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Chapter_8_answers_to_review_questions - Review Questions...

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Review Questions 8-5 Auditing standards require auditors to document their understanding of the terms of the engagement with the client in an engagement letter. The engagement letter should include the engagement’s objectives, the responsibilities of the auditor and management, and the engagement’s limitations. An engagement letter is an agreement between the CPA firm and the client concerning the conduct of the audit and related services. It should state what services will be provided, whether any restrictions will be imposed on the auditor’s work, deadlines for completing the audit, and assistance to be provided by client personnel. The engagement letter may also include the auditor’s fees. In addition, the engagement letter informs the client that the auditor cannot guarantee that all acts of fraud will be discovered. 8-13 The recent economic events have led to the collapse of several large financial services entities that has triggered a broader economic decline affecting all industries. The unstable economy has resulted in a significant slowdown in most businesses. These declines are likely to have a significant impact on financial reporting. First, severe market declines may impact the accounting for many types of investments and other assets that now may be impaired or may have experienced significant declines in their fair values. The determination of those accounts is largely dependent on numerous management judgments and estimates. Auditors should apply appropriate professional skepticism as they evaluate management’s judgments and estimates. Second, the significant lack of sales and other revenues may be placing undue pressure on management to meet revenue targets, including the need for entity survival. Thus, there may be a greater presence of fraud risk due to these significant pressures. Third, auditors should closely evaluate the entity’s ability to continue as a going concern. There may be several instances where the auditor’s report should be modified to include an explanatory paragraph describing the auditor’s substantial doubt about the entity’s ability to continue as a going concern. Multiple Choice Questions From CPA Examinations 8-25 a. (3) b. (3) c. (4) d. (1) Discussion Questions And Problems 8-29 a. A related party transaction occurs when one party to a transaction has the ability to impose contract terms that would not have occurred if the parties had been unrelated. FASB 57 concludes that related parties consist of all affiliates of an enterprise, including (1) its management and their immediate families, (2) its principal owners and their immediate families, (3) investments accounted for by the equity method, (4) beneficial employee trusts that are managed by the management of the enterprise, and (5) any party that may, or does, deal with the enterprise and has ownership, control, or significant influence over the management or
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8-29 (continued)
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