Question

You are doing a review services and related tax work engagement for Murphy Construction Company. You have made extensive inquiries of management about their financial statements and have concluded that management has an excellent understanding of its business and is honest, but lacking in knowledge of technical accounting issues. In doing the review you determine the following: 1. Repairs and maintenance expense has increased significantly compared to the preceding year. The president states that this seems to have been a year with a lot of repairs, in part because their equipment is getting older. 2. Property tax expense is the same as last year even though Murphy purchased a new building, including the land. The president states that there are no real estate taxes on the new building and land until next year. 3. Based on your knowledge of the construction industry you know that the pipes Murphy uses in construction have had a decrease in selling price to construction companies near the end of the current year. The president states that even though they have a large pipe inventory it will all be used in the next year or two, so the current price doesn’t matter because they won’t need to buy any. 4. Accounts receivable has increased almost 25% compared to the previous year, but the allowance for uncollectible accounts has stayed the same. The president states that even though receivables have increased, they still expect uncollectible accounts to be less than the stated allowance. 5. In discussions with the president you determine that there is a material uninsured lawsuit against the company from a former customer. The president believes it is a frivolous lawsuit and will not permit a footnote about it for fear that it will result in similar lawsuits from other customers.

Required

a. Beyond inquiries and analytical procedures, what are the accountant’s responsibilities in performing review service engagements?

b. Describe what you should do in each of the preceding situations, assuming each one is material.

Answer 1

a)

Besides the Inquiries and analytical procedures,The responsibilities of an accountant in review service engagements are as follows :

• Develop the insight on accounting principles and practices related to the concerned industry.
• Improve your Knowledge about the business of the client.
• Ask for letter of representation.
• Issue the review report.
• If auditor finds out that the information produced to them is false then perform other necessary procedures.

b)

Steps to be taken in each of the preceding situations :

• Assess the nature of repairs and maintenance expense to find out whether any expense needs to be capitalized.
• Enquire the management about proper documentation related to real estate taxes which is not the responsibility of the client until the forthcoming year.
• Request the management to provide them with invoices of the recent purchases of pipes that will be used for construction and approximate the Value of the inventory based on recent prices.
• Calculate the days sales and compare the trends of the collection with previous years to assess whether there is any downtime in collecting receivables.
• Disuss with the legal representatives of the client to have the information about the possible outcome from the lawsuit which has been filed on the company.