1) Which of the following best describes the primary role and responsibility of independent external auditor?

A) Produce a company's annual financial statements and notes.

B) Express an opinion on the fairness of a company's annual financial statements and footnotes.

C) Provide business consulting advice to audit clients.

D) Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies. 2) An attestation engagement is one in which a CPA is engaged to:

A) issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party.

B) provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.

C) testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts.

D) assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.

3) The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of these management assertions?

A) Existence.

B) Rights and obligations.

C) Completeness.

D) Valuation.

4) Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

A) An inadequate understanding of the entity's internal controls.

B) The close proximity to the end of the entity's fiscal year.

C) Concluding that the entity's management probably lacks integrity.

D) The inability to perform preliminary analytical procedures before assessing control risk.

Problem Two Problem two consists of questions on materiality:

(a) Briefly define materiality by the Financial Accounting Standards Board (FASB) under the FASB Concept Statements.

(b) What is the independent auditors' concept of "performance materiality" under the AICPA Statements on Auditing Standards and how is that distinguished from materiality for the statements as a whole?

Problem Three

Alan Johns was recently promoted to senior accountant at the WCSU CPA Firm. He was put in charge of the Natural Markets audit because of his experience with other grocery clients. Natural Markets has a small, but growing, chain of natural food stores. This is the first year Natural Markets has been audited. Because of their growth, Natural Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan is assigned two new staff assistants for the audit. Both staff assistants recently graduated from their accounting program at Western Connecticut State University. Because this is his first engagement as a senior accountant, Alan wants to bring the job in on the preliminary budget established by the quality control partner at the firm. To save time, Alan provided his assistants with a copy of the audit plan for Happy Time Food Stores, a different grocery client of the WCSU CPA Firm. Alan told the staff assistants this would make the audit go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their audit work, the assistants told Alan that the audit plan of Happy Time did not always match up with what they found at Natural Markets. Alan responded "cross out whatever is not relevant in the audit plan and don't add anything it will only make us go over the budget, and don't spend any time on the internal controls." When Alan came to the client near the end of audit work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Natural Markets (the audit plan for Happy Time had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Natural Markets' seven stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added, "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the quality control partner.

Required: Describe the three performance standard of generally accepted auditing standards (known previously as field work) and indicate how the actions of Alan Fallon resulted in a failure to comply with the performance standards.

Problem Four

As the quality control partner of the WCSU CPA Firm, you are required to periodically review the independence of each partner and professional staff at the firm to insure there are in independence issues with the firm's client base. You have come across four issues:

(1) A staff auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients.

(2) An audit client provides financial support to a number of charitable causes that also receive support from the accounting firm.

(3) A senior auditor on one audit engagement owns a financial interest in the common stock of the client.

(4) A client's Chief Executive Officer (CEO) graduated from the same university as the partner in charge of the WCSU CPA Firm.

Required: Which of the following would most likely be a violation of the independence requirement found in Generally Accepted Auditing Standards? Describe why one scenario above would be a violation of the independence rules, while the other three would likely not be violations.

Problem Five

The Luna Veterinary Group LLC is considering expanding their veterinary practice by opening a second office in a nearby town and has hired a new veterinarian, Rachael Bosco, DVM, to run the new office. Dr. Christie Luna, DVM, is president of The Luna Veterinary Group and she knows her business is profitable, but the LLC does not produce regular financial statements, nor does she possess the technical knowledge to prepare GAAP financial statements. When discussing the potential expansion with the Dog & Cat Savings Bank, their banking officer, Joanne Boomer, said in their meeting: I would need a GAAP financial statement of The Luna Veterinary Group for you last year end. I would also need a CPAs report of some type attached to the financial statements. After meeting with the Dog & Cat Savings Bank, Dr. Luna calls her CPA firm.

Required: Consider the LLCs need for financing from the Cat and write a memo outlining the pros and cons the three levels of service the CPA firm could provide: compilation and review under the AICPA Statements on Accounting and Review Services (SSARS) and an audit of the LLCs financial statements under the AICPA Statement of Auditing Standards (SAS).

Describe the nature of each of the three services to Dr. Christie Luna. Conclude your memo with a recommendation for what you believe would best service Dr. Lunas needs.