III. Short Answer (20 points, 5 points each). Below are four short fact patterns. Please respond to each with the correct answer. Auditing is a risky business. Many problems may arise during an audit. For questions 1. and 2. below discuss the primary risks involved in each scenario. Please be specific. 1. Sam and Dave are audit partners, and have decided to undertake the audit of ABC Corp. During some preliminary analytical procedures they determined that the cash account was low relative to the amount of sales. Sam proceeds to double check the bank reconciliations, but they seem to be correct. Dave reviews the Chart of Organization to see the responsibility level of those that examine the cancelled checks for proper signatures. However, Sam and Dave are still worried. 2. KPMX is a very large auditing firm. The Chairman of the Board of Endo Corp., Tom Smith, wants to hire KPMX for its annual audit. However, Jane Green, the audit partner at KPMX knows that the turnover in the Accounting Department at Endoun Corp. is very high, and she also heard that the Endoun Corp. is poorly managed. Moreover, Eadoun Corp's, business is innovative and unique, and none of the auditors at KPMX have ever audited a company in that industry. The next two questions, 3. And 4. involve litigation against auditors. 3. You are a partner in a CPA firm, and you just were served with a summons and complaint by a financial firm to appear in the NYS Supreme Court based upon an audit that your firm performed three years ago. That client is no longer in business, and the plaintiff finance company believes that the unqualified opinion that accompanied the financial statements was in error. Of the lawsuits cited in the textbook which would enable your auditing firm to have the best outcome? Why? 4. You are the accountant for XYZ Corp., a successful family business for over 20+ years. Now that the business has grown and matured, the matriarch and majority stockholder, Dean Markus, want to go public. You prepare the audited financial statements, as you have for the last 20+ years, and file the required registration statement. However, you inadvertently fail to disclose that the land upon which the XYZ Corp. factory is situated has a lease that will terminate in the next three years. Initially, the stock does well in the stock market. However, at the first annual meeting of shareholders, the news breaks about the lease arrangement, and the next day the shares of XYZ plummet. If shareholder, Jim Flannigan, decides to commence a lawsuit, will he prevail?