QUESTION 1) (20 pts, 200 words) ABC Company has an existing loan in the amount of $6 million with an annual interest rate of 10.0%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace ABC's existing loan agreement with a new one. Burgan Bank has offered to loan ABC Busch $6 million at a rate of 8.0% but requires ABC to provide financial statements that have been reviewed by a CPA firm established by AUM graduates. Gulf Bank has offered to loan ABC $6 million at a rate of 7.0% but requires ABC to provide financial statements that have been audited by a CPA firm established by some other AUM graduates. Required: Explain why the interest rate for the loan that requires a review report is lower than that for the loan that does 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. QUESTION 2) (36 pts) For the above 6 examples, a) State the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each. (3 pts each) b) In each example, state the type of audit (financial statement audit, operational audit, or compliance audit). (3 pts each) 1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data. 2- Financial statements for use by stockholders when there is an internal audit staff. 3- Internal controls at a hospital to ensure the hospital is in compliance with ministry of health regulations. 4- Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible. 5- Annual statements for the use of management. 6- Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits. QUESTION 3) (30 pts) As an auditor you encounter the following situations in doing the audit of a large sport center. You are not a partner of the CPA firm. 1. The sales manager tells you that there is a substantial discount on new memberships that is limited to long-established customers of the company. Because your firm has been doing the audit for several years, the sales manager has decided that you should also be eligible for the discount. 2. The sport center has an executive lunchroom that is available free only to the managers of the sport center. The accounting managers informs you that you can also eat there any time. ACT 480- Auditing-Online Summer-2020 Page 213 3. You are invited to and attends the company's christmas party. When presents are handed you, are surprised to find your name included. The present has a value of approximately KWD 5. Use the three-step process in the AICPA conceptual framework to assess whether your independence has been impaired. a. Describe how each of the situations might threaten your independence from the sport center. (15 pts, 150 words) b. Assuming no safeguards are in place and you accept the offer or gift in each situation, discuss whether you have violated the rules of conduct. (15 pts, 150 words) QUESTION 4) (14 pts) Provide your own example for the below threats. (200 words) a) Self-interest (7 pts) b) Undue Influence (7 pts) QUESTION 1) (20 pts, 200 words) ABC Company has an existing loan in the amount of $6 million with an annual interest rate of 10.0%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace ABC's existing loan agreement with a new one. Burgan Bank has offered to loan ABC Busch $6 million at a rate of 8.0% but requires ABC to provide financial statements that have been reviewed by a CPA firm established by AUM graduates. Gulf Bank has offered to loan ABC $6 million at a rate of 7.0% but requires ABC to provide financial statements that have been audited by a CPA firm established by some other AUM graduates. Required: Explain why the interest rate for the loan that requires a review report is lower than that for the loan that does 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. QUESTION 2) (36 pts) For the above 6 examples, a) State the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each. (3 pts each) b) In each example, state the type of audit (financial statement audit, operational audit, or compliance audit). (3 pts each) 1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data. 2- Financial statements for use by stockholders when there is an internal audit staff. 3. Internal controls at a hospital to ensure the hospital is in compliance with ministry of health regulations. 4. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible. 5- Annual statements for the use of management. 6- Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits. QUESTION 3) (30 pts) As an auditor you encounter the following situations in doing the audit of a large sport center. You are not a partner of the CPA firm. 1. The sales manager tells you that there is a substantial discount on new memberships that is limited to long-established customers of the company. Because your firm has been doing the audit for several years, the sales manager has decided that you should also be eligible for the discount. 2. The sport center has an executive lunchroom that is available free only to the managers of the sport center. The accounting managers informs you that you can also eat there any time
