...Anne Aylor Case [a] Why are different materiality bases considered when determining planning materiality? Financial information have a lot of different areas and its now equally important for its users. In the case of auditor, based the preliminary procedures performed and the nature of the entity, only some areas that he would need to be focus on. [b] Why are different materiality thresholds relevant for different audit engagements? Materiality is not an absolute concept but rather based on professional judgment. Therefore the materiality threshold will vary depend on the situation of the entities and different important audit areas of entities. [c] Why is the materiality base that results in the smallest threshold generally used for planning purposes? In order to give a reasonable assurance for the financial statements are free of material misstatement, the auditor have to design the audit using the smallest threshold to detect the smallest misstatement possible. [d] Why is the risk of management fraud considered when determining tolerable misstatement? If management is intentionally trying to misstate the financial statements it is likely that misstatements will be systematically biased in one direction. On the other hand, if management is not trying to misstate the financial statements it is likely...
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...How to improve and maintain the independence of external auditors Auditor's responsibility is to give advice based on the company's annual financial statements. A company will work with the auditor's annual report of the decision. So this is an important auditor to provide accurate reports. (Dr Jill, Professor Robin)[online] An independent auditor to give the opinion that is no other factors. It includes human, economic, monetary, and so on. Their view is that there is no limit, and give them the freedom to express their views based on their expertise. Besides, they must be clear and to ensure no errors in the opinion. As they say is a company in important business decisions. Although this is the advice given by person, but as a professional auditor should reduce accidents. Professional auditor must be independent of its work. When problems occur, they must be the cooling time and the time taken to solve the problem, without any confusion. An independent auditor must be a smart, intelligent person. Because they know how to handle and solve their own problems without people help. Code of ethics Code of ethics is formed to help the auditors aware to the areas where ethical pressure may exist and be in dependent all the time. Independent auditors are not only responsible to their client but also the public interest. Therefore, they should follow the code of ethics. (Sagar, Mead, Bampton, 2008) There are some fundamental principles in code of ethics which must followed by them...
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...Case 2 [1] A. Financial information is prepared for multiple users for different purposes and thus not all elements of the financial statements are equally relevant to all users. B. Materiality is a relative rather than an absolute concept. The materiality threshold that will influence users of the financial statements will vary depending on the context in which the entity operates. C. Auditors must design the audit to find the smallest misstatement that would influence users of the financial statements. Reasonable assurance that the financial statements are free of material misstatements cannot be provided unless the audit is designed to detect the smallest misstatement that would influence users. D. A high likelihood of management fraud makes it more likely that individual account misstatements will have the same directional effect on net income (i.e., asset accounts will be overstated and liability accounts will be understated). On the other hand, a low likelihood of management fraud makes it more likely that individual account misstatements will have an offsetting effect on net income e. The nature and cost of evidence available by account varies. Therefore, to minimize cost, auditors may want to assign a higher tolerable misstatement to accounts lacking competent evidence or costly to audit. The higher the tolerable misstatement for an account the less evidence needed. F. It is not likely that all account misstatements will have the same directional...
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...[1] a) Looking at Exhibit 1 it says that “the magnitude and nature of financial statement misstatements or omissions will not have the same influence on all financial statement users” (p.11). With that it is clear why different materiality bases are considered because a misstatement on one account on the financial statement may be of more importance to one particular type of user while or the other it is irrelevant. b) An example given at the bottom of Exhibit 1 explains why it is important to have different thresholds for different audit engagements. “If a client is close to violating the minimum current ratio requirement for a loan agreement, a smaller planning materiality amount should be used for current assets and liabilities. Conversely, if the client is substantially above the minimum current ratio requirement for a loan agreement, it would be reasonable to use a higher planning materiality amount for current assets and current liabilities” (p.11). This makes sense because it is unfair to audit a small company under the same materiality thresholds as one would do with a significantly large company. c) Once again looking at Exhibit 1 on page 11, the very last paragraph on that page states why it is important to generally use the smallest threshold for planning purposes. It is because the smallest amount provides reasonable assurance that the financial statements, takes as a whole, are not materially misstated for any user. It is to be conservative with discrepancies...
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...7 Planning Materiality C a s es inc lu de d in t his Se ction 7.1 Anne Aylor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Determination of Planning Materiality and Tolerable Misstatement O t he r c ase s t h at discuss topics rel ated to this section 5.6 Sarbox Scooter, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . . Evaluation of Audit Differences . . . . . . . . . . . . . . . . . . . . . . . 369 12.2 Auto Parts, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Considering Materiality When Evaluating Accounting Policies and Footnote Disclosures Instructor Resource Manual — Do Not Copy or Redistribute Instructor Resource Manual — Do Not Copy or Redistribute Anne Aylor, Inc. C a s e 7.1 Determination of Planning Materiality and Tolerable Misstatement Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt Ins tr uc t ional O b je c t ive s [1] To provide experience with establishing planning materiality. [2] To provide experience with establishing tolerable misstatement for individual financial statement accounts. [3] To illustrate factors considered when establishing planning materiality...
