hi sir ... hope u r doing well . I have 2 questions and I have the answers for both questions i just want you to use your own words and change what u think is not appropriate . see the attachment you find the questions and next message will have the answers . thanks

\fExercise : 6. NOTE; This is a good problem to have students revise after their initial efforts. List of Relevant Authorities: 17 CFR, 210.2-01 (Regulation S-X, Rule 2-01) PCAOB Interim Standards (AU 220 and 311) AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct Rule 101, Interpretation 101-1, and ET 92.16 Issue: Is the independence of an audit partner of a CPA firm impaired if he or she invests in a side business with a public company audit client under 17 CFR, 210.2-01 (Regulation S-X) ? Conclusion: An auditor's independence is impaired if he or she invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business. Similarly, an auditor's independence is impaired if he or she has a material joint closely held investment with an audit client. Reasoning: Legal Authorities Discussed (SEC and PCAOB standards, as approved by the SEC) The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor's independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 Code of Federal Regulations (CFR) 210.2-01. An accounting firm's independence includes its mental attitude and any covered person under AU 220.01. The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB Interim Audit Standard (AU 220.03). The term \"covered persons in the firm,\" as defined in Rule 2-01(f)(11), includes not only all partners, who conduct an audit, review, or attestation engagement of an audit client, but also individuals who are capable of influencing the audit process either through their oversight of the audit itself or through their influence over the members of the audit engagement team. It also includes any other partner or principal from an `office' of the accounting firm in which the lead audit engagement partner exists. PCAOB Interim Audit Standard (AU 311.046). An SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) #2859 concerned independence-impairing business relationships. Ernst & Young was ordered to pay disgorgement of $2,4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y's audit clients. The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called The Ernst & Young Thought Leaders Series. Two E&Y partners were ordered to cease and desist from causing any future securities violations. Other Professional Standards Discussed (AICPA) The AICPA's Code of Professional Conduct Rule 101 also require independence in the performance of professional services provided by its members. An auditor's independence is considered impaired if the auditor has a material joint closely held investment with the audit client under ET-Int. 101-1(A)(3). A \"joint closely held investment\" is an investment in an entity or property by the member of AICPA and the client's directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property. ET-INT 92.16 Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR 210.2-01 (Reg. S-X, Rule 2-01). Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit pa rtners, then, 17 CFR 210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client. The problem exists if the lead partner of the audit client practices in the same office as the audit partner. If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member. Hence, without contrary to current assumptions, the auditor in question may be a covered person. AU 311.046. In addition, as a covered person (the audit partner) has a direct business relationship with director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3). (17 CFR 210.2-01). An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, the general public may perceive that this business relationship may not be, in appearance, independent. PCAOB Interim Audit Standard AU 220.03. The audit partner and the member of board of director's business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest charges. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code 101. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm's independence under ET-INT. 101-1(A)(3) since the audit partner's CPA Firm is performing professional services for the board member's company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor's independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. ET-INT 92.16. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 7. \"Step 1\" Identify the Problems (1) Preliminary problem identification: Should Midwest Realty recognize the future lease commitments as a loss for the current period or as period costs to be expensed in the year paid? (2) Problem Analysis: Midwest Realty classified the lease commitments as operating leases. The lease agreement was standard and no cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. (3) Redefined statement of the problem. Can one recognize a contingent loss currently on the future rental commitments? Step 2Collect the evidence (1) Review authorities: the researcher can identify the following keywords for a literature or website search: Losses, contingent loss, contingency, lease, rental expense, commitments. (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Losses No relevant citations Contingencies Loss Contingencies Leases Operating leases Citation 450-20-05-5 450-20-55-25 840-20-50-1 Step 3Evaluate Results and Identify Alternatives Through the examination of the documents, the following facts are