1.A. Retain the original text.

B. Delete the text.

C. Replace with Objective Audit Report

D. Replace with Independent Auditors Report

D. Replace with Registered Auditors Report

2. A. Retain the original text.

B. Delete the text.

C. Replace with Sam Best, President, and Loren Steele, Controller

D. Replace with Department of Internal Auditing

E. Replace with Audit Committee of Keystone

F. Replace with Board of Directors of Keystone

3.

A. Retain the original text.

B. Delete the text.

C. Replace with Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. Except for these lease obligations, other accounting principles followed are in accordance with accounting principles generally accepted in the United States of America.

D. Retain the original text, but change title of section to Basis for Disclaimer of Opinion

E. Retain the original text, but move paragraph to follow opinion paragraph.

4.

A. Retain the original text.

B. Delete the text.

C. Replace with and except for the matter described in the Emphasis of Matter paragraph

D. Replace with and because of the significance of the matter described in the Emphasis of Matter paragraph

E. Replace with and considering the matter described in the Emphasis of Matter paragraph

5.

A. Retain the original text.

B. Delete entire paragraph.

C. Delete only final sentence, We concur with the change.

D. Add the following at the end of the paragraph: We provide no assurance related to this change.

E. Add the following at the end of the paragraph: We provide reasonable assurance related to this change.

6.

A. Retain the original text.

B. Delete the text.

C. Replace with Keystone Engagement Partner (provide partners name)

D. Replace with Include names of all primary engagement staff and partner members.

E. Replace with Adams, Barnes & Co., LLP, by Keystone Engagement Partner (provide partners name)

7.

