Question

1) You are a CPA employed as an accountant for a large manufacturing company. Each month, you assist in preparing the company’s actual monthly GAAP financial statements. Your boss tells you that “one way or the other, you must make the actual month’s GAAP income exceed the month’s budgeted income.” The way you are told to do this is to prepare the following journal entry in an amount which causes actual income to exceed budgeted income:   

Dr. Inventory

Cr. Cost of Goods Sold

If you go along with this, are you violating any AICPA rules? If yes, which AICPA rule are you violating? (3 Points)

2) You are in a job interview for an accounting position. The interviewer notices you took this Principles of Auditing course. The interviewer asks you to briefly respond to the following 3 questions:

A. What is an audit? (3 points)

B. How are fees set on an audit? (2 points)

C. There are a number of major challenges facing the audit profession – describe one. (3 point

Answer 1

1.

AICPA rules are being violated as COGS is being shown less and higher inventories are being shown. Due to lower costs higher profits are shown.

Integrity and Objectivity Rule is being violated as due to pressure by boss, we have to make a wrong entry for showing higher profits and lower costs. According to this rule, there is a violation if any such acts occur.

2.

A

Audit is examination of books of accounts by an auditor followed by checking the inventory physically to ensure all departments are following documented systems of transaction recording. It is done to check accuracy of financial statements

B

Size and complexity of company-much or audit fees can be explained by client characteristics. Large diversified companies pay higher fees. Companies in highly regulated industries such as NBFC -Non Banking Financial Institutions tend to pay lower fees

Big six premium- studies have constantly shown that big six auditors charge higher fees. Reasons speculated are that larger firms can provide higher quality audit

Client risk consideration- Clients operating in high risk industries are usually charged more to compensate for higher risk of default

C

Revenue recognition

This proves to be one of the most complicated and sensitive areas of audit for the most obvious reasons. Sometimes, the audit evidence turns out to be weak or too vague. Thus, auditors conduct a substantive test for completeness. Documents like sales invoice etc are verified in order to be sure of authenticity. analytical procedures help them generate sufficient evidence on basis of various proofs and detailed testing helps generate the required levels of confidence to support the assertions.