This question is intended to test your knowledge of selected topics that are set forth in accounting principles generally accepted in the United States of America (GAAP) and auditing standards generally accepted in the United States of America (GAAS). Your successful completion of each of the following problems will demonstrate your ability to: (1) relate the given facts to a particular GAAP or GAAS standard; (2) locate each standard and evaluate the given facts in the context of the relevant portion of the standard; and (3) summarize your conclusion in a concise and business-like manner. Among other skills, the following questions will require the student's basic understanding of the concepts specific to.

AU-C Section 300 Planning an Audit. AU-C Section 700 Forming an Opinion and Reporting on Financial Statements. AU-C Section 230 Audit Documentation. AU-C Section 560 Subsequent Events. AU-C Section 240 Consideration of Fraud in a Financial Statement Audit. AU-C Section 200 General Principles and Responsibilities. AU-C Section 315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. AU-C Section 705 Modification to the Opinion in the Independent Auditor's Report.

Problem 1

You have recently resigned your position as an audit manager with a Big Four accounting and audit firm and joined a small local firm, Jones CPA (Jones) as a partner. Soon after this transition, the managing partner of Jones, Diane, asked you to accompany her and other partners to Piedmont Company (Piedmont), a local and privately owned manufacturer of pet foods, to be a part of the presentation for Jones to be appointed as the new auditors for Piedmont.

The presentation goes extremely well, and you have been very impressed with your partners and are excited about the possibility of Piedmont being added to the audit practice of Jones. Just as you are leaving the meeting, you overhear parts of a conversation between a Jones tax partner and the Company's VP of Finance. Although you do not hear the entire conversation you clearly heard the VP of Finance say to your tax partner Phil, "is Jones large enough to pay up if your accountants make a mistake in preparing our financial statements?"

On the ride back to the office, you and Diane immediately talk about this conversation. Diane heard it too, and she adds that Phil's response was that "Jones is large enough to stand behind all of our work".

Required

What fundamental premise of an audit of financial statements do the Piedmont VP of Finance and the Jones tax partner appear to significantly misunderstand?

Problem 2

You have recently resigned your position as an audit manager with a Big Four accounting and audit firm and started your own accounting and audit firm. You are working alone and do not have any professional staff. Soon after you open your practice, a local country club (the Club) request your services to perform an audit of their financial statements for the year ended December 31, 2023. The Clubs financial statements for the year ended December 31, 2022, where audited by a large regional accounting firm.

Required

In addition to those items set forth in the quality standards relative to client acceptance, what additional items might be appropriate for a sole practitioner to consider?

Problem 3

Your firm just completed its internal inspection of its audit practice for the period ended April 30, 2023. As a part of that inspection an engagement for which your serve as the engagement partner was selected for review. This review disclosed that the engagement team had failed to receive a signed written representation from the client for your December 31, 2023, audit, but instead had included the representation letter for the prior year's audit. The audit release date for this engagement was 5.15.23 and this discovery was made on 10.15.23. You have now an appropriately dated and signed management representation letter.

This matter has been most disturbing to you, and you have taken the time to carefully review the professional standards related to audit documentation.

Required

In accordance with the professional standards, is it appropriate for the engagement team to delete the 2022 management representation letter and add the 2023 management representation letter. Why or why not?

Problem 4

November Corporation (the Company) is in liquidation and has prepared its financial statements on the liquidation basis. The engagement team has reached the conclusion that the financial statements have been properly prepared in accordance with US GAAP.

Required

Under this fact pattern, will your firm be able to issue an unmodified opinion on such financial statements. Why or why not.

Problem 5

Your firm is in the process of completing its annual audit of the financial statements of Charlie Corporation (the Company) as of and for the year ended December 31, 2023. In preparation of its 2023 financial statements management has evaluated a significant lawsuit which arose during January of 2023 and concluded that it was appropriate to record a liability related to this matter of $500,000. A draft of the 2023 financial statements includes this adjustment and a related disclosure regarding the litigation. You have completed your review of the financial statements; the quality review has been completed and you have discussed the audit conclusions with the engagement team. A decision has been made to date your firm's unmodified audit report, April 15, 2024. Subsequent events have been evaluated through that date (4.15.24) and the engagement team has included in the file management's attorney advises the Company that in a surprise move the court has revised the award to $5,000,000 instead of $500,000, an increase of a material amount to the Company's financial statements. Management of the Company has appropriately adjusted the financial statements and revised its disclosure related to this litigation.

Required

Based upon your review of the preceding facts, describe the two options that your firm has with respect to the dating of the firm's audit report on the 2023 financial statements.

Problem 6

In connection with your firm's audit of the financial statements of Foxtrot Corporation (the Company) for the year ended December 31, 2023, you have been assigned to work with the engagement manager on the audit of the Company's accounts payable. You have completed your assigned work and determined that an account payable to a subcontractor on Project A, in the amount of $50,000, had been inadvertently omitted from accounts payable. The Company accounts for its long-term construction contracts on the percentage completion method of accounting. A summary of Project A, without inclusion of the omitted account payable follows.

Other Information

Project A started in February 2023 The unrecorded account payable will not impact management's estimated profit on Project A. Financial statement materiality for this audit is $20,000. The Company's working capital prior to the discovery of unrecorded account payable is $100,000.

Required

At the request of the engagement manager, calculate the impact of this error on the Company's balance sheet, working capital, gross profit, net income, and operating cash flows.

Problem 7

Your engagement team is in the process of planning your firm's audit of Xray Corporation (the Company) as of and for the year ended December 31, 2023. The Company's long-time CFO has recently taken a medical leave of absence and the CFO oversite of the accounting function is now being performed by an accountant from a local temp agency. Your conversations with the Company's owner suggest that she is very concerned about the absence of the regular CFO. The owner's concern, in part, is based upon feedback that she is getting from her accounting staff about the temp's accounting knowledge and their feed back that the Company's inventory accounting is not undergoing the review and testing of the account balances that was performed by the regular CFO on a regular basis. Specifically, the owner is being told that cycle counts of inventory balances as a test of the accuracy of the perpetual records has not been performed in 10 months and that the normal year-end review of inventory for obsolescence has not been performed since the regular CFO went out on medical leave.

Required

By reference to the professional standards, compare the preceding issues (a temporary CFO and lack of attention to the Company's inventory) and characterize each of them as either risk at the financial statement level or the risks f material misstatement at the assertion level.

Problem 8

You are the engagement manager for your firm's audit of the financial statements or Golf Corporation (the Company) as of and for the year ended December 31, 2023. The Company, which sells sporting goods equipment to colleges and universities on the east coast of the United States, is headquartered in Norfolk, VA but has regional offices in Gainesville, FL, Atlanta, GA, Charlotte, NC, and Clemson, SC. Your firm is in Richmond, VA but has offices in each of the locations where the Company as regional offices. The Company is privately owned and during 2023 acquired a similar entity located in Atlanta, GA. The acquisition of this company was the Company's first acquisition and required the Company to borrow $3,000,000 from a local bank to close the transaction.

Required

By reference to the professional standards, need a BRIEF outline of the planned engagement team discussion including: (1) which team members should attend; and (2) the significant matters that should be considered.