ACCT 444 Week 2 Homework

ACCT 444 Week 2 Homework
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ACCT 444 Week 2 Homework Solution
Chapter 5
5-23 (Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf Manufacturing
Corporation, a privately owned company that has a June 30 fiscal year. Greenleaf arranged for a
substantial bank loan that was dependent on the bank’s receiving, by September 30, audited
financial statements that showed a current ratio of at least 2 to 1. On September 25, just before
the audit report was to be issued, Chen received an anonymous letter on Greenleaf’s stationery
indicating that a 5-year lease by Greenleaf, as lessee, of a factory building accounted for in the
financial statements as an operating lease was, in fact, a capital lease. The letter stated that there
was a secret written agreement with the lessor modifying the lease and creating a capital lease.
Chen confronted the president of Greenleaf, who admitted that a secret agreement existed but
said it was necessary to treat the lease as an operating lease to meet the current ratio requirement
of the pending loan and that nobody would ever discover the secret agreement with the lessor.
The president said that if Chen did not issue his report by September 30, Greenleaf would sue
Chen for substantial damages that would result from not getting the loan. Under this pressure and
because the audit files contained a copy of the 5-year lease agreement that supported the
operating lease treatment, Chen issued his report with an unqualified opinion on September 29.
Despite the fact that the loan was received, Greenleaf went bankrupt within 2 years. The bank is
suing Chen to recover its losses on the loan, and the lessor is suing Chen to recover uncollected
rents.
Required
Answer the following questions, setting forth reasons for any conclusions stated:
1. Is Chen liable to the bank?
1. Is Chen liable to the lessor?
1. Is there potential for criminal action against Chen?
5-24 (Objective 5-6) Under Section 11 of the Securities Act of 1933 and Section 10(b), Rule
10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by a purchaser of registered
securities. The following items relate to what a plaintiff who purchased securities must prove in a
civil liability suit against a CPA.
The plaintiff security purchaser must allege or prove:

1. Material misstatements were included in a filed document.
2. A monetary loss occurred.
3. Lack of due diligence by the CPA.
4. Privity with the CPA.
5. Reliance on the financial statements.
6. The CPA had scienter (knowledge and intent to deceive).
Required
For each of the items 1 through 6 listed above, indicate whether the statement must be proven
under
1. Section 11 of the Securities Act of 1933 only.
1. Section 10(b) of the Securities Exchange Act of 1934 only.
1934. Both Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934.
1934. Neither Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities
Exchange Act of 1934.*
Chapter 6
6-23 (Objectives 6-1, 6-3) Auditors provide “reasonable assurance” that the financial statements
are “fairly stated, in all material respects.” Questions are often raised as to the responsibility of
the auditor to detect material misstatements, including misappropriation of assets and fraudulent
financial reporting.
Required
.
1. Discuss the concept of “reasonable assurance” and the degree of confidence that financial
statement users should have in the financial statements.
1. What are the responsibilities of the independent auditor in the audit of financial
statements? Discuss fully, but in this part do not include fraud in the discussion.
1. What are the responsibilities of the independent auditor for the detection of fraud involving
misappropriation of assets and fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the detection of fraud is appropriate.

.
6-27 (Objectives 6-6, 6-7) The following are specific transaction-related audit objectives applied
to the audit of cash disbursement transactions (a through f), management assertions about classes
of transactions (1 through 5), and general transaction-related audit objectives (6 through 11).
Specific Transaction-Related Audit Objective
1. Recorded cash disbursement transactions are for the amount of goods or services received and are
correctly recorded.
2. Cash disbursement transactions are properly included in the accounts payable master file and are
correctly summarized.
3. Recorded cash disbursements are for goods and services actually received.
4. Cash disbursement transactions are properly classified.
5. Existing cash disbursement transactions are recorded.
6. Cash disbursement transactions are recorded on the correct dates.
Required
1. Explain the differences among management assertions about classes of transactions and
events, general transaction-related audit objectives, and specific transaction-related audit
objectives and their relationships to each other.
1. For each specific transaction-related audit objective, identify the appropriate management
assertion.
2. For each specific transaction-related audit objective, identify the appropriate general
transaction-related audit objective.
Chapter 11
11-30 (Objective 11-1) The following are activities that occurred at Franklin Manufacturing, a
nonpublic company.
1. Franklin’s accountant did not record checks written in the last few days of the year until the next
accounting period to avoid a negative cash balance in the financial statements.
2. Franklin’s controller prepared and mailed a check to a vendor for a carload of material that was
not received. The vendor’s chief accountant, who is a friend of Franklin’s controller, mailed a
vendor’s invoice to Franklin, and the controller prepared a receiving report. The vendor’s chief
accountant deposited the check in an account he had set up with a name almost identical to the
vendor’s.

3. The accountant recorded cash received in the first few days of the next accounting period in the
current accounting period to avoid a negative cash balance.
4. Discounts on checks to Franklin’s largest vendor are never taken, even though the bills are paid
before the discount period expires. The president of the vendor’s company provides free use of
his ski lodge to the accountant who processes the checks in exchange for the lost discounts.
5. Franklin shipped and billed goods to a customer in New York on December 23, and the sale was
recorded on December 24, with the understanding that the goods will be returned on January 31
for a full refund plus a 5 percent handling fee.
6. Franklin’s factory superintendent routinely takes scrap metal home in his pickup and sells it to a
scrap dealer to make a few extra dollars.
7. Franklin’s management decided not to include a footnote about a material uninsured lawsuit
against the company on the grounds that the primary user of the statements, a small local bank,
will probably not understand the footnote anyway.
Required
1. Identify which of these activities are frauds.
1. For each fraud, state whether it is a misappropriation of assets or fraudulent financial
reporting…