identified: Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining 6 vacant offices. The loss is contingent upon whether Midwest company can sublease the remaining 6 offices out. The loss can be reasonably estimated and it is possible that the loss will be incurred. Thus, based on the facts above, the amount is a contingent loss. Step 4Develop the Conclusion. Recognize the loss currently on the rental commitments on the vacant offices. Since this loss is a contingent loss, disclose it in the financial statements. Step 5Communicate the results To: Calvin Brain, Controller From: XYZ, CPAs At your request, we have reached the following matter to determine the impact on Midwest Realty. The specific issue reached concerns whether a loss can be recognized currently on the rental commitments on the vacant offices. A loss contingency should be accrued by a charge to income if (1) it is probable that a loss has been incurred and (2) the amount of the loss can be reasonable estimated. Midwest Realty, Inc. has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues by the cost incurred. We can reasonably estimated that the remaining six vacant offices could be subleased. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. Exercise : 6. NOTE; This is a good problem to have students revise after their initial efforts. List of Relevant Authorities: 17 CFR, 210.2-01 (Regulation S-X, Rule 2-01) PCAOB Interim Standards (AU 220 and 311) AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct Rule 101, Interpretation 101-1, and ET 92.16 Issue: Is the independence of an audit partner of a CPA firm impaired if he or she invests in a side business with a public company audit client under 17 CFR, 210.2-01 (Regulation S-X) ? Conclusion: An auditor's independence is impaired if he or she invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business. Similarly, an auditor's independence is impaired if he or she has a material joint closely held investment with an audit client. Reasoning: Legal Authorities Discussed (SEC and PCAOB standards, as approved by the SEC) The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor's independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 Code of Federal Regulations (CFR) 210.2-01. An accounting firm's independence includes its mental attitude and any covered person under AU 220.01. The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB Interim Audit Standard (AU 220.03). The term \"covered persons in the firm,\" as defined in Rule 2-01(f)(11), includes not only all partners, who conduct an audit, review, or attestation engagement of an audit client, but also individuals who are capable of influencing the audit process either through their oversight of the audit itself or through their influence over the members of the audit engagement team. It also includes any other partner or principal from an `office' of the accounting firm in which the lead audit engagement partner exists. PCAOB Interim Audit Standard (AU 311.046). An SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) #2859 concerned independence-impairing business relationships. Ernst & Young was ordered to pay disgorgement of $2,4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y's audit clients. The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called The Ernst & Young Thought Leaders Series. Two E&Y partners were ordered to cease and desist from causing any future securities violations. Other Professional Standards Discussed (AICPA) The AICPA's Code of Professional Conduct Rule 101 also require independence in the performance of professional services provided by its members. An auditor's independence is considered impaired if the auditor has a material joint closely held investment with the audit client under ET-Int. 101-1(A)(3). A \"joint closely held investment\" is an investment in an entity or property by the member of AICPA and the client's directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property. ET-INT 92.16 Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR 210.2-01 (Reg. S-X, Rule 2-01). Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit pa rtners, then, 17 CFR 210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client. The problem exists if the lead partner of the audit client practices in the same office as the audit partner. If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member. Hence, without contrary to current assumptions, the auditor in question may be a covered person. AU 311.046. In addition, as a covered person (the audit partner) has a direct business relationship with director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3). (17 CFR 210.2-01). An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, the general public may perceive that this business relationship may not be, in appearance, independent. PCAOB Interim Audit Standard AU 220.03. The audit partner and the member of board of director's business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest charges. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code 101. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm's independence under ET-INT. 101-1(A)(3) since the audit partner's CPA Firm is performing professional services for the board member's company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor's independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. ET-INT 92.16. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 7. \"Step 1\" Identify the Problems (1) Preliminary problem identification: Should Midwest Realty recognize the future lease commitments as a loss for the current period or as period costs to be expensed in the year paid? (2) Problem Analysis: Midwest Realty classified the lease commitments as operating leases. The lease agreement was standard and no cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. (3) Redefined statement of the problem. Can one recognize a contingent loss currently on the future rental commitments? Step 2Collect the evidence (1) Review authorities: the researcher can identify the following keywords for a literature or website search: Losses, contingent loss, contingency, lease, rental expense, commitments. (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Losses No relevant citations Contingencies Loss Contingencies Leases Operating leases Citation 450-20-05-5 450-20-55-25 840-20-50-1 Step 3Evaluate Results and Identify Alternatives Through the examination of the documents, the following facts are identified: Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining 6 vacant offices. The loss is contingent upon whether Midwest company can sublease the remaining 6 offices out. The loss can be reasonably estimated and it is possible that the loss will be incurred. Thus, based on the facts above, the amount is a contingent loss. Step 4Develop the Conclusion. Recognize the loss currently on the rental commitments on the vacant offices. Since this loss is a contingent loss, disclose it in the financial statements. Step 5Communicate the results To: Calvin Brain, Controller From: XYZ, CPAs At your request, we have reached the following matter to determine the impact on Midwest Realty. The specific issue reached concerns whether a loss can be recognized currently on the rental commitments on the vacant offices. A loss contingency should be accrued by a charge to income if (1) it is probable that a loss has been incurred and (2) the amount of the loss can be reasonable estimated. Midwest Realty, Inc. has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues by the cost incurred. We can reasonably estimated that the remaining six vacant offices could be subleased. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. To: From: The Engagement Partner Kris Date: October 19, 2011 Re Auditing Issues : Per your request, I am providing you with the results of my research regarding the two issues that were raised in our last meeting on Conglomention Inc. Issue 1: How should Conglomention recognize the revenues and expenses of warranties? Advice: Conglomention, Inc. offers to its customer appliances which has separately priced (extended) warranties. An extended warranty refers to protection over and above the original warranty and separately priced means that the customer has the option to purchase or not to purchase the services as per the contract for an identifiable amount distinct from the price of the product. As per FASB Technical Bulletin 90-1, Revenue from separately priced extended warranty should be recognized on straight line basis over the period of the contract except where there are sufficient historical evidence indicating that cost of services are incurred on some other appropriate method. In such cases, revenue should be recognized in proportion to costs to be incurred. Key words: Recognition of revenue and expenses on extended warranties. Database: FASB Technical Bulletin 90-1. Conclusion: Lowland should recognize revenue and expenses on straight line basis. However, any other basis can be used provided there is sufficient historical evidence to support such recognition. Revenue should be recognized in such cases in the proportion of costs to be incurred. Exercise : 6. NOTE; This is a good problem to have students revise after their initial efforts. List of Relevant Authorities: 17 CFR, 210.2-01 (Regulation S-X, Rule 2-01) PCAOB Interim Standards (AU 220 and 311) AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct Rule 101, Interpretation 101-1, and ET 92.16 Issue: Is the independence of an audit partner of a CPA firm impaired if he or she invests in a side business with a public company audit client under 17 CFR, 210.2-01 (Regulation S-X) ? Conclusion: An auditor's independence is impaired if he or she invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business. Similarly, an auditor's independence is impaired if he or she has a material joint closely held investment with an audit client. Reasoning: Legal Authorities Discussed (SEC and PCAOB standards, as approved by the SEC) The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor's independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 Code of Federal Regulations (CFR) 210.2-01. An accounting firm's independence includes its mental attitude and any covered person under AU 220.01. The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB Interim Audit Standard (AU 220.03). The term \"covered persons in the firm,\" as defined in Rule 2-01(f)(11), includes not only all partners, who conduct an audit, review, or attestation engagement of an audit client, but also individuals who are capable of influencing the audit process either through their oversight of the audit itself or through their influence over the members of the audit engagement team. It also includes any other partner or principal from an `office' of the accounting firm in which the lead audit engagement partner exists. PCAOB Interim Audit Standard (AU 311.046). An SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) #2859 concerned independence-impairing business relationships. Ernst & Young was ordered to pay disgorgement