A. Retain the original text.

B. Delete the text.

C. Replace with January 31, 20X6, except for Note 7, as to which the date is February 2, 20X6.

D. Replace with December 31, 20X5.

E. Replace with January 31, 20X6.

F. Replace with February 2, 20X6.

This simulation presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected. An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone's 20X5 financial statements. Required: Your job as senior on the engagement is to review and revise the 20x5 audit report for the Keystone audit. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Ensure that the 20x5 list is appropriate given the information provided. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. Exhibit 1 - Working Paper Memo Exhibit 2 - Audit Report Memo Exhibit 3 - E-mail to Senior Document (For each Document Callout, choose the correct Determination from the table below.) Certified Public Accountant's Report (Callout #1) To Sam Best, President: (Callout #2) We have audited the accompanying financial statements of Keystone Computers & Networks, Inc., which comprise the balance sheet as of December 31, 20X5, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended. (Callout #3) Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph and subject to the accounting change described in the Emphasis of Matter paragraph, (Callout #4) the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Computers & Networks, Inc., as of December 31, 20X5, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 4 to the financial statements, in 20x5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change. (Callout #5) Adams, Barnes & Co. (Callout #6) Phoenix, Arizona February 6, 20X6. (Callout #7) EXHIBIT 1 Working Paper Memo Schedule D-2-3 Plant Assets Keystone 1/10/X6 Keystone has changed the life of a material portion of its plant assets from 25 year to 28 year assets. The effect of this change is to materially increase net income. I agree that the change is appropriate. Note 4 discusses the change. Depreciation Expense based on 25-year life: See Schedule XXX Depreciation Expense based on 28-year life: See Schedule XXY Keystone Engagement Partner EXHIBIT 2 Audit Report Memo Memo To: Senior From: Keystone Engagement Partner Date: January 29, 20X6 Re: Audit Report I spoke with the Chairman of the Board of Directors, as well as the President and the Controller. The overall Board deals with governance of Keystone as the company has not developed an audit commit- tee; the CEO and Controller fulfill traditional roles within the company. All agreed on the following: They confirmed that they wish to only present financial statements for the year ended 12/31/20X5. I pointed out to them that given our audit findings and circumstances of the engagement, the audit report will include any modifications required by the standards, but no discretionary sections or disclosures. I agree that the change in plant asset life is justifiable and preferable. Note that the company has not capitalized certain leases, a departure from GAAP. The President and Controller believe that capitalizing the leases would lead to misleading financial statements. I pointed out to them my disagreement, and my belief that not capitalizing the leases materially, but not pervasively, misstates the financial statements. They said they disagree, but that they know that We, as auditors, must "follow the standards." The President and Controller agree that they will sign the representations letter as we have prepared it. EXHIBIT 3 E-mail to Senior To: Senior From: Keystone Engagement Partner Date: February 4, 20X6 Re: Revision of Keystone Financial Statements (i.e., Note 9), I have spoken with the Chairman of the Board of Directors, as well as the President and Controller con- cerning note 7 to the financial statements describing the fire in the warehouse on February 2, 20x6. January 31 was the date on which we had obtained sufficient appropriate audit evidence with respect to the overall financial statements. But, as indicated, the fire occurred on February 2 and resulted in inclusion of an additional note disclosure that includes the date and other details related to the fire. We will follow an approach of limiting our subsequent event procedures solely to the financial state- ment revisions related to the fire rather than extending all subsequent event procedures and assuming responsibility for all subsequent events. Assuming we complete necessary audit procedures in time, we should plan on issuing our audit report on February 6. Callouts Determination 1. "Certified Public Accountant's Report" 2. "Sam Best, President" 3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended." 4. "and subject to the accounting change described in the Emphasis of Matter paragraph" 5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change." 6. "Adams, Barnes & Co." 7. "February 6, 20X6." This simulation presents a draft of a nonpublic company audit report document and three exhibits. To allow this DRS to stand alone without consideration of other parts of the Keystone Computers & Networks, Inc. (Keystone) case, assume that the findings described in this case were identified very late in the audit and that any other misstatements identified in other portions of the case have been corrected. An associate member of the Adams, Barnes & Co. audit team prepared a first draft of the audit report on Keystone's 20X5 financial statements. Required: Your job as senior on the engagement is to review and revise the 20x5 audit report for the Keystone audit. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Ensure that the 20x5 list is appropriate given the information provided. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. Exhibit 1 - Working Paper Memo Exhibit 2 - Audit Report Memo Exhibit 3 - E-mail to Senior Document (For each Document Callout, choose the correct Determination from the table below.) Certified Public Accountant's Report (Callout #1) To Sam Best, President: (Callout #2) We have audited the accompanying financial statements of Keystone Computers & Networks, Inc., which comprise the balance sheet as of December 31, 20X5, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Basis for Qualified Opinion The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended. (Callout #3) Opinion In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph and subject to the accounting change described in the Emphasis of Matter paragraph, (Callout #4) the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Computers & Networks, Inc., as of December 31, 20X5, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 4 to the financial statements, in 20x5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change. (Callout #5) Adams, Barnes & Co. (Callout #6) Phoenix, Arizona February 6, 20X6. (Callout #7) EXHIBIT 1 Working Paper Memo Schedule D-2-3 Plant Assets Keystone 1/10/X6 Keystone has changed the life of a material portion of its plant assets from 25 year to 28 year assets. The effect of this change is to materially increase net income. I agree that the change is appropriate. Note 4 discusses the change. Depreciation Expense based on 25-year life: See Schedule XXX Depreciation Expense based on 28-year life: See Schedule XXY Keystone Engagement Partner EXHIBIT 2 Audit Report Memo Memo To: Senior From: Keystone Engagement Partner Date: January 29, 20X6 Re: Audit Report I spoke with the Chairman of the Board of Directors, as well as the President and the Controller. The overall Board deals with governance of Keystone as the company has not developed an audit commit- tee; the CEO and Controller fulfill traditional roles within the company. All agreed on the following: They confirmed that they wish to only present financial statements for the year ended 12/31/20X5. I pointed out to them that given our audit findings and circumstances of the engagement, the audit report will include any modifications required by the standards, but no discretionary sections or disclosures. I agree that the change in plant asset life is justifiable and preferable. Note that the company has not capitalized certain leases, a departure from GAAP. The President and Controller believe that capitalizing the leases would lead to misleading financial statements. I pointed out to them my disagreement, and my belief that not capitalizing the leases materially, but not pervasively, misstates the financial statements. They said they disagree, but that they know that We, as auditors, must "follow the standards." The President and Controller agree that they will sign the representations letter as we have prepared it. EXHIBIT 3 E-mail to Senior To: Senior From: Keystone Engagement Partner Date: February 4, 20X6 Re: Revision of Keystone Financial Statements (i.e., Note 9), I have spoken with the Chairman of the Board of Directors, as well as the President and Controller con- cerning note 7 to the financial statements describing the fire in the warehouse on February 2, 20x6. January 31 was the date on which we had obtained sufficient appropriate audit evidence with respect to the overall financial statements. But, as indicated, the fire occurred on February 2 and resulted in inclusion of an additional note disclosure that includes the date and other details related to the fire. We will follow an approach of limiting our subsequent event procedures solely to the financial state- ment revisions related to the fire rather than extending all subsequent event procedures and assuming responsibility for all subsequent events. Assuming we complete necessary audit procedures in time, we should plan on issuing our audit report on February 6. Callouts Determination 1. "Certified Public Accountant's Report" 2. "Sam Best, President" 3. "Basis for Qualified Opinion: The Company has excluded from property and debt in the accompanying balance sheets certain lease obligations that, in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $3,500,000, long-term debt by $3,500,000, and retained earnings by $500,000 as of December 31, 20X5. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.12 for the year then ended." 4. "and subject to the accounting change described in the Emphasis of Matter paragraph" 5. "As discussed in Note 4 to the financial statements, in 20X5 the entity elected to change the estimated life of a number of its plant assets. We concur with this change." 6. "Adams, Barnes & Co." 7. "February 6, 20X6