Al- Auditing services and information risk Vial-tek has an existing loan in the amount of Php20.0 million with an annual interest rate of 8.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Vial-tek's existing loan agreement with a new one. First National Bank has offered to loan Vial-tek Php20.0 million at a rate of 7.5% but requires Vial-tek to provide financial statements that have been reviewed by a CPA firm. City First Bank has offered to loan Vial-tek Php20.0 million at a rate of 6.5% but requires Vial-tek to provide financial statements that have been audited by a CPA firm. The controller of Vial-tek approached a CPA firm and was given an estimated cost of Php120,000 to perform a review and Php200,000 to perform an audit. Required: a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that did not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. Calculate Vial-tek's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Vial-tek should keep its existing loan, accept the offer from First National Bank, or accept the offer from City First Bank. C. Assume that First National Bank has offered the loan at a rate of 7.0% with a review, and the cost of the audit has increased to Php250,000 due to new auditing standards requirements. Indicate whether Vial-tek should keep its existing loan, accept the offer from First National Bank, or accept the offer from City First Bank d. Discuss why Vial-tek may desire to have an audit, ignoring the potential reduction in interest costs. Explain how knowledge of e-commerce technologies and a strategic understanding of the client's business may increase the value of the audit service. (Source: Arens, 12mad. P1-18, p. 22. modified) A2 - Organization of a CPA firm Mr. Rittenberg and Mr. Ford, both CPAs, are long-time friends. They were previously connected with an established accounting firms. They are planning to organize an accounting firm which will offer services to various companies. Mr. Rittenberg has an extensive exposure in the audit of financial services companies while Mr. Ford was exposed in the audit of various industries other than financial services. They do not have much exposure in taxation and advisory services. Required: a. Explain the process establishing a CPA firm including registration and compliance with various regulatory agencies. b. Since their exposure is in financial audit, what services can they offer to their clients? Will they be able to offer other services in which they do not have experience? C. How will they determine engagement fees? A3 - Audit process In early summer, an auditor is advised of a new assignment as the senior auditor for Amethyst Company, a major client for the past five years. The partner instructed her to oversee the engagement. Client acceptance procedures have already been done. She is given the engagement letter for the audit covering the current calendar year. No staff was assigned yet to assist her in the engagement. It is her responsibility to plan and supervise the fieldwork for the engagement
