19.25.

(Estimated time - 25 minutes)

Item No.
Required Disclosure or
Audit Procedures
Entry and Reasons
1.
Goods in-transit would be detected in the courseThe
of receipt
the
of the goods provides additional evidence with
auditor's review of the year-end cutoff of purchases.
respect
Theto conditions that existed at the date of the balance
auditor would examine receiving reports and purchase
sheet and hence the financial statements should be adjusted
invoices to make certain that the liability to suppliers
to take
hadinto account such additional information.
been recorded for all goods included in inventory, and that
all goods for which the client was liable at year end were
recorded in inventory.
2.
Settlements of litigation would be revealed by requesting
Settlements of litigation would require an adjustment of the
from the company's legal counsel a description
financial
and statements since the events that gave rise to the
evaluation of any litigation, impending litigation,litigation
claims, had taken place prior to the balance sheet date.
and contingent liabilities of which he or she has knowledge
that existed at the date of the balance sheet being reported
upon, together with a description and evaluation of any
additional matters of a like nature which come to his or her
attention up to the date the information is furnished. A
review of cash disbursements for the period between the
balance sheet date and completion of field work may also
reveal evidence of the settlement.
3.
The purchase would normally be Revealed in The
general
purchase of a new business is not an event that provides
conversations with the client and would further be evidence
detected with respect to conditions existing at the balance
by reading the minutes of meetings of stockholders,
sheet date; hence, it does not require adjustments in the
directors, and appropriate committee. In addition, financial
because statements. However, such an event would
the amount paid is likely to be unusually large in relation
normally
to be of such importance that disclosures of it is
other cash disbursements, a review of cash disbursements
required to keep the financial statements from being
for the period between the balance sheet date
misleading.
and
If the acquisition is significant enough, it might
completion of field work is likely to reveal such
be advisable
an
to supplement the historical statements with
extraordinary transaction. Moreover, because a purchase
pro-forma
of statements indicating the financial results if the
a business usually requires a formal purchase agreement,
two firms had been consolidated for the year ending
the letter from the firm's legal counsel would probably
December
have 31, 19XO. Otherwise, disclosure in footnotes to
revealed the purchase.
the financial statements would be adequate. Occasionally, a
situation of this type may have such a material impact on the
entity that the auditor may wish to include in the audit report
an explanatory paragraph directing the reader's attention to
the event and its effect.
4.
Inventory losses attributable to a flood would be brought
Lossestoattributable to floods subsequent to the balance sheet
the auditor's attention through inquires and discussions
datewith
to not provide in formation with respect to conditions
corporate officers and executives. Moreover, thethat
auditor
existed at the balance sheet data; hence, adjustment in
would know the location of the plants and warehouses
the financial
of
statements is not required. However, because
clients and upon becoming aware of any major floods
the losses
in are material, they should be revealed in footnotes
such a location, he or she would investigate to determine
to the iffinancial statements. Occasionally, situation of this
the client's facilities had suffered any damage.
type may have such a material Impact on the entity that the
auditor may wish to include in the audit report an
explanatory paragraph directing the reader's attention to the
event and its effect.
5.
The sale of bonds or other securities would requireSales
a filing
of bonds or capital stock are transactions of the type
with the SEC in which the auditor would presumably
that do
benot provide information with respect to conditions
involved. In addition, the sale would be revealed bythat
reading
existed at the balance sheet date; hence, adjustment of
the minutes of directors and finance committee's meetings,
the financial statements is not required. However, such sales
by corresponding with the client's attorneys may
and by
be of sufficient importance to require footnote
examining the cash receipts books in the period subsequent
disclosure. Occasionally, a situation of this type may have
to the balance sheet date for evidence of unusually
suchlarge
a material impact on the entity that the auditor may
receipts.
wish to in the audit report an explanatory paragraph directing
the reader's attention to the event and its effect.

19-31.

(Estimated time - 20 minutes)

a.

b.

Independent auditors use a management letter to call to management's attention matters that the auditor
has noted during the course of the audit engagement but which did not fall within the scope of the
opinion. The management letter provides an excellent vehicle for suggesting services that can assist the
business in improving organizational performance. A management letter is rendered as a constructive
service to suggest improvements as well as point out deficiencies.
Many types of information can be covered in a management letter. The major, broad areas which are
presented and discussed in the management letter include:
Suggestions for modifying and improving a client's internal controls.
Recommendations for changes and improvements in accounting systems to better
meet management's information needs.
Suggestions for improving the management of resources such as cash, inventories,
and investments.
Comments regarding tax related matters.
A detailed example of a suggestion for improving business practices follows:
We understand that your accounting system offers discounts to customers who purchase in significant
volumes. The program that grants these volume discounts as it prices a sales invoice does so after
important information on gross margins has been reported to department managers. While sales
invoices and underlying accounting information is correct, it does not agree with management
information that is provided to sales managers as they make pricing decisions. As soon as possible you
need to change the program that calculates the sales discounts so that gross margins and other
information used by sales management includes the volume discounts offered customers.
(Answer updated from original ICMA answer.)

a.

19-32.
1.
2.
3.
4.
5.
6.
7.
8.

(Estimated time - 30 minutes)

1--subsequent event during the subsequent event period requiring adjustment.
1--subsequent event during the subsequent event period requiring adjustment.
2--subsequent event during the subsequent event period requiring disclosure.
2--subsequent event during the subsequent event period requiring disclosure
1--subsequent event during the subsequent event period requiring adjustment.
4--subsequent event occurring after field work but before issuance of report.
4--subsequent event occurring after field work but before issuance of report.
5--postaudit discovery of facts existing at date of report.

