Comprehensive Questions 11-21 (Assessing Control Risk) An auditor is required to obtain a sufficient understanding of each of the components

Comprehensive Questions 11-21 (Assessing Control Risk) An auditor is required to obtain a sufficient understanding of each of the components of an entity’s system of internal control to plan the audit of the entity’s financial statements and to assess control risk for the assertions embodied in the account balance, transaction class, and disclosure components of the financial statements.

Required
a. Explain the reasons an auditor may assess control risk at the maximum level for one or more assertions embodied in an account balance.
b. What must an auditor do to support assessing control risk at less than the maximum level when the auditor has determined that controls have been placed in operation?
c. What should an auditor consider when seeking a further reduction in the planned assessed level of control risk?
d. What are an auditor’s documentation requirements concerning an entity’s system of internal control and the assessed level of control risk?
AICPA (adapted)

Click here for the solution: Comprehensive Questions 11-21 (Assessing Control Risk) An auditor is required to obtain a sufficient understanding of each of the components

The client has presented all required financial statements with the exception of the statement of cash flows

MULTIPLE CHOICE

Question 1
The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that all other statements are presented fairly. The auditor:

Question 2
A CPA may wish to emphasize specific matters regarding the financial statements even though an unqualified opinion will be issued. Normally, such explanatory information is:

Question 3
Examples of unqualified opinions which contain modified wording (without adding an explanatory paragraph) include:

Question 4
When the auditor determines the financial statements are fairly stated and then determines that the auditor lacks independence, the auditor should issue:

Question 5
Which of the following is not a change that affects consistency and, therefore, does not
require an explanatory paragraph?

Question 6
The audit report date on a standard unqualified report indicates:

Question 7
GAAP requires that changes in accounting principles be to a:

Question 8
If the balance sheet of a company is dated December 31, 2009, the audit report is dated February 8, 2010, and both are released on February 15, 2010, this indicates that the auditor has searched for subsequent events that occurred up to:

Question 9
The purpose of the introductory paragraph in the standard unqualified report is:

Question 10
The introductory paragraph of the standard audit report states that the auditor is:


Click here for the solution: The client has presented all required financial statements with the exception of the statement of cash flows

The SIMPLEX financial system is characterized by a required reserves ratio of 11 percent

P5-5 The SIMPLEX financial system is characterized by a required reserves ratio of 11 percent; initial excess reserves are $1 million, and there are no currency or other leakages.
a. What would be the maximum amount of checkable deposits after deposit expansion, and what would be the money multiplier?
b. How would your answer in (a) change if the reserve requirement had been 9 percent?

Click here for the solution: The SIMPLEX financial system is characterized by a required reserves ratio of 11 percent

You have two assets and must calculate their values today based on their different payment streams and appropriate required returns

E6–6 You have two assets and must calculate their values today based on their different payment streams and appropriate required returns. Asset 1 has a required return of 15% and will produce a stream of $500 at the end of each year indefinitely. Asset 2 has a required return of 10% and will produce an end-of-year cash flow of $1,200 in the first year, $1,500 in the second year, and $850 in its third and final year.

Click here for the solution: You have two assets and must calculate their values today based on their different payment streams and appropriate required returns

Suppose rFr=9%, rM=14% and bi=1.3.

Suppose rFr=9%, rM=14% and bi=1.3.

a). What is ri, the required rate of return on Stock i?

b). Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML remains constant. How would this affect rM and ri?

c). Now assume rRF remains at 9% but rM (1) increases to 16% or (2) falls to 13%. The slope of the SML does not remain constant. How would these changes affect ri?
Click here for the solution: Suppose rFr=9%, rM=14% and bi=1.3.

Durkee Corporation keeps careful track of the time required to fill orders

Durkee Corporation keeps careful track of the time required to fill orders. The times required for a particular order appear below:

Wait time........ Hours: 10.7
Process time......Hours: 0.9
Inspection time...... Hours: 0.4
Move time ...... Hours: 2.3
Queue time ...... Hours: 4.5

Required:
A.) Determine the throughput time. Show your work!
B.) Determine the manufacture cycle efficiency (MCE), show your work!
C.) Determine the delivery cycle time. Show your work!

Click here for the solution: Durkee Corporation keeps careful track of the time required to fill orders

(Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems

Case 24-2 (CA24-2) (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Rem’s financial statements for the year ended December 31, 2007, Maggie Zeen, CPA, completed field work 2 weeks ago. Ms. Zeen now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes.
Item 1
A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2007, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2007.
Item 2
Recently Rem interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2006, discontinued for all of 2007 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2008. In the annual report dividend policy is to be discussed in the president’s letter to stockholders.
Item 3
A major electronics firm has introduced a line of products that will compete directly with Rem’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Rem’s line. The competitor announced its new line during the week following completion of field work. Ms. Zeen read the announcement in the newspaper and discussed the situation by telephone with Rem executives. Rem will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Item 4
The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Ancient National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancellable lease, the company has the option of purchasing the property for $1. In Rem’s income statement the rental payment is reported on a separate line.

Instructions
For each of the items above discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)
 
Click here for the solution: (Disclosures Required in Various Situations) Rem Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems