XYZ, Inc. Audit Assingment Help With Solution

Posted on March 31, 2017

XYZ, Inc. Audit Assingment Help With Solution

Questions

1) Briefly describe how the following fit into an overall regulatory framework that guides external audits: the Auditing Standards Board’s (ASB’s) 10 Generally Accepted Auditing Standards, SAS (The ASB’s Statements of Auditing Standards), PCAOB rules, and ISA (International Standards on Auditing). By “fit into a regulatory environment” I mean that I want to you cover the organizations that promulgates these standards, how they relate to each other, and what types of audits they apply to.
 
2) You are a partner in a medium-sized, regional CPA firm and have been approached by XYZ, Inc., a relatively small, public company, to do their audit for next year. XYZ is registered with the SEC and has filed audited 10-Ks for the last 10 years since they went public. XYZ specializes in developing shale gas using fracking technology. Fracking technology involves drilling wells into shale formations and injecting high pressure water containing special chemicals into the well to fracture the shale formation and release the trapped natural gas.
 
You and your firm currently are a members of the AICPA and all partners and managers are licensed CPAs in the state of New Mexico. Your firm has limited experience with oil and gas extraction and has no other fracking clients. However, your firm has offices that can cover the physical locations where the prospective client does business.
 
a) Describe two reasons why a firm like this firm would want an audit even if they were not required to do so by the SEC. I am looking for substantive reasons that show you understand the importance of auditing in capital markets and why possible stakeholders like lenders and investors would what a firm like this to have an audit.
 
b) Describe three organizations, boards, or groups that have legal authority to regulate aspects of your audit of this client and discuss how that organization, board, or group would regulate your work on this audit.
 
c) Develop a checklist of five areas or issues that you would want to research before you accepted this firm as an audit client. For each area or issue, explain why you would want to research it and give an example of where you might go to get some information about each issue.
 
i) Issue 1 –
ii) Issue 2 –
iii) Issue 3 –
iv) Issue 4 –
v) Issue 5 –

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3) For each of the following situations, describe how the auditor should modify the audit report for the firm’s financial statements and provide a brief explanation of why you made the choice you did. Just cover the report on the financial statements and ignore any reference to the report on internal controls. We will get to that later in the class. By “modify the audit report,” I mean what modifications the auditor would make to any paragraph of the report because of the information described. Make sure your answer either states clearly that no modifications to any paragraph are needed or describes what modifications would be needed to which paragraphs of the report and also provides an explanation for you decision.
 
a) The auditor wishes to emphasize that the auditee has engaged in significant related party transactions. The information on the related party transaction is fully disclosed in the footnote to the financial statements.
b) The auditor has substantial doubt about the auditee’s ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
c) The auditee experienced a computer failure during the year being audited and the auditor was not able to verify the ending inventory balance. Inventory is material to the auditee’s financial statements, but not pervasively material
d) You complete the audit of KLM, Inc. and, in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in KLM.
 
4) Write a brief explanation of how the PCAOB’s five assertions address most, if not all, risks that can lead to material misstatements in financial statements. I am looking for more than just a restatement of the definitions of the assertions. I am looking for a conceptual analysis of the logic behind these five and how they cover all the major sources of a material misstatement in a set of financial statements.
 
5) Each of the following situations involves a possible violation by a memberin industry of the AICPA’s Code of Professional Conduct. For eachsituation, indicate whether it violates the Code. If it violates the Code,indicate which rule is violated and explain why.
 
a) You are auditing a firm that you have audited for years. However, the auditee has yet to pay their full fee from last year’s audit and you have turned the matter over to a collection agency.
b) During the audit of a client, you found that the manager on the job had not reviewed a staff accountant’s verification of the auditee’s inventory balance at year-end. The client was a manufacturing firm and inventory represented 30% of their assets.
c) During the audit of client, you found out that the manager on the job, who you had recently hired from a major competitor on the auditee, had secretly shared details the auditee’s pricing strategies with his former employer.
d) You are the partner-in-charge of the audit of HIJ, Inc. Over the years, you have become a golfing buddy of HIJ’s CEO, Jessica Peters. During the current year, you and Peters jointlypurchased an exclusive vacation home in New Mexico. The vacationhome represents more than 10 percent of your personal wealth.
6) XYZ, Inc. is planning a major plant expansion. It plans to finance the expansion with a bank loan. XYZ has engaged your CPA firm to audit its 2013 financial statements. They told you that they were going to give the financial statements to ABC Bank and other, unnamed banks.
 
When you performed the audit of the 2013 financial statements, you did not discover a material overstatement of inventory because you did not test XYZ’s physical inventory at the end of 2013. XYZ is a manufacturing firm and so inventory tends to make up a significant portion of their total assets. You were also aware of a pending product liability lawsuit that XYZ had not disclosed in its footnotes despite the fact that XYZ’s attorney informed you that XYZ’s liability under the lawsuit would result in material losses for XYZ. However, you issued an unqualified opinion on their 2013 financial statements and issued your report at the end of January 2014.
In early February 2014, ABC Bank relied on XYZ’s financial statements and your audit report and granted XYZ a $750,000 loan.
 
By July 2014, XYZ was in financial trouble, but was able to stay in business because of the loan proceeds because they hadn’t yet constructed the plant expansion. They had lost the product liability lawsuit and could not pay the plaintiff the full amount of the loss. In addition, they defaulted on their bank loan and petitioned for bankruptcy. The bank lost most of the $750,000 loan and XYZ’s stock price fell sharply to the point that it had become virtually worthless.
 
ABC bank has sued you to recover their losses. The stockholders also have sued you for losses due to XYZ’s large drop in stock price. All these transactions took place in a jurisdiction that provides for auditor liability for ordinary negligence to known and intended users of the financial statements.
 
Answer the following questions and justify your answers with specific references to the appropriate laws and legal principles.

a) Will ABC bank be successful in their law suit against you for:

i) ordinary negligence?
ii) fraud?
b) Will the stockholders who purchased their stock in the stock offering for which XYZ used your audit financial statements succeed in against you under each of the following bodies of law?

i) Common Law
ii) Federal securities law (be sure to indicate which statue)
 

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