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...Facts: Anne Aylor, Inc. sells classic, high-end fashion in the retail industry in approximately 584 locations in 46 states. Most of their merchandise is developed and designed within the company. They use 131 independent manufacturers in 19 different countries, including China, Philippines, Indonesia, India, and Vietnam. The stock was trading at $22.57 at the end of March, 2011. 1a) Materiality is different depending on the users of the financial statements (AS11). Debt and liquidity is more important to creditors and stockholders are more concerned with net earnings and growth. Establishing the overall audit strategy for the engagement and developing an audit plan is dependent on the type of users (AS9). An objective is to reduce risk (AS8); therefore, inherent risk is assessed before considering control risk. 1b) Thresholds are different based on the industry and the magnitude of that particular company. Materiality is much different in a small company in comparison to a significantly large company. Preliminary judgments about the effectiveness of internal control over financial reporting have an effect on the planning of the audit (AS5) in regards to materiality. 1c) The smallest materiality threshold used for planning is used to “provide reasonable assurance (AU230) that the financial statements taken as a whole are fairly presented in all material respects at the lowest cost.” 1d) Obtaining an understanding of the company, its environment, and internal control...
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...Auditing Cases An Interactive Learning Approach FIFTH M F S D E D ITIO N S. B A. B M. G F. P Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editor in Chief: Donna Battista Acquisitions Editor: Stephanie Wall Editorial Project Manager: Christina Rumbaugh Senior Managing Editor: Cynthia Zonneveld Production Project Manager: Carol O'Rourke Senior Operations Supervisor: Diane Peirano Printer/Binder: BindRite Graphics, Robbinsville Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text. Copyright © 2012, 2009, 2006, 2003, 2000 by Pearson Education, Inc., publishing Prentice Hall. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290. Many of the designations by manufacturers and sellers to distinguish...
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...Auditing Cases instructor resource Manual f our th e d itio n Mark S. Beasley Frank A. Buckless Steven M. Glover Douglas F. Prawitt do not coPy or redistribute Prentice hall Upper Saddle River, New Jersey ta b l e s e ct ion o f co n t e n t s 1 2 client acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . S o l u tionS inc lu de d in t h iS Section 1.1 Ocean Manufacturing, Inc. 3 The New Client Acceptance Decision s e ct ion Understanding the Client’s Business and assessing risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 S o l u tionS inc lu de d in t h iS Section 2.1 Your1040Return.com Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.2 2.3 2.4 Dell Computer Corporation Evaluation of Client Business Risk Flash Technologies, Inc. Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Risk Analysis and Resolution of Client Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Understanding of Client’s Business Environment s e ct ion 3 Professional and ethical issues . . . . . . . . . . . . . . . . . . . . . . . 59 S o l u tio nS inc lu de d in t h iS Section 3.1 3.2 3.3 3.4 3.5 A Day in the Life of Brent Dorsey Staff Auditor Professional Pressures Nathan Johnson’s Rental Car Reimbursement Solving Ethical Dilemmas–Should...
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...Part I: The Setup 11. Downing Nixon, Part II: The Execution 12. In from the Cold 13. Poppy’s Proxy and the Saudis 14. Poppy’s Web 15. The Handoff 16. The Quacking Duck 17. Playing Hardball 18. Meet the Help 19. The Conversion 20. The Skeleton in W.’s Closet 21. Shock and . . . Oil? 22. Deflection for Reelection 23. Domestic Disturbance 24. Conclusion Afterword Author’s Note Acknowledgments Notes Foreword When a governor or any state official seeks elective national office, his (or her) reputation and what the country knows about the candidate’s background is initially determined by the work of local and regional media. Generally, those journalists do a competent job of reporting on the prospect’s record. In the case of Governor George W. Bush, Texas reporters had written numerous stories about his failed businesses in the oil patch, the dubious land grab and questionable funding behind a new stadium for Bush’s baseball team, the Texas Rangers, and his various political contradictions and hypocrisies while serving in Austin. I was one of those Texas journalists. I spent about a decade trying to find accurate information on Bush’s record in the Texas National Guard. My curiosity had been prompted by his failure to adequately answer a question I had asked him as a panelist in a televised debate with Ann Richards during the 1994 gubernatorial campaign. Eventually I published three books on Bush and his political consigliere, Karl Rove. During Bush’s...
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