of $2,4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y's audit clients. The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called The Ernst & Young Thought Leaders Series. Two E&Y partners were ordered to cease and desist from causing any future securities violations. Other Professional Standards Discussed (AICPA) The AICPA's Code of Professional Conduct Rule 101 also require independence in the performance of professional services provided by its members. An auditor's independence is considered impaired if the auditor has a material joint closely held investment with the audit client under ET-Int. 101-1(A)(3). A \"joint closely held investment\" is an investment in an entity or property by the member of AICPA and the client's directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property. ET-INT 92.16 Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR 210.2-01 (Reg. S-X, Rule 2-01). Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit pa rtners, then, 17 CFR 210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client. The problem exists if the lead partner of the audit client practices in the same office as the audit partner. If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member. Hence, without contrary to current assumptions, the auditor in question may be a covered person. AU 311.046. In addition, as a covered person (the audit partner) has a direct business relationship with director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3). (17 CFR 210.2-01). An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, the general public may perceive that this business relationship may not be, in appearance, independent. PCAOB Interim Audit Standard AU 220.03. The audit partner and the member of board of director's business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest charges. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code 101. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm's independence under ET-INT. 101-1(A)(3) since the audit partner's CPA Firm is performing professional services for the board member's company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor's independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. ET-INT 92.16. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 7. \"Step 1\" Identify the Problems (1) Preliminary problem identification: Should Midwest Realty recognize the future lease commitments as a loss for the current period or as period costs to be expensed in the year paid? (2) Problem Analysis: Midwest Realty classified the lease commitments as operating leases. The lease agreement was standard and no cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. (3) Redefined statement of the problem. Can one recognize a contingent loss currently on the future rental commitments? Step 2Collect the evidence (1) Review authorities: the researcher can identify the following keywords for a literature or website search: Losses, contingent loss, contingency, lease, rental expense, commitments. (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Losses No relevant citations Contingencies Loss Contingencies Leases Operating leases Citation 450-20-05-5 450-20-55-25 840-20-50-1 Step 3Evaluate Results and Identify Alternatives Through the examination of the documents, the following facts are identified: Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining 6 vacant offices. The loss is contingent upon whether Midwest company can sublease the remaining 6 offices out. The loss can be reasonably estimated and it is possible that the loss will be incurred. Thus, based on the facts above, the amount is a contingent loss. Step 4Develop the Conclusion. Recognize the loss currently on the rental commitments on the vacant offices. Since this loss is a contingent loss, disclose it in the financial statements. Step 5Communicate the results To: Calvin Brain, Controller From: XYZ, CPAs At your request, we have reached the following matter to determine the impact on Midwest Realty. The specific issue reached concerns whether a loss can be recognized currently on the rental commitments on the vacant offices. A loss contingency should be accrued by a charge to income if (1) it is probable that a loss has been incurred and (2) the amount of the loss can be reasonable estimated. Midwest Realty, Inc. has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues by the cost incurred. We can reasonably estimated that the remaining six vacant offices could be subleased. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. Exercise : 6. NOTE; This is a good problem to have students revise after their initial efforts. List of Relevant Authorities: 17 CFR, 210.2-01 (Regulation S-X, Rule 2-01) PCAOB Interim Standards (AU 220 and 311) AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct Rule 101, Interpretation 101-1, and ET 92.16 Issue: Is the independence of an audit partner of a CPA firm impaired if he or she invests in a side business with a public company audit client under 17 CFR, 210.2-01 (Regulation S-X) ? Conclusion: An auditor's independence is impaired if he or she invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business. Similarly, an auditor's independence is impaired if he or she has a material joint closely held investment with an audit client. Reasoning: Legal Authorities Discussed (SEC and PCAOB standards, as approved by the SEC) The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor's independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 Code of Federal