Problem # 1

 

D. Jackson, CPA, audited Washington Company's financial statements for the year ended December 31, 2007. On November 1, 2008, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2008, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2008.
Required:
What procedures concerning Jackson should Lincoln perform before accepting the engagement?

Problem # 2

Explain the bottom-up approach and the top-down approach to quantifying overall materiality.

 

Problem # 3

The president of Max-the man Loan Company had a genuine dislike for external auditors. Almost any conflict generated a towering rage. Consequently, the company changed auditors often. The firm of Wayne & Rob( W& R), CPAs, was recently hired to audit the 2015 financial statements. W& R succeeded the firm of Cathy & Company( C& C), which had obtained the audit after Alan & Harry ( A& H) had been fired. A& H audited the 2015 financial statements and rendered a report that contained an additional paragraph explaining an uncertainty about Max-the man Loan Company’s loan loss reserve. Goodbye A& H! The president then hired C& C to audit the 2015 financial statements, and Chris Canby started the work, but before the audit could be completed, Canby was fired and W& R was hired to complete the audit. C& C did not issue an audit report because the audit was not finished.

Required:

Does the Wayne & Rob firm need to initiate communications with Cathy & Company? With Alan & Harry? With both? Explain your response in terms of the purposes of communications between predecessor and successor auditors.

 

 

 

 

 

 

Problem # 4

You are a CPA in a regional public accounting firm that has 10 offices in three states. Mr. Murphy has approached you with a request for an audit. He is president of Astro Software and Games Inc., a five- year- old company that has recently grown to $ 500 million in sales and $ 200 million in total assets. Murphy is thinking about going public with a $ 25 million issue of common stock, of which $ 10 million would be a secondary issue of shares he holds. You are very happy about this opportunity because you know Murphy is the new president of the Symphony Society board and has made quite a civic impression since he came to your medium- size city seven years ago. Astro is one of the growing employers in the city.

Required:

a. Discuss the sources of information and the types of inquiries that you and the firm’s partners may make in connection with accepting Astro as a new client.

b. Do professional audit standards require any investigation of prospective clients?

c. Suppose Murphy also told you that 10 years ago his closely held hamburger franchise business went bankrupt, and on investigation, you learn from its former auditors ( your own firm in another city) that Murphy was fraudulent in its application of franchise- fee income recognition rules and presented such difficulties that your firm resigned from the audit ( before the bankruptcy). Do you think the partner in charge of the audit practice should accept Astro as a new client?