Includes a cpa firm performing analytical procedures

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includes a CPA firm performing analytical procedures, making inquiries about the fair presentation of the statements, and examining the information for reasonableness. Because of a CPA firm’s expertise in accounting, the accountant from the CPA firm can often identify incorrect presentations in the financial statements that have been overlooked by the accountant for the company. Reviews are 6-16
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common for smaller privately-held companies with relatively small amounts of debt. 6-32 (continued) The bank probably did not require an audit because the additional cost of an audit was greater than the benefit the bank perceived. In many cases, the decision as to whether to have a review or an audit is negotiated between the company seeking a loan and the bank loan officer. Both the company and the bank have options in negotiating such things as the amount of the loan, the rate of interest, and whether to require an audit or a review. The bank can reject the loan request and the company can go to other banks that want to make loans. Frequently, banks have a list of CPA firms in which they have considerable confidence due to their reputation in the community or past work they have done for other bank customers. b. Because the amount of the loans from the bank to Ritter increased, the bank probably wanted additional assurance about the reliability of the financial statements. It is also likely that Rene Ritter negotiated the one percent reduction of the interest rate by offering to have an audit instead of a review. A one percent reduction in the interest rate saves Ritter $40,000 annually compared to the $15,000 additional fee for an audit. c. Rene referred to the CPA firm as partners in a professional sense, not a business sense. The CPA firm had provided many consulting and tax services, as well as providing review and audit services over the entire business life of the company. Rene recognized that these professional services had contributed to the success of the business and she chose to acknowledge those contributions during her retirement comment. Assuming that the CPA firm retained an attitude of independence throughout all audits and reviews, no violation of professional independence standards occurred. Most well run CPA firms provide selected consulting, tax, and assurance service for their privately held clients without violating independence requirements. d. As the external auditor, the firm of Gonzalez & Fineberg provides the stockholders, creditors, and management an independent opinion as to the fair presentation of the financial statements. Given the potential biases present when management prepares the financial statements, the stockholders and creditors must consider the potential for information risk that might be present. The independent audit conducted by Gonzalez & Fineberg helps stockholders and creditors reduce their information risk. Management also benefits by having the external auditors independently assess the financial statements even though those statements are prepared by management. Due to the complexities involved in preparing financial
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