Reissues, Engagement Letters, ADR, and Unpaid Fees Flashcards
ABC audited Zipple Corporation for fiscal year 20X1. Zipple then fired ABC as its auditor and replaced it with XYZ because XYZ’s fees were lower and Zipple was looking to save money. Because of ABC’s knowledge of Zipple, Zipple did hire ABC to perform some internal audit work for it. Eleven months later, Zipple was negotiating a merger with Mercy Corporation and wished to show its financial statements to Mercy.
Zipple asked ABC for permission to consent to Zipple’s inclusion of the 20X1 audited financial statements in a proxy statement to be delivered to Mercy’s shareholders. Which of the following is not proper for ABC to do?
ABC may ask XYZ: “Hey, any material changes you know about that would reflect on the Zipple financial statements we certified?”
ABC may read any interim financial statements newly filed by Zipple.
ABC may repeat several of its most important audit procedures to ensure that it sees similar results eleven months later.
ABC may investigate and then refuse its permission to include the financial statements in the proxy statement.
ABC may repeat several of its most important audit procedures to ensure that it sees similar results eleven months later.
Correct! It would not be proper for ABC to essentially do a new audit when it is no longer independent.
In which of the following situations would it be proper for the PriceCooperHouse accounting firm to sign a current-year audit report for struggling client QRS Co.?
QRS is more than a year behind in paying bills for audit services that PriceCooperHouse has submitted.
QRS is more than a year behind in paying for PriceCooperHouse audit services, but PriceCooperHouse has not sent bills to QRS for the past several months.
QRS is more than a year behind in paying for PriceCooperHouse audit services, but has issued a promissory note to PCH promising to pay the overdue fees.
QRS is more than a year behind in paying for PriceCooperHouse audit services, but has filed for bankruptcy and is awaiting decisions of the bankruptcy trustee.
QRS is more than a year behind in paying for PriceCooperHouse audit services, but has filed for bankruptcy and is awaiting decisions of the bankruptcy trustee.
Correct! A member in public practice may not sign a current year audit report if it has unpaid fees from the client for services provided more than one year prior, but an exception arises when the client files for bankruptcy.
A client company has not paid its year 1 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the year 2 audit, the year 1 audit fees must be paid before the: Year 1 report is issued. Year 2 fieldwork is started. Year 2 report is issued. Year 3 fieldwork is started.
Year 2 report is issued.
This answer is correct because the professional standards require payment prior to issuance of the subsequent year audit report.
Which of the following terms would be properly included in an engagement letter signed by audit firm MNO and its client, Magnifica Corporation?
MNO promises to reimburse Magnifica for any losses sustained by the wrongdoing of its own employees that MNO did not detect.
Magnifica promises to reimburse MNO for any damages it must pay to investors caused by MNO’s careless acts in conducting the Magnifica audit.
Magnifica promises to reimburse MNO for any damages MNO must pay to investors caused by its nonnegligent failure to detect fraud by Magnifica’s management.
Neither MNO nor Magnifica will be liable to investors for any losses caused by their mutual errors that lead to the filing of materially erroneous financial statements.
Magnifica promises to reimburse MNO for any damages MNO must pay to investors caused by its nonnegligent failure to detect fraud by Magnifica’s management.
Correct! It is proper for an engagement letter to require an attest client to indemnify an audit firm for liability and costs resulting from knowing misrepresentations by the client’s management.
The Cheng Accounting Firm is concerned with litigation costs, so it is inserting provisions in all its engagement letters that require arbitration rather than litigation of disputes between Cheng and its attest clients. Which of the following is true?
I. Such a provision is simply not allowed by the code.
II. Such a provision is allowed, but if it is invoked,
Cheng should apply the Conceptual Framework to determine whether independence is impaired by the fact that it and its client have potentially been placed in positions of material adverse interests. I only. II only. Both I and II. Neither I nor II.
II only.
The code does note that entering into binding arbitration potentially creates independence problems by placing the firm and the client in positions of material adverse interests, creating a self-interest threat.
The Espinoza Accounting Firm is set to certify the financial statements of client ABC Co. on May 15, 2020. However, ABC did not pay Espinoza’s bill for doing the previous audit that was signed on May 15, 2019. Which of the following is true?
Because ABC has not paid Espinoza in more than a year, Espinoza’s independence would be impaired if it signed this new report in 2020.
Espinoza can avoid any independence problems by simply not billing ABC, which cannot be behind on its bills if it has not received any bills.
Espinoza’s independence would not be impaired if
ABC would issue to it a signed note, promising to pay within six months.
ABC’s independence considerations should prevent it from signing the May 15, 2020, report even if ABC is in bankruptcy.
Because ABC has not paid Espinoza in more than a year, Espinoza’s independence would be impaired if it signed this new report in 2020.
A member in public practice may not sign a current-year audit report if it has unpaid fees from the client for services provided more than one year prior.
