11.55 Written Representations. For each of the following issues, classify them according to whether they will be (1) included in written representations in all audits, (2) included in written representations in audits of public entities (under AS 5), or (3) not included in written representations:

a.       Management acknowledgement of its responsibility for the fairness of the financial statements in accordance with U.S. GAAP.

b.      A list of pending or threatened litigation, claims, or assessments currently outstanding against the client.

c.       A description of recommendations that allow the client to improve the efficiency and effectiveness of its operations.

d.      Availability of all financial records and related data.

e.       Information related to the presentation and disclosure of items within the financial statements.

f.       Disclosure of all significant deficiencies and material weaknesses in internal control.

g.      Information concerning fraud involving management and employees who have significant roles in internal control.

h.      Auditors' judgment about the quality of the client's accounting principles.

i.        Management's conclusion about the effectiveness of its internal control over financial reporting.

j.        A statement that the financial statements are prepared according to U.S. generally accepted accounting principles.

 

 

 

 

11.58 Uncorrected Misstatements and Performance Materiality. Aaron Rivers, CPA is auditing the financial statements of Charger Company, a client for the past five years. During past audits of Charger, Rivers identified some immaterial misstatements (most of which relate to isolated matters and do not have common characteristics). A summary of these misstatements follows (to illustrate, in 2009, the misstatements would have reduced net income by $13,200 if corrected):

 

 

Effect on

Effect

Effect on

Effect

Year

Net Income

on Assets

Liabilities

on Equity

2009

($13,200)

($20,000)

($6,800)

($13,200)

2010

5,000

12,000

7,000

5,000

2011

(9,250)

(11.000)

(1.750)

(9,250)

2012

(2,000)

(5,500)

(3,500)

(2,000)

2013

1,000

1,000

0

1,000

During the most recent audit, Rivers concluded that sales totaling $11,000 were recognized as of December 31, 2014, that did not meet the criteria for recognition until 2015. When Rivers discussed these sales with Chris Turner, Charger Company's chief financial officer, Turner asked Rivers about the performance materiality level used in the audit, which was $25,000. Upon learning of this, Turner remarked, "Then there's no need to worry ... it's not a material amount. Why should we bother with this item?"

Required:

a.       How does the misstatement identified in 2014 affect net income, assets, liabilities, and equity in 2014? (Assume a 35 percent tax rate for Charger.)

b.      Comment upon Turner's remark to Rivers. Is Turner's reasoning correct?

c.       Upon doing some research, Rivers learned of the rollover method and iron curtain method for evaluating the performance materiality of misstatements. Briefly define each of these methods.

d.      How would Rivers evaluate the performance materiality of the $11,000 sales cutoff error in 2014 under the rollover method and iron curtain method?

e.       Based on your response to (d), what adjustments (if any) would Rivers propose to Charger Company's financial statements under the rollover method and iron curtain method?

 

 

 

 

 

11.71   Various Completion Matters. For each of the following independent situations, describe the most appropriate course of action that the auditors should take.

a.       Drew Allison is conducting the audit of Anderson, Inc. as of December 31, 2014. At the beginning of completing the evidence gathering, Allison becomes aware that one of Anderson's major customers (Jones) is experiencing significant financial difficulties. Jones normally accounts for 5 percent of Anderson's net sales. After performing the necessary procedures, Allison believes that $2.8 million of Jones's receivable balance will ultimately become uncollectible. Allison further believes this amount is material to Anderson's financial condition and results of operations.

b.      Nagan Carmela is completing the December 31, 2014, audit of Nugget Company. As part of the final procedures, Carmelo has requested representations from Nugget's management regarding their assertion as to the fairness of the financial statements and other important matters addressed by professional standards. Because Nugget's management is attending an analyst briefing in the upcoming week, Carmelo receives these signed representations dated February 6, 2015. Carmelo has a few remaining items to complete, does so, and dates the auditors' report February 9, 2015.

c.       Pat Colt completed the December 31, 2014, audit of Manning and issued an unqualified opinion on Manning's financial statements dated March 15, 2015. Colt's opinion was released, along with Manning's financial statements, on March 21, 2015. During a review of Manning's first quarter 10-Q in late April, Colt became aware of the company's settlement with a customer over a product warranty lawsuit; this case had been settled on March l3, 2015. Although Colt had received the necessary letter from Manning's attorneys, the letter was arrived prior to the settlement of the case and did not mention this development. After reviewing the information related to the settlement, Colt does not believe that the settlement is material to Manning's financial condition or results of operations and believes the opinion on Manning's financial statements is still supportable.

d.      Cameron Alta completed the December 31, 2014, audit of Saxe Company on February 10, 2015. Saxe is planning to release its financial statements, along with Alta's opinion on these financial statements and internal control over financial reporting, on February 17, 2015. On February 12, 2015, a flood in one of Saxe's warehouses located in the Gulf Coast region destroyed more than $10 million of inventory. Although the extent to which this loss is recoverable through Saxe's insurance is uncertain at this time, Alta believes that this loss could have a material impact on Saxe's financial condition and results of operations.

e.       During the audit of Glomco, Angel Myron identified a number of misstatements. These misstatements are not material in dollar amount, do not appear to represent any discern- able pattern, and do not represent fraudulent activity. As a result, Myron has decided that Glomco's financial statements do not need to be adjusted to reflect the effect of these misstatements.

f.       Following the completion of the 2014 audit of Blankenship Corporation and release of the financial statements and auditors' reports, Reese Jill met with the manager on the engagement to conduct a postmortem on the engagement and identify how changes in Blankenship's operations noted during the most recent audit may affect future audits. During this review, Jill became aware that Blankenship's process for evaluating good- will related to an acquisition made by Blankenship during the most recent year for potential impairment had not been considered. Jill believes that the omitted procedure is important in supporting the opinion on Blankenship's financial statements and that users continue to rely on the financial statements and the auditors' reports.