Auditing: Restatement of financial statements. Define the deficiency.

PROBLEM: The company has found it necessary to restate its financial statements for the past two years due to a material overstatement of revenues two years ago and an equal understatement last year. The errors are due to sales of certain software that allowed the purchasers extremely lenient rights of return. The errors were discovered shortly after the end of the current accounting year. Members of management indicated that the misstatements occurred because they simply didn’t know the accounting rules. Now they know the rules, and they won’t let it happen again. REQUIRED: (1) State the highest level of deficiency that you think the circumstances represent. Is it a control deficienc... click for more

Auditing

REQUIRED: (1) Discuss management’s four overall responsibilities with respect to internal control over financial reporting that arise from the SEC’s implementation of the Sarbanes-Oxley Act of 2002. (2) Discuss what is meant by a “walkthrough.” Must walkthroughs be performed during audits of internal control over financial reporting? May the client perform a walkthrough and the auditors then review the client’s work?

Auditing

REQUIRED: (1).Comment on the following: “Auditors must decide, based on cost considerations, whether to test the design effectiveness or operating effectiveness of controls.” (2).Comment on the following: “All controls should be tested either prior to or on the ‘as of ‘ date.” (3).If an adverse internal control report is issued by an auditor, may an unqualified report be issued on the financial statements? Discuss.

Evaluating the significance of misstatements - Sun Island Apparel, Inc.

8-14 (Evaluating the significance of misstatements) You are concluding the audit of Sun Island Apparel, Inc. as of December 31, 20x1. You believe that you can tolerate $675,000 in misstatements to pretax income. You have noted only three issues that may affect the financial statements based on evidence found during the audit. They are: 1. When auditing accounts receivable, you investigated every sales transaction between December 26th 20x1 and January 5th 20x2. You have problems with revenue recognition on two shipments that were ordered in December of 20x1, recorded in revenue as of December 31, 20x1 but the customer did not pick the items up until January 4, 20x2. These shipments... click for more

Auditing

17-27 (Substantive tests for stockholders’ equity balances) Jones, CPA, the continuing auditor of Sussex, Inc., is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive tests with control risk at the maximum level. Sussex has no par, no stated value common stock, and acts as its own registrar and transfer agent. During the past year, Sussex both issued and reacquired shares of its own common stock, some of which the company still owned at year-end. Additional common stock transactions occurred among the shareholders during the year. Common stock transactions can be traced to individual shareholders’ accounts in a subsidiary ledger and ... click for more