Ch 17 Flashcards
Barbara Montgomery is a first-year auditor for Coopers and Rose, a large public accounting firm. She has been assigned to audit the Lakes Brothers, a clothing retailer with retail outlets throughout the United States. This audit has proved troublesome in the past, and during a staff meeting preceding the audit, Robert Cooley, the supervisor on the audit, says: “We are going to be required to work several hours ‘off-the-clock’ each week until this audit is completed.” He also observes that the client is putting a great deal of pressure on the firm to maintain an acceptable level of fees.
Barbara has been to staff training school, where it was emphasized that not charging a client for hours actually worked as a violation of Coopers and Rose’s employment policy, a violation that could cause her to be dismissed. She also knows that only staff personnel are paid overtime and that supervisors are evaluated on successfully completing audits within allowable budgets. Barbara discusses the issue with John Reed, a second-year staff accountant. John says: “Don’t worry, if you go along no one will find out and Robert will give you a good evaluation.” John says that Robert is highly regarded by senior members of the firm and is likely to be promoted to manager in the near future.
Is it ethical for Barbara to work hours and not charge them to the client?
it is not ethical for Barbara to work hours and not change them to client, because this goes directly against the firm’s employment policy and could have a negative effect on her job.
Barbara Montgomery is a first-year auditor for Coopers and Rose, a large public accounting firm. She has been assigned to audit the Lakes Brothers, a clothing retailer with retail outlets throughout the United States. This audit has proved troublesome in the past, and during a staff meeting preceding the audit, Robert Cooley, the supervisor on the audit, says: “We are going to be required to work several hours ‘off-the-clock’ each week until this audit is completed.” He also observes that the client is putting a great deal of pressure on the firm to maintain an acceptable level of fees.
Barbara has been to staff training school, where it was emphasized that not charging a client for hours actually worked as a violation of Coopers and Rose’s employment policy, a violation that could cause her to be dismissed. She also knows that only staff personnel are paid overtime and that supervisors are evaluated on successfully completing audits within allowable budgets. Barbara discusses the issue with John Reed, a second-year staff accountant. John says: “Don’t worry, if you go along no one will find out and Robert will give you a good evaluation.” John says that Robert is highly regarded by senior members of the firm and is likely to be promoted to manager in the near future.
Use the six-step approach outline in this chapter to resolve this ethical dilemma.
- Barbara is being pressured to work extra hours and not bill the client.
- Since she is being asked to work extra hours, she is going against her firm’s policy by working overtime and not charging the hours to the client.
- Barbara, the firm, the client, and all of the people on the audit team including the supervisor
- Decide to work extra hours and not charge the client. Decide not to work extra hours and not charge the client. Report the information to a person within the company of a higher position
- If she decides to work extra hours and not charge the client then it will make her look good.
If she decides not to work extra hours and not charge the client then it will be a good reflection on her. If she reports the information to a person within the company of a higher position, then the blame would not be on her. - Report to someone higher in the company.
Never work for free. Never work off the clock.
What are the six steps used to resolve ethical dilemmas?
- Obtain the relevant facts.
- Identify the ethical issues.
- Determine the individuals or groups affected by the dilemma.
- Identify the possible alternative solutions.
- Determine how the individuals or groups are affected by the alternative solutions.
- Decide the appropriate action.
Lancaster Electronics produces electronic components for sale to manufacturers of radios, television sets, and phonographic systems. In connection with his examination of Lancaster’s financial statements for the year ended December 31, 2022, Dan Olds, CPA, completed fieldwork two weeks ago. Mr. Olds is now evaluating the significance of the following items for preparing his auditor’s report. Except as noted, none of these items has been disclosed in the financials or footnotes.
Discuss any additional disclosures in the financial statements and footnotes that the auditor should recommend to his client.
Recently, Lancaster interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2020, discontinued for all of 2021 to finance equipment in the company’s new plant, and resumed in the first quarter of 2020. In the annual report, dividend policy is to be discussed in the president’s letter to stockholders.
There is not need to modify the auditor’s report.
There are not any additional disclosures or footnotes that are required for them discontinuing their dividend payments.
Lancaster Electronics produces electronic components for sale to manufacturers of radios, television sets, and phonographic systems. In connection with his examination of Lancaster’s financial statements for the year ended December 31, 2022, Dan Olds, CPA, completed fieldwork two weeks ago. Mr. Olds is now evaluating the significance of the following items for preparing his auditor’s report. Except as noted, none of these items has been disclosed in the financials or footnotes.
