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Jean KeelingLv2

3 Nov 2018

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This is from Problem 6-31. Textbook: Auditing and AssuranceServices: A systematic approach 9th Edition

Ken Smith, the partner in charge of the auit of HoughtonEnterprises, identified the following significant deficienciesduring the audit of the December 31, 2013, financialstatements:

1. controls for granting credit to new customers were notadequate. in particular, the credit department did not adequatelycheck the creditworthiness of customers with an outside creditagency.

2. there were inadequate physical safeguards over the company'sinventory. no safeguards prevented employees from stealinghigh-value inventory parts.

Required:

A. Draft the required communications to the management ofHoughton Enterprises, assuming that both items are significantdeficiencies.

B. Assume that Smith determined that the second item was amaterial weakenss. How would the required communication change?

The amount of subjectivity involved in establishing fair valueestimates can be complex for management responsible for making thefair value measurements and disclosures contained in financialstatements. This is particularly true for fair value measurementsfor which observable market prices are not available. Auditingstandards require auditors to obtain sufficient appropriate auditevidence to provide reasonable assurance that fair valuemeasurements and disclosures are in conformity with accountingstandards, and auditing standards provide guidance for auditingthose measurements and disclosures contained in financialstatements.

a. Visit the PCAOB's web site (pcaobus.org) to identify where inthe PCAOB Auditing Standards guidance is provided for auditing fairvalue measurements and disclosures.

b. PCAOB auditing standards require the auditor to obtain anunderstanding of the entity's process for determining fair valuemeasurements and disclosures. Identify 5 things the auditor shouldconsider when obtaining that understanding.

c. What should the auditor consider when engaging a specialistto perform substantive tests related to fair value assertions?

d. Briefly describe the three types of substantive tests of fairvalue measurements that the auditor may perform.

2. ) A. In a compliance audit, the auditorâs primary objectiveis to

Determine that all instances of noncompliance are discovered andreported.

Provide management with recommendations for improvement overcompliance.

Obtain sufficient appropriate evidence to form an opinion oncompliance.

Test and express an opinion on internal control overcompliance.

B.) When auditing an entityâs financial statements in accordancewith Government Auditing Standards (the Yellow Book), anauditor is required to report on

Recommendations for actions to improve operations

The scope of the auditorâs tests of compliance with laws andregulations

I only.

Neither I nor II.

Both I and II.

II only.