Leah Pasternak

Auditing I ACC403
Homework Submission
Chapter 3 Problems
3-25:
a) The correct answer is option 3. The annual audit report of M showed that sales were mistakenly being
recorded as revenue when the order for goods was placed, instead of when they were shipped. If the
amount is material then the auditor should ask the client to correct the error. If the client refuses to
correct the error then the auditor should issue a qualified except for opinion.
b) The correct answer is option 2. If management does not provide a reasonable justification for a
change in accounting principles then the auditor should not give a disclaimer opinion.
c) The correct answer is option 3. If the auditor states in his/her opinion paragraph the effect of not
capitalizing certain lease obligations, and that the financial statement presents a true and fair view of all
materials, then the auditor should give a qualified opinion.
3-28:

(a)

(b)

(c)

(d)

CONDITION

MATERIALITY

TYPE OF REPORT

COMMENTS

LEVEL
1. Scope of audit has
been restricted

Significantly material

Disclaimer opinion

Client has refused to

permit the auditor to
increase the scope of
his audit, therefore,
disclaimer opinion
should be given
instead of qualified as
to scope and opinion.

2. Lack of
independence

N/A

Disclaimer opinion

Lack of independence
by auditor on the
engagement dictates a
disclaimer opinion for

lack of independence.
3. None

N/A

Unqualified
opinion

The entity has made a

decision to apply a
changed financing
method to have use of
the trucks, which is
sufficiently disclosed.
Accounting principle
has not changed.

4. Substantial doubt
without going concern

Material

Unqualifiedexplanatory paragraph

Auditor has doubt

about the ability of
the client to continue
as a going concern,
therefore, the auditor
should give an
unqualified opinion
with an explanatory
paragraph.

5. None

Material

Unqualified

Auditor involved in
business valuation
specialist to collect
sufficient information
in order to determine
the investments fair
value. The auditor
should give an
unqualified opinion as
he was able to
determine that the
work of the specialist
provided sufficient
evidence.

6. Unable to follow
GAAP

Material or highly
material.

Adverse of qualified

The materiality of
20% of earnings
before taxes would be
adequate for many
auditors to give an
adverse opinion.

3-31:
Item
No.
1.
2.

3.
4.
5.
6.
7.
8.

Type of Change

An error but not containing an accounting principle.

An accounting change including a change in accounting principles. Though
the effect of this change in each situation may not be separable and the
accounting for this change is similar to change in estimate only, an
accounting principle is included.
An accounting change including a change from one GAAP to another GAAP.
An accounting change comprising of a change in an accounting estimate.
Not an accounting change but a change in classification.
An accounting change comprising of a rectification of a mistake in principle,
which is accounted for as a rectification of a mistake.
An accounting change comprising a change in the reporting entity, which is
an unusual change in accounting principles.
An accounting change including a change from one GAAP to another GAAP.

Should auditors
report be
modified?
No
Yes

Yes
No
No
Yes
Yes
Yes

Chapter 4 Problems
4-20:
a) Yes
b) No
c) No
d) No
e) No
f) Yes
4-23:
a) Independence is required for an auditor as the users of financial statements require an independent
perspective about the reliability of the information contained within the financial statements. Janes is
required by the Code of Professional Conduct to remain independent in appearance as well as
independent in mind. Taking advantage of a sales discount, eating in the employee lunch room and
receiving presents at the companys Christmas party could jeopardize this Code.
b) In order for an auditor to remain independent during an audit it is important that the auditor follow a
set of principles rather than a set of rules. An established framework for these proper set of principles is
key. A good framework would consist of fundamental ethical principles, reasoned analysis of the
possible threats to these principles, and proper guidance on the safeguards that will help mitigate
possible threats. Safeguards apply at three levels: safeguards in the work environment, safeguards that
increase the risk of detection, and specific safeguards to deal with particular cases. If unable to
implement fully adequate safeguards, the auditor must not carry out the work.

c) Yes, Janes will have violated the rules of professional Conduct without having safeguards in place.
d) Janes should definitely examine the effect taking the discount offer would have on her independence
in the work she is performing, before accepting the offer. Her best bet would be to not take advantage
of the discount. She can accept the lunch as long as she does not establish any relationships with other
employees while eating the lunch. She can accept the gift at the party as long as she is able to maintain
her independence while performing her work. Again, her best et would be to not accept the Christmas
party gift, however, this situation is different from the situation of accepting a discount on a new car.
She poses the threat of offending the client if she turns down an already purchased gift.
4-26:
a) The four parts of the AICPA Code of Professional Conduct are:
1. Principles, not enforceable
2. Ethical principles, not enforceable
3. Rules, enforceable
4. Interpretations of Rules of Conduct, not enforceable
b) Principles set the ideal standards related to ethical conduct described in philosophical terms. On the
other hand, rules imply the minimum number of standards of ethical conduct mentioned as specific
rules. These rules can be enforced against members of AICPA.
c) The enforcement actions that could be enforced when an auditor does not follow the rules of conduct
are the loss of the CPA certificate or the loss of their license to practice.
d)

2013

2012

Total cases at beginning of period

(including 140 and 150, respectively,
deferred due to pending litigation)

827

819

Cases opened during period

437

768

Total cases at end of period (including

141 and 140, respectively, deferred due
to pending litigation)

734

827

Summary of Disposition of Completed Cases*

Expelled or Suspended
90

88

Admonished

76

161

Corrective Action Required

167

244

No Violation/Dismissed

69

36

No Further Action

85

182

Subsequent Monitoring Completed

Satisfactorily

30

32

Other

13

17