One of the last procedures that auditors perform on an engagement is to evaluate any potential misstatements in the financial statements that they have found during the audit. They do this to determine whether any accounts require adjustment to be fairly stated in accordance with GAAP. If adjustments are required, the auditors discuss them with their client. If material misstatements in the financial statements are not corrected, an unmodified audit opinion cannot be issued. Assume that you are on the team auditing Regacho Companys financial statements for the year ended December 31, 2021. You have been asked to review the following list of audit findings to determine the adjusting entry, if any, that should be recommended to the client. Assume all amounts are material. a. The bank confirmation returned by the bank indicated that Regacho Company had an outstanding note payable of $100,000 on December 31. Interest on the note is due on the last day of each month at a rate of 12% per year. The confirmation reported that December interest had not been paid. The auditor reviewing the bank confirmation indicated that Regacho Company remitted the interest payment to the bank on January 2, 2022. The outstanding note payable of $100,000 is correctly reflected on the year-end balance sheet; December interest was recorded when payment was made. b. Salaried employees of Regacho Company are paid on the first of each month for the previous month. Besides their regular salary, they receive overtime pay for any hours worked above 40 hours per week. The accounting system automatically records salary expense at the end of each month. Overtime pay is computed separately based on approved time sheets. It is normally paid and recorded on the fifth of each month. Overtime for December in the amount of $38,000 was paid and recorded on January 5, 2022. c. On December 28, 2021, Regacho Company received an advance payment of $50,000 for work to be provided to a client in January 2022. Regacho prepared the following journal entry when the cash was received: Cash 50,000 Revenue 50,000 d. In January, 2022, Regacho Company was sued by a former client who seeks to recover $150,000 for work performed in December that the client claims is of poor quality. The letter received from Regachos attorney indicated that it is reasonably possible that the company will be required to pay the damages asked. Required: For each of the four items, indicate the adjusting entry that should be recommended, if one is necessary. If no entry is required, is any other follow-up by the auditor indicated?

Problem 2 Salameh & Singh, CPAs, perform financial statement audits of nonpublic companies only. Please indicate the type of opinion(s) that they should issue under each of the following circumstances. Assume that all amounts are material unless stated otherwise. a. Their audit client reports land at current estimated market value on the Balance Sheet. b. The audit client began accounting for inventory using a perpetual inventory system at the beginning of the year being audited. Previously, the client had computed cost of goods sold at year end using the periodic inventory method. Interim procedures performed during the audit revealed that the perpetual inventory records maintained under the new system were deficient and could not be relied upon. As a result, Salameh & Singh modified their planned substantive testing of inventory. Instead of testing the clients entries to inventory throughout the year, they increased their planned testing of the physical count of inventory on December 31, carefully observing the process. They are satisfied that the evidence obtained provides sufficient appropriate evidence in support of the clients inventory account at year-end. c. Salameh & Singh determined that substantial doubt exists about a clients ability to continue as a going concern. d. An audit client owns 70% of the equity securities of a subsidiary located in Topeka, Kansas. The client is unwilling to pay for an audit of the subsidiarys financial statements and the auditors are unable to obtain sufficient audit evidence in support of the value of the investment and related earnings reported in the financial statements. e. An audit client owns 70% of the equity securities of a subsidiary located in Topeka, Kansas. Salameh & Singh decide it will be more efficient to engage the services of a Topeka-based CPA to audit the financial statements of the subsidiary than to send their own staff. After identifying a local firm with the appropriate expertise, they recommend that their client engage the Kansas firm to perform the audit of the subsidiary. Because their client acted upon their recommendation, they decide to assume responsibility for the work of the Kansas auditor. f. One of their clients changed from straight-line depreciation to the unit of production method and the auditors agree with the change. g. Salameh & Singh are auditing a local company that is a subsidiary of a larger firm. They have decided to emphasize this fact in their audit report. h. One of their clients has changed its estimate of the useful life of its buildings from 20 to 15 years. The auditors believe the new estimate is reasonable.

Problem 3 Nonpublic companies may have their financial statements audited, reviewed, compiled, or prepared by CPAs. The majority of this semester has been spent learning about audits of financial statements, but it is important to have a basic understanding of the other ways CPAs can be associated with the financial statements of their clients. IN YOUR OWN WORDS: a. Briefly describe a review of financial statements. What level of assurance, if any, is provided? What type of report is issued? Include in your explanation three procedures that are performed by the CPA during a review engagement. b. Briefly describe a compilation of financial statements. What level of assurance, if any, is provided? What type of report is issued? c. Briefly describe preparation of financial statements. What level of assurance, if any, is provided? What type of report is issued?