Regulations (CFR) 210.2-01. An accounting firm's independence includes its mental attitude and any covered person under AU 220.01. The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB Interim Audit Standard (AU 220.03). The term \"covered persons in the firm,\" as defined in Rule 2-01(f)(11), includes not only all partners, who conduct an audit, review, or attestation engagement of an audit client, but also individuals who are capable of influencing the audit process either through their oversight of the audit itself or through their influence over the members of the audit engagement team. It also includes any other partner or principal from an `office' of the accounting firm in which the lead audit engagement partner exists. PCAOB Interim Audit Standard (AU 311.046). An SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) #2859 concerned independence-impairing business relationships. Ernst & Young was ordered to pay disgorgement of $2,4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y's audit clients. The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called The Ernst & Young Thought Leaders Series. Two E&Y partners were ordered to cease and desist from causing any future securities violations. Other Professional Standards Discussed (AICPA) The AICPA's Code of Professional Conduct Rule 101 also require independence in the performance of professional services provided by its members. An auditor's independence is considered impaired if the auditor has a material joint closely held investment with the audit client under ET-Int. 101-1(A)(3). A \"joint closely held investment\" is an investment in an entity or property by the member of AICPA and the client's directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property. ET-INT 92.16 Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR 210.2-01 (Reg. S-X, Rule 2-01). Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit pa rtners, then, 17 CFR 210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client. The problem exists if the lead partner of the audit client practices in the same office as the audit partner. If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member. Hence, without contrary to current assumptions, the auditor in question may be a covered person. AU 311.046. In addition, as a covered person (the audit partner) has a direct business relationship with director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3). (17 CFR 210.2-01). An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, the general public may perceive that this business relationship may not be, in appearance, independent. PCAOB Interim Audit Standard AU 220.03. The audit partner and the member of board of director's business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest charges. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code 101. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm's independence under ET-INT. 101-1(A)(3) since the audit partner's CPA Firm is performing professional services for the board member's company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor's independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. ET-INT 92.16. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 7. \"Step 1\" Identify the Problems (1) Preliminary problem identification: Should Midwest Realty recognize the future lease commitments as a loss for the current period or as period costs to be expensed in the year paid? (2) Problem Analysis: Midwest Realty classified the lease commitments as operating leases. The lease agreement was standard and no cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. (3) Redefined statement of the problem. Can one recognize a contingent loss currently on the future rental commitments? Step 2Collect the evidence (1) Review authorities: the researcher can identify the following keywords for a literature or website search: Losses, contingent loss, contingency, lease, rental expense, commitments. (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Losses No relevant citations Contingencies Loss Contingencies Leases Operating leases Citation 450-20-05-5 450-20-55-25 840-20-50-1 Step 3Evaluate Results and Identify Alternatives Through the examination of the documents, the following facts are identified: Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining 6 vacant offices. The loss is contingent upon whether Midwest company can sublease the remaining 6 offices out. The loss can be reasonably estimated and it is possible that the loss will be incurred. Thus, based on the facts above, the amount is a contingent loss. Step 4Develop the Conclusion. Recognize the loss currently on the rental commitments on the vacant offices. Since this loss is a contingent loss, disclose it in the financial statements. Step 5Communicate the results To: Calvin Brain, Controller From: XYZ, CPAs At your request, we have reached the following matter to determine the impact on Midwest Realty. The specific issue reached concerns whether a loss can be recognized currently on the rental commitments on the vacant offices. A loss contingency should be accrued by a charge to income if (1) it is probable that a loss has been incurred and (2) the amount of the loss can be reasonable estimated. Midwest Realty, Inc. has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues by the cost incurred. We can reasonably estimated that the remaining six vacant offices could be subleased. