4 The auditor was appointed after year end and was unable to observe the highly

4 the auditor was appointed after year end and was

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4. The auditor was appointed after year-end and was unable to observe the highly material ending balances in inventory. The auditor was unable to satisfy herself as to the inventory balance using alternative procedures. 5. During the year, your client changed the useful lives of significant manufacturing fixed assets. This change has a material effect on the current year's financial statements.
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Problem 2 - Legal Liability and Ethics (8 points) Part a. - Legal Liability (4 points) - You were negligent in the performance of an audit. Indicate whether you are likely to be found liable under the following liability regimes and level of negligence (add explanation if considered necessary): Auditor liable? Degree of negligence Yes No Gross negligence Under common law, to a bank relying on the financial statements. You were not aware that the bank would use the financial statements. Ordinary negligence To shareholders of a publicly traded company following the ruling embodied in the Hochfelder case requiring "scienter." Ordinary negligence To the original investors in an initial public offering. The investors did not rely on the misstated financial statements in their decision to invest. Ordinary negligence Under the Ultramares Doctrine , to creditors relying on the financial statements. You knew the financial statements might be used by creditors, but did not know the specific creditors. Part b. - Ethics (4 points) The following questions represent possible violations of either SEC or AICPA Professional Standards. Indicate whether these represent violations (4 points) Violation? Situation Yes No 1. You have just been hired as a staff auditor in the Syracuse office of CostFirehouse, CPA. You own 200 shares of WebScape, a high- tech company audited by the San Jose office. 2. Flintstone, CPA provides the audit and bookkeeping, tax and management consulting services to Cogswell Cogs, a privately held company. 3. Rubble, CPA is the auditor for and provides information systems consulting for Spacely Sprockets, a publicly held company. 4. Simpkins is a staff person on the General Electric audit. He owns 10 shares of stock in General Electric that were given to him by his grandmother. Problem 3 - Audit Objectives and Evidence (12 points) For each specific audit objective (audit procedure), identify the most appropriate audit objective
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and the type of evidence. Select a lettered response from the first two columns for the audit objective, and numbered response from the last column for the type of evidence. Indicate only one response for each item. Lettered and numbered responses may be used more than once or not at all. Selected Audit Objective Transaction objectives Balance objectives Type of evidence a. Occurrence g. Existence 1. Physical examination b. Completeness h. Completeness 2. Confirmation c. Accuracy i. Accuracy 3. Inspection d. Classification j. Classification 4. Observation e. Timing k. Cutoff 5. Inquires of client f. Posting and summarization l. Detail tie-in 6. Recalculation m. Realizable value 7. Reperformance n. Rights and obligations 8.
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