Chapter 1 Homework – Daniel Pinto
1.25 – B. Prepare a written report containing a conclusion about the reliability
of a management assertion.
1.28 – B. Express an opinion on the fairness with which they present
financial position, results of operations, and cash flows in conformity with
accounting standards promulgated by the Financial Accounting Standards
Board.
1.29 – D. They generally see a potential conflict of interest between company
managers who want to get loans and the bank’s needs for reliable for reliable
financial statements.
1.39 – A. Cutoff
1.40 – D. rights and obligations.
1.45 – A. Existence
1.54 – B. Completeness
Question 1.61 – Controller as Auditor
The Chairman of the Board of Hughes Corporation proposed that the Board
hire as controller the CPA that had been the manager of the team that
conducted Hughes Corporation’s audit engagement. The Chairman thought
that hiring this person would make the annual audit unnecessary and would
consequently result in saving the professional fee paid to the auditors.
The Chairman proposed giving this new controller a full staff to conduct such
investigations of accounting and operating data as necessary.
Required
Evaluate the Chairman’s proposal. What is the “fatal flaw” in the Chairman’s
proposal?
- The “fatal flaw’ in the Chairman’s proposal is not understanding why
audits are done in my opinion. External audits are done to ensure
auditor independence, hiring the CPA as a controller wouldn’t be very
independent and would likely not result in an unbiased result. The
controller is a part of management and cannot objectively evaluate the
company’s financial statements. An audit is meant to provide
independent assurance to stakeholders that financial statements are
free from material misstatement.
A.27 – B. Type 1 reports would be most appropriate for auditors’ reporting
requirements for
issuers.
A.32 – A. Yes Yes
A.38 – C. Review report on unaudited financial statements.
A.40 – C. A statement that a review engagement is greater in scope than a
compilation.
A.57 – Accounting and Review Services. Henry Horkheimer, MD, is
considering expanding his office as a result of adding a new doctor to his
family medical practice. Dr. Horkheimer knows that his business is profitable,
but he does not produce regular financial statements, nor does he possess
the technical knowledge to do so. Although he is financially savvy enough to
know that he needs financial statements to obtain financing to expand his
business, he is completely unsure as to what services he needs or even what
is available. He has asked you for advice.
Consider Dr. Horkheimer’s need for financing and write a memo outlining the
pros and cons of four services an accountant could provide: audit, review,
compilation, and preparation of financial statements. Conclude your memo
with a recommendation for which service you believe would best suit Dr.
Horkheimer’s needs.
Memo: Accounting Services for Dr. Henry Horkheimer, MD
To: Dr. Henry Horkheimer, MD
Date: January 30, 2025
Subject: Recommendation for Financial Statement Services Dr. Horkheimer,
To secure financing for your practice expansion, you will need reliable
financial statements. Below is a brief overview of four accounting services:
1. Audit: Provides the highest assurance and credibility abut is costly
and time-intensive. Best for businesses requiring maximum trust from
lenders.
2. Review: Offers moderate assurance at a lower cost than an audit.
Suitable for most small businesses seeking financing.
3. Compilation: Organizes financial data into statements without
assurance. Affordable but may not meet lender requirements.
4. Preparation: Produces basic financial statements without assurance.
Best for internal use only, not external financing
Recommendation: A review engagement is ideal for your needs, balancing
credibility and cost to satisfy most lenders without the expense of an audit.
Sincerely,
Daniel Pinto
A.60 – Limited Assurance in Review Reports. One portion of the report on a
review services engagement is the following: “Based on my review, I am not
aware of any material modifications that should be made to the
accompanying financial statements in order for them to be in conformity with
accounting principles generally accepted in the United States of America [or
another framework for financial reporting].”
Required:
a. Does this paragraph represent “limited assurance” provided by the
accountants?
- Yes, this paragraph represents “limited assurance”. The
statement on the report of “I am not aware of any material
modifications that should be made” is a negative form of
assurance which is a part of limited assurance that accountants
provide. This statement shows that the accountant has taken the
steps to obtain a moderate level of assurance but has not
completed a full audit.
b. Why is limited assurance generally prohibited in audit reports?
- Limited assurance is generally prohibited in audit reports
because audits are meant to provide a high level of assurance or
reasonable assurance. Audit reports require a positive form of
expression stating that the financial statements are fairly
presented in all material respects. A high level of assurance is
required for investors and creditors as they rely on this
information to make important decisions.
c. What justification is there for permitting limited assurance in a review
engagement on the financial statements of a nonissuer?
- There are many reasons that may justify the permission of
limited assurance in a review engagement. Cost-effectiveness,
Appropriate level of assurance, Nature of procedures, Regulatory
requirements, and professional judgment. These are the reasons
that limited assurance be used in a review engagement on the
financial statements of a nonissuer