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. Exercise : 6. NOTE; This is a good problem to have students revise after their initial efforts. List of Relevant Authorities: 17 CFR, 210.2-01 (Regulation S-X, Rule 2-01) PCAOB Interim Standards (AU 220 and 311) AAER-2859 (Aug. 5, 2008) AICPA Code of Professional Conduct Rule 101, Interpretation 101-1, and ET 92.16 Issue: Is the independence of an audit partner of a CPA firm impaired if he or she invests in a side business with a public company audit client under 17 CFR, 210.2-01 (Regulation S-X) ? Conclusion: An auditor's independence is impaired if he or she invests in a side business with an audit client since the audit client has the ability to exercise significant influence over the side business. Similarly, an auditor's independence is impaired if he or she has a material joint closely held investment with an audit client. Reasoning: Legal Authorities Discussed (SEC and PCAOB standards, as approved by the SEC) The SEC will not recognize an auditor as independent if the auditor cannot exercise objective and impartial judgment during an engagement. A qualified auditor must have independence from their audit clients in both fact and appearance. An auditor's independence is considered impaired if the auditor has a material investment in an entity over which the audit client has the ability to exercise significant influence. 17 Code of Federal Regulations (CFR) 210.2-01. An accounting firm's independence includes its mental attitude and any covered person under AU 220.01. The auditor must be free from any obligation to or interest in the client, its management, or its owners so that the general public recognizes the auditor as independent. PCAOB Interim Audit Standard (AU 220.03). The term \"covered persons in the firm,\" as defined in Rule 2-01(f)(11), includes not only all partners, who conduct an audit, review, or attestation engagement of an audit client, but also individuals who are capable of influencing the audit process either through their oversight of the audit itself or through their influence over the members of the audit engagement team. It also includes any other partner or principal from an `office' of the accounting firm in which the lead audit engagement partner exists. PCAOB Interim Audit Standard (AU 311.046). An SEC enforcement decision in Accounting and Auditing Enforcement Release (AAER) #2859 concerned independence-impairing business relationships. Ernst & Young was ordered to pay disgorgement of $2,4 million and prejudgment interest over $500,000 due to an independence-impairing business relationship between E&Y and Mark Thompson, a member of the board of directors of three of E&Y's audit clients. The relationship between E&Y and Thompson involved their collaboration in the creation of audio CDs called The Ernst & Young Thought Leaders Series. Two E&Y partners were ordered to cease and desist from causing any future securities violations. Other Professional Standards Discussed (AICPA) The AICPA's Code of Professional Conduct Rule 101 also require independence in the performance of professional services provided by its members. An auditor's independence is considered impaired if the auditor has a material joint closely held investment with the audit client under ET-Int. 101-1(A)(3). A \"joint closely held investment\" is an investment in an entity or property by the member of AICPA and the client's directors or officers, or any owner who has the ability to exercise significant influence of the client that enables them to control the entity or property. ET-INT 92.16 Application of Relevant Authorities: If the audit partner of a CPA firm holds an investment in a computer side business with a member of the board of directors of a public company of an audit client, his or her independence is considered impaired. In this situation, the audit client has significant influence over the investment, therefore, the auditor is not independent. 17 CFR 210.2-01 (Reg. S-X, Rule 2-01). Assuming that the audit partner in question does not engage in direct audit and review services, if the firm has only two audit pa rtners, then, 17 CFR 210.2-01(f)(11), Reg. S-X, Rule 2-01(f)(11) classifies the second partner as a covered person, as he may perform second partner review. Hence, the audit partner may be a covered member in a two-partner registered accounting firm even though he does not engage in direct contact with the audit client. The problem exists if the lead partner of the audit client practices in the same office as the audit partner. If the lead partner who associates with the audit client practices in the same office as the audit partner, the audit partner will be a covered member. Hence, without contrary to current assumptions, the auditor in question may be a covered person. AU 311.046. In addition, as a covered person (the audit partner) has a direct business relationship with director, it indicates that this direct business relationship impairs the independence of an auditor with respect to the audit client in pursuant to Reg. S-X, Rule 2-01(c)(3). (17 CFR 210.2-01). An auditor must be free from any obligation to or interest in its owners (directors) so that the general public recognizes the auditor as independent. As the audit partner has business interest with the director of the audit client, who has the power to influence the audit client, such as by holding a seat in audit committee, the general public may perceive that this business relationship may not be, in appearance, independent. PCAOB Interim Audit Standard AU 220.03. The audit partner and the member of board of director's business