1. The audit of WWW Ltd. by Hong’s CPA firm is almost complete.


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May 24, 2016. 1. The audit of WWW Ltd. by Hong’s CPA firm is almost complete. Hong has a meeting scheduled with the client to discuss a proposed audit adjustment of $75,000 to a receivable from AAA Inc. At the meeting, management’s position is that no adjustment is necessary as AAA is controlled by the same company that controls WWW. Essentially, the parent company has adjusted the prices for transactions between its subsidiaries in previous years, and WWW’s management feels that if this receivable is not paid in full, then the lost amount will be recovered from another transaction with AAA next year. The auditor’s position is that the $75,000 adjustment is required or an unqualified opinion cannot be issued. After the meeting, in a spirit of compromise and team work, the client agreed to make an adjustment of reducing the receivable by $37,500. 1. Assume that as part of the compromise in reaching the $37,500 adjustment, Hong agreed to issue an unqualified opinion. Has Hong maintained his independence? Briefly explain why. 2. Assume that the client tried to restrict Hong from communicating with AAA, and instead insisted that Hong deal only with the parent company, since the parent company controls AAA. Does this affect Hong’s independence? Briefly explain your answer Question 2 Jenny Xiao is a CPA who is in her first assignment as a senior auditor, in charge of the field work for the audit of Physonics Ltd. for the year ended June 30, 2010. The company, which manufactures and markets instruments used in high energy physics research, has enjoyed steadily increasing sales and earnings per share in recent years. Its shares are traded on the national stock exchange. While performing analytical tests in the planning stage of the audit, she began to suspect that sales and net income for the current year may be overstated. Further investigation revealed that an unusually large volume of sales were booked in the last few days of June 2010. Discussion with shipping department personnel and careful review of the shipping bills of lading lead her to believe that many of the items were actually shipped during the first two weeks of July. The result is that net income has been overstated by about 7%. Without this additional income, reported income would be lower than that of the previous year She has prepared her working papers supporting her conclusions and has discussed them with Mark Virgio, the partner in charge of the engagement. He arranged a meeting with the controller and the Vice President of finance of Physonics. During the meeting, both of the executives deny that the sales journal has been “held open.” In any event, they argue, the amounts are not material. Following the meeting, Mark informs Jenny that he agrees with the executives and has decided that no adjustment is necessary. He asks that she mark the matter as “resolved” in the audit working papers. Required: What are the moral/ ethical issues,if any? What should Jenny do? Use the following steps of case analysisapproach. Case Analysis Approach Identify problems and issues Generate alternatives Select the decision criteria Analyze and evaluate the alternatives Recommend an action for Jenny jenai
posted a question · May 23, 2016 at 9:48pm

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