Each answer should be 1-2 paragraphs in length and have at least 1 references.

1. A CPA firm does not guarantee the financial soundness of a client when it renders an opinion on financial statements, nor does the CPA firm guarantee the absolute accuracy of the statements. Yet the CPA firm’s opinion is respected and accepted. What is expected of the CPA firm in order to merit such confidence?

2. Rogers and Green, CPAs, admit they failed substantially to follow generally accepted auditing standards in their audit of Martin Corporation. “We were overworked and understaffed and never should have accepted the engagement,” said Rogers. Does this situation constitute fraud on the part of the public accounting firm? Explain.

3. Many CPA firms are taking a business risk approach to audits. Define what is meant by business risk. Provide an example of a business risk that could result in a risk of material misstatement of financial statements.

4. You have discussed with the president of Vista Corporation several material weaknesses in internal control that have come to your attention during your audit. At the conclusion of this discussion, the president states that he will personally take steps to remedy these problems and that there is no reason for you to bring these matters to the attention of the board of directors. He explains that he believes the board should deal with major policy decisions and not be burdened with day-to-day management problems. How would you respond to this suggestion? Explain fully.

5. Explain briefly the term systematic selection as used in auditing and indicate the precautions to be taken if a random sample is to be obtained. Is systematic selection applicable to unnumbered documents? Explain.

6. Salvador Corporation made an investment in Letter.com, Inc., in exchange for 100,000 options to purchase Letter.com’s stock at $20 per share. Since the stock options are not marketable, Salvador’s management has this derivative valued by a security appraiser. The appraiser uses an option-pricing model to determine the fair value of the derivative for the financial statements. Describe how you would audit the valuation of the stock options.

7. An accountant of an audit client made the following statement: “It is important to read the notes to financial statements, even though they are presented in technical language and are incomprehensible. Auditors may reduce their exposure to third-party liability by stating something in the notes that contradicts completely what the client has presented in the balance sheet or income statement.” Evaluate the above statement and indicate:

a) areas of agreement, if any

b) areas of misconception, incompleteness, or fallacious reasoning included in the statement

8. Jane Wilson has prepared personal financial statements in which her assets are valued at her historical cost, less appropriate depreciation. Is this presentation in conformity with generally accepted accounting principles? Can a public accounting firm audit these statements and issue a standard unmodified opinion?

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