditor in the audit of financial
statements? Discuss fully, but in this part do not include fraud in the
discussion.
.
1.
What
are the responsibilities of the independent auditor for the detection of fraud
involving misappropriation of assets and fraudulent financial reporting?
Discuss fully, including your assessment of whether the auditor’s
responsibility for the detection of fraud is appropriate.
.
6-27
(Objectives 6-6, 6-7) The following are specific transaction-related audit
objectives applied to the audit of cash disbursement transactions (a through
f), management assertions about classes of transactions (1 through 5), and
general transaction-related audit objectives (6 through 11).
Specific
Transaction-Related Audit Objective
1.
Recorded cash disbursement
transactions are for the amount of goods or services received and are correctly
recorded.
2.
Cash disbursement transactions are
properly included in the accounts payable master file and are correctly
summarized.
3.
Recorded cash disbursements are for
goods and services actually received.
4.
Cash disbursement transactions are
properly classified.
5.
Existing cash disbursement
transactions are recorded.
6.
Cash disbursement transactions are
recorded on the correct dates.
Required
1.
Explain
the differences among management assertions about classes of transactions and
events, general transaction-related audit objectives, and specific
transaction-related audit objectives and their relationships to each other.
1.
For
each specific transaction-related audit objective, identify the appropriate
management assertion.
2.
For
each specific transaction-related audit objective, identify the appropriate
general transaction-related audit objective.
Chapter
11
11-30
(Objective 11-1) The following are activities that occurred at Franklin
Manufacturing, a nonpublic company.
1.
Franklin’s accountant did not record
checks written in the last few days of the year until the next accounting
period to avoid a negative cash balance in the financial statements.
2.
Franklin’s controller prepared and
mailed a check to a vendor for a carload of material that was not received. The
vendor’s chief accountant, who is a friend of Franklin’s controller, mailed a
vendor’s invoice to Franklin, and the controller prepared a receiving report.
The vendor’s chief accountant deposited the check in an account he had set up
with a name almost identical to the vendor’s.
3.
The accountant recorded cash
received in the first few days of the next accounting period in the current
accounting period to avoid a negative cash balance.
4.
Discounts on checks to Franklin’s
largest vendor are never taken, even though the bills are paid before the
discount period expires. The president of the vendor’s company provides free
use of his ski lodge to the accountant who processes the checks in exchange for
the lost discounts.
5.
Franklin shipped and billed goods to
a customer in New York on December 23, and the sale was recorded on December
24, with the understanding that the goods will be returned on January 31 for a
full refund plus a 5 percent handling fee.
6.
Franklin’s factory superintendent
routinely takes scrap metal home in his pickup and sells it to a scrap dealer
to make a few extra dollars.
7.
Franklin’s management decided not to
include a footnote about a material uninsured lawsuit against the company on
the grounds that the primary user of the statements, a small local bank, will
probably not understand the footnote anyway.
Required
1.
Identify
which of these activities are frauds.
1.
For each fraud, state whether it is a misappropriation of assets
or fraudulent financial reporting.
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