ACCT 444 Week 2 Homework Solution
ACCT 444 Week 2 Homework
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.
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).
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.*
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.
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.
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.
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.
1. Identify which of these activities are frauds.
1. For each fraud, state whether it is a misappropriation of assets or fraudulent financial reporting…