BACKGROUND:
Audit standards require that several levels
of review occur. The senior accountants’ review is required to ensure that the
staff has performed the required audit procedures and that findings and
conclusions are well documented. Managers and partners review at a higher
level. Their intent is to ensure that GAAS has been applied and met, that
conclusions are appropriate, and that the working papers all tie together and
no open items exist. A second partner is required to ensure that the quality
control process has been met and to provide another opinion on the application
and meeting of GAAS requirements.
EKH Industries was audited by BK&D
CPAs. Four different individuals performed reviews of the working papers: Sarah
A., Emily R., Laura B., and Joe J. Emily’s review comments included
inconsistent amounts between working papers for the same accounts; for example,
the gain on the sale of assets did not match between the property working
papers and the cash flow support. Laura’s comments indicated inconsistent
trends–some working papers talked about rising labor costs while others
discussed layoffs of plant personnel. Joe documented that cutoff was not
properly tested for cash accounts and that accounts receivable testing was
missing a conclusion. Sarah indicated that signoffs were not appropriate, the
working papers were not dated appropriately, and the drafts had been issued too
early.
1.
Who is the BK&D CPA senior
auditor in this case?
2.
Who is the BK&D CPA
concurring (second) partner in this case?
3.
Who at BK&D CPA is
reviewing the work of Joe J. in this case?
4.
Who at BK&D CPA is the
engagement partner in this case?
BACKGROUND:
A subsequent event refers to an event that
occurs after the date of the audited balance sheet but prior to the date of the
auditors’ report. Subsequent events can be divided into two broad categories.
The first are those that provide additional evidence about facts that existed
either on or before the balance sheet date (Type I events). The second are
those that involve facts that came into existence after the balance sheet date
(Type II events). Type I events require adjustment to the financial statements while
Type II events only require financial statement disclosure.
Dillon & Company CPAs are auditing the
financial statements of PDQ Manufacturing as of December 31, 2009. During the
fieldwork of its audit (March 2010), the auditors noted the following situations:
A major customer who owed PDQ $10,000 in accounts receivable (a material
amount) filed for Chapter 7 bankruptcy. A warehouse where the customer stored
some of its inventory for resale had a fire. Estimated damage could not yet be
quantified. In addition, the company’s board treasurer was killed in a tragic
plane crash. Dillon & Company is now ready to issue its audit opinion.
1.
What should Dillon &
Company CPAs do as a result of the customer bankruptcy?
2.
What type of subsequent event
is the death of the board treasurer?
3.
Does the death of the board
treasurer require an adjustment to the 12/31/09 financial statements?
4.
What should Dillon &
Company CPAs do to adjust the financial statements for the fire in the
warehouse?
ScholarMatic: Explanation & Answer
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