Question 1

Frank has come to you because he is worried about recovering the cost of his share of a law firm partnership. His partner, Jennifer, is exercising the "shotgun" clause in their partnership agreement, and wants to buy him out. Over the last two years, Frank and Jennifer have had numerous battles over the way that Frank handles his accounts receivable. Frank is lenient with his customers, and has converted many of his accounts into long term notes extending two and three years into the future. He is confident that these amounts are collectible, because every one of his clients continues to make small monthly payments. Occasionally, he writes off the interest amounts for some customers, since they seem more amenable to paying the principal balances than the interest.

Frank thinks that Jennifer may have been hiding profits from him and collecting some of her accounts in cash. He wants you to audit the books so that he can figure out what the 'true' profits are and how much Jennifer should pay him for his share of the partnership.

Required:

A) Explain to Frank what you would be able to do during the audit engagement and discuss the appropriateness of an audit engagement to Frank's objectives.

B) List and describe three management assertions that may have been violated. Explain how the assertions could be affected.

Question 2

You are completing the audit of Derban Automative Inc. (DAI), a new client, and encountered the following issues. For each issue, describe the impact upon the December 31, 2013 financial statement audit, and any further actions that you should take:

A) Based on your communication with the previous auditor, you learned that the previous auditors had a dispute with DAI management concerning the valuation of inventory. The previous auditor provided a clean opinion since the inventory balance was not material, but resigned anyway because of the poor relations with DAI's management.

B) Inventory consists of raw materials, semi-processed liquids, and finished goods. The fourth quarter inventory count was attended by the previous auditors, who have provided a copy of their working papers related to the inventory count to your firm.

C) The fourth quarter inventory count resulted in a significant write-down of work-in-progress and finished goods inventory. Management thinks that the write-down may have been caused by outdated standard costs.