The date field work is completed is not specifically given. This answer is based on the customary
practice of dating the audit report as of the end of field work (i.e., February 26).
b.

For categories (1) and (2) the auditor has the responsibility for identifying and evaluating subsequent
events up to the date of the auditor's report. In discharging this responsibility, the auditor should be

alert for subsequent events in performing substantive tests, and also perform specific auditing
procedures at or near the completion of field work.
For categories (3) and (4), the auditor has no responsibility to make inquiry or to perform any auditing
procedures during this time period to discover subsequent events. However, if knowledge of such an
event comes to the auditor's attention, he or she should determine whether the event requires
adjustment of or disclosure in the financial statements.
For category (5), the auditor has no responsibility for their discovery. However, if the auditor becomes
aware of such facts and the facts may have affected the report that was issued, the auditor is required to
ascertain the reliability of the information.
c.
1.
2.
3.
4.
5.
6.
7.
8.
d.

Information about the items would be obtained from the following:

Inquiry of management; client "rep" letter.
Review of bad debt write-offs in January.
Reading of minutes.
Observation of fire; newspaper account of fire; inquiry of management.
Inquiry of management; lawyer's letter; and client "rep" letter.
Reading of minutes.
Newspaper story on takeover; inquiry of management.
Inquiry of management; lawyer's letter; and client 'rep" letter.

If the client fails to make required disclosure, the auditor should notify each member of the board of
directors of such refusal and take the following steps to prevent further reliance on the audit report
and:

20-22.

Notify the client that the audit report must no longer be associated with the
financial statements.
Notify regulatory agencies having jurisdiction over the client that the report should
no longer be relied on.
Notify (generally via the regulatory agency) each individual known to be relying
on the statements that the report should no longer be relied on.

(Estimated Time: 30 minutes)

a.

The purpose of a WebTrust engagement is to provide customers assurance about three aspects of
electronic commerce. WebTrust addresses an entitys business and information privacy practices;
issues of transaction integrity; and issues of information protection. If a customer is satisfied that you
have significant assurances in place to protect and maintain privacy regarding information disclosed in
a transaction, it is likely that a consumer will transact business through that website. This is one way
of ensuring that concerns over information integrity do not discourage customers from purchasing golf
equipment through your website. Assurance about business practices through a WebTrust engagement
might allow you to extend the size and scope of your marketplace through your internet presence and
focus on the other factors that have make your business a competitive force in the marketplace.

b.

The client makes three major assertions in a WebTrust engagement about its electronic commerce
practices. The principles involved in a WebTrust engagement address the following:
An entitys business and information privacy practices; that is the entity discloses
its business and information privacy practices for e-commerce transactions and
executes transactions in accordance with its disclosed practices.

Transaction integrity; that is whether the entity maintains effective controls to

provide reasonable assurance that customers transactions using e-commerce are
completed and billed as agreed.
Information protection; that is whether the entity maintains effective controls to
provide reasonable assurance that private customer information obtained as a
result of e-commerce is protected from uses not related to the entitys business.
The client needs to represent that it has met the specific criteria related to these assertions and the CPA
will attest to that assertion.
c.

A business may make representations about these three criteria without asking for an assurance report
from a CPA. However, the public may not attach the same degree of credibility as they would if the
assertion was the subject of an attest engagement. The business needs to make a judgment about the
importance of having the assertion attested to by a CPA.

d.

The inherent limitations involved in a WebTrust engagement include:

Because of inherent limitations of controls, errors or fraud may occur and not be
detected. Even a strong system of internal control might not find every fraud,
particularly fraud that involves collusion.
Users should not project any conclusions, based on our findings, to future periods.
There is a risk that changes made to the system or controls, changes in processing
requirements, or failure to make changes required because of the passage of time,
may alter the validity of conclusions on past performance.

20-23.

(Estimated Time: 20 Minutes)

a.

The primary clients that would be interested in a SysTrust engagement are entities that prepare,
process, or maintain information that is used by others for decision-making. For example, a supplier
in a strategic alliance may make production decisions based on information obtained from customer
about its sales and inventory levels. The supplier may want assurance about the reliability of
information obtained from the customer because of its strategic importance to decisions made by the
supplier. Hence, the customer might engage the CPA to attest to the reliability of the system. If
the end customer must coordinate product obtained from several suppliers, the need for SysTrust
engagement may increase to ensure coordination of strategic decisions by all parties.

b.

The SysTrust principles and criteria address four major concerns about system reliability: (1) System
availability, (2) system security, (3) system integrity, and (4) system maintainability. A SysTrust
engagement provides reasonable assurance that these four principles and related criteria were achieved
during a specific time period. Users should understand the inherent limitations associated with the fact
that:
Because of inherent limitations of controls, errors or fraud may occur and not be
detected. Even a strong system of internal control might not find every fraud,
particularly fraud that involves collusion.
Users should not project any conclusions, based on our findings, to future periods.
There is a risk that changes made to the system or controls, changes in processing
requirements, or failure to make changes required because of the passage of time,
may alter the validity of conclusions on past performance.

c.

A CPA that sells time on its accounting system to small business clients where they can log onto the
system and maintain their own general ledger, could engage another independent CPA to issues a
SysTrust report on the accounting system associated with the systems availability, security, integrity
and maintainability. The CPA could not issue an attestation report on its own system as it would not be

independent. Further, there may be a risk that users may misunderstand the SysTrust report and expect
that the CPAs system will ensure that financial statements that result from the system are prepared in
accordance with GAAP. No such assurance could be provided as the CPA would not know the basis
transactions recorded using the system.