relationship is similar to the business relationship described in AAER #2859. If the SEC finds that the joint investment in the computer side business is independence-impairing, then the audit partner must cease and desist from causing any future securities violations and lose the right to practice as an accountant before the SEC. It is also likely that the CPA firm will have to pay disgorgement and interest charges. Investing in a business with a board member of an audit client causes the two parties to have a joint closely held investment. AICPA Code 101. A joint closely held investment between the audit partner and the board member of the audit client impairs the audit firm's independence under ET-INT. 101-1(A)(3) since the audit partner's CPA Firm is performing professional services for the board member's company. The investment in the computer business, a material joint closely held investment with the audit client, also impairs an auditor's independence. As both the audit partner and the director invest in the computer business, they control the business when they engage in a joint closely held investment. ET-INT 92.16. This impairs the independence of the accounting firm as the covered member and the director held business and financial interest in the computer business. 7. \"Step 1\" Identify the Problems (1) Preliminary problem identification: Should Midwest Realty recognize the future lease commitments as a loss for the current period or as period costs to be expensed in the year paid? (2) Problem Analysis: Midwest Realty classified the lease commitments as operating leases. The lease agreement was standard and no cancelable. The agreement required the lessee to make the monthly payments over 10 years and offered the lessee a five- year renewable option. Midwest Realty was bound by the lease agreements on all the offices. (3) Redefined statement of the problem. Can one recognize a contingent loss currently on the future rental commitments? Step 2Collect the evidence (1) Review authorities: the researcher can identify the following keywords for a literature or website search: Losses, contingent loss, contingency, lease, rental expense, commitments. (2) Locate and review the authoritative sources and literature Keyword/ Citation Diagram Keyword Reference Descriptions Losses No relevant citations Contingencies Loss Contingencies Leases Operating leases Citation 450-20-05-5 450-20-55-25 840-20-50-1 Step 3Evaluate Results and Identify Alternatives Through the examination of the documents, the following facts are identified: Midwest Realty, Inc. has the obligation to make the lease payments on the vacant offices; Midwest Inc. will incur a loss because it has not generated any revenue on the remaining 6 vacant offices. The loss is contingent upon whether Midwest company can sublease the remaining 6 offices out. The loss can be reasonably estimated and it is possible that the loss will be incurred. Thus, based on the facts above, the amount is a contingent loss. Step 4Develop the Conclusion. Recognize the loss currently on the rental commitments on the vacant offices. Since this loss is a contingent loss, disclose it in the financial statements. Step 5Communicate the results To: Calvin Brain, Controller From: XYZ, CPAs At your request, we have reached the following matter to determine the impact on Midwest Realty. The specific issue reached concerns whether a loss can be recognized currently on the rental commitments on the vacant offices. A loss contingency should be accrued by a charge to income if (1) it is probable that a loss has been incurred and (2) the amount of the loss can be reasonable estimated. Midwest Realty, Inc. has an enforceable obligation to make the lease payments on the vacant offices, and has not generated any revenues by the cost incurred. We can reasonably estimated that the remaining six vacant offices could be subleased. The authoritative literature supports that the accrual of a loss for the vacant lease offices and the amount of the loss will be the minimum estimate of the potential loss. To: From: The Engagement Partner Kris Date: October 19, 2011 Re Auditing Issues : Per your request, I am providing you with the results of my research regarding the two issues that were raised in our last meeting on Conglomention Inc. Issue 1: How should Conglomention recognize the revenues and expenses of warranties? Advice: Conglomention, Inc. offers to its customer appliances which has separately priced (extended) warranties. An extended warranty refers to protection over and above the original warranty and separately priced means that the customer has the option to purchase or not to purchase the services as per the contract for an identifiable amount distinct from the price of the product. As per FASB Technical Bulletin 90-1, Revenue from separately priced extended warranty should be recognized on straight line basis over the period of the contract except where there are sufficient historical evidence indicating that cost of services are incurred on some other appropriate method. In such cases, revenue should be recognized in proportion to costs to be incurred. Key words: Recognition of revenue and expenses on extended warranties. Database: FASB Technical Bulletin 90-1. Conclusion: Lowland should recognize revenue and expenses on straight line basis. However, any other basis can be used provided there is sufficient historical evidence to support such recognition. Revenue should be recognized in such cases in the proportion of costs to be incurred