Discuss any additional disclosures in the financial statements and footnotes that the auditor should recommend to his client.
A 10-year loan agreement, which the company entered into three years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of agreement. The balance of retained earnings at the date of the loan agreement was $298,000. From that date through December 31, 2022, income after taxes has totaled 360,000 and cash dividends have totaled $130,000. Based on these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2022.
There should be a disclosure on the financial statements for the nature and the amount of the restriction on the retained earnings, in this case it would $298,000.
Lancaster Electronics produces electronic components for sale to manufacturers of radios, television sets, and phonographic systems. In connection with his examination of Lancaster’s financial statements for the year ended December 31, 2022, Dan Olds, CPA, completed fieldwork two weeks ago. Mr. Olds is now evaluating the significance of the following items for preparing his auditor’s report. Except as noted, none of these items has been disclosed in the financials or footnotes.
Discuss any additional disclosures in the financial statements and footnotes that the auditor should recommend to his client.
The company’s new manufacturing plant building, which cost $600,000 and has an estimated life of 25 years, is leased from the Sixth National Bank in annual rental of $100,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year non-cancellable lease, the company has the option of purchasing the property for $1. In Lancaster’s income statement, the rental payment is reported on a separate line.
The fair market value of the property and related obligations should be on the balance sheet and finance charges and amortization would be in income statement.
Lancaster Electronics produces electronic components for sale to manufacturers of radios, television sets, and phonographic systems. In connection with his examination of Lancaster’s financial statements for the year ended December 31, 2022, Dan Olds, CPA, completed fieldwork two weeks ago. Mr. Olds is now evaluating the significance of the following items for preparing his auditor’s report. Except as noted, none of these items has been disclosed in the financials or footnotes.
Discuss any additional disclosures in the financial statements and footnotes that the auditor should recommend to his client.
A major electronics firm has introduced a line of products that will compete directly with Lancaster’s primary line, which is now being produced in the specially designed new plant. Because of manufacturing innovations, a competitor’s line will be of comparable quality but priced 50% below Lancaster’s line. The competitor announced its new line during the week following completion of its fieldwork. Mr. Olds read the announcement in the newspaper and discussed the situation by telephone with Lancaster executives. Lancaster will meet the lower prices with prices that are high enough to cover viable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs.
Disclose the competition and how it affects them and should be stated as a subsequent event in the footnotes.
Not enough information to record the impact, so just disclose it in the footnotes, otherwise financial statements could be misleading to users.
In 2012, the AICPA redrafted the majority of the auditing sections in the Codification of Statements on Auditing Standards, including the sections related to the audit report (known as the “Clarity Project”).
What was the purpose of this project?
To make the standards easier to read, understand, and implement while converging with the International Standards on Auditing
In 2012, the AICPA redrafted the majority of the auditing sections in the Codification of Statements on Auditing Standards, including the sections related to the audit report (known as the “Clarity Project”).
According to the clarity project, what are the steps an auditor should take to form an opinion on a company’s financial statements?
- Form an opinion on whether the financial statements are presented fairly, in all material respects.
- Conclude whether he or she has obtained reasonable assurance about whether the financial statements are free from material misstatement.
- Evaluate whether the financial statements are prepared in accordance with an applicable financial reporting framework.
- Evaluate and determine if the financial statements adequately disclose the significant accounting policies selected and applied.
- Evaluate whether the financial statements achieve fair presentation.
- Evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the various forms of disclosure available in published financial statements.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the disclosure issues addressed by the Securities Exchange Act of 1933.
Addresses issues of disclosures.
Designed to provide adequate disclosures of material facts to allow investors to assess the degree of potential risk.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the disclosure issues addressed by the Securities Exchange Act of 1934.
Regulates trading of public companies.
Holds corporations accountable for releasing false or misleading statements.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the disclosure issues addressed by the Foreign Corrupt Practices Act of 1977.
Made it a criminal offense to bribe political or government officials outside of the United States.
Requires public companies to maintain detailed records that reflect financial transactions.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the disclosure issues addressed by the AICPA Code of Professional Ethics.
Provides acceptable accounting principles and procedures.
Addresses independence issues.
The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms.
Discuss the disclosure issues addressed by Section 404 of the Sarbanes-Oxley Act of 2002.
