· a. What are the major advantages and disadvantages of each of the four types of auditing careers?
· b. What do you think is the best early career choice for the senior interested in ultimately becoming a certified fraud examiner?
· c. What other types of auditing careers are available to those who are qualified?
1-21 (Objectives 1-6, 1-7) In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following:
Instructions:
a. For these 12 examples, state the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each.
b. In each example, state the type of audit (financial statement audit, operational audit, or compliance audit).
· 1. Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or her return.
· 2. Financial statements for use by stockholders when there is an internal audit staff.
· 3. A bond indenture agreement to make sure a company is following all requirements of the contract.
· 4. Internal controls at a casino to ensure the casino is in compliance with federal and state regulations.
· 5. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible.
· 6. Annual statements for the use of management.
· 7. Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits.
· 8. Statements for bankers and other creditors when the client is too small to have an audit staff.
· 9. Financial statements of a branch of the federal government to make sure that the statements present fairly the actual disbursements made during a period of time.
· 10. Federal income tax returns of a corporation to determine whether the tax laws have been followed.
· 11. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data.
· 12. Disbursements of a branch of the federal government for a special research project to determine whether the expenditures were consistent with the legislative bill that authorized the project.
· 2-18 (Objective 2-6) Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class and it was clear that he didn’t really understand the nature of the audit process as he asked the following questions:
Instructions: If you were Sarah, how would you respond to each question?
· a. What is the main objective of the audit of an entity’s financial statements?
· b. The audit represents the CPA firm’s guarantee about the accuracy of the financial statements, right?
· c. Isn’t the auditor’s primary responsibility to detect all kinds of fraud at the client?
· d. Given the CPA firm is auditing financial statements, why would they need to understand anything about the client’s business?
· e. What does the auditor do in an audit other than verify the mathematical accuracy of the numbers in the financial statements?
2-21 (Objective 2-6) Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company’s records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor’s report within 3 weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.
Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing internal controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Ray’s financial statements. The students followed Holmes’s instructions and after 2 weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unqualified auditor’s report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles.
Instructions:
Briefly describe each of the principles underlying AICPA auditing standards and indicate how the action(s) of Holmes resulted in a failure to comply with each principle. Organize your answer as follows: *
1. 1-22
St. Joseph’s School has 1,200 students, each of whom currently pays $8,000 per year to attend. In addition to revenues from tuition, the school receives an appropriation from the church to sustain its activity. The budget for the upcoming year is $15 million, and the church appropriation will be $4.8 million. By how much will the school have to raise tuition per student to keep from having a shortfall in the upcoming year?
2. 1-23
Refer to Problem 1-22. Sensing resistance to the idea of raising tuition from members of St. Joseph’s Church, one of the board members suggested that the 960 children of church members could pay $8,000 as usual. Children of nonmembers would pay more. What would the nonmember tuition per year be if St. Joseph’s wanted to continue to plan for a $15 million budget?
The owner of a private freighter is trying to decide which cargo he should carry on his next trip. He has two choices of cargo, which he can agree to carry in any combination. He may carry up to 15 tons of cargo A, which takes up 675 cubic feet per ton and earns revenue of $85 per ton. Or, he may carry up to 54 tons of cargo B, with a volume of 450 cubic feet per ton and revenue of $79 per ton.
The freighter is divided into two holds, starboard and port. The starboard hold has a volume of 14,000 cubic feet and a weight capacity of 26 tons. The port hold has a volume of 15,400 cubic feet and a weight capacity of 32 tons. For steering reasons, it is necessary that the weight be distributed equally between the two sides of the freighter. However, the freighter engines and captain’s bridge, which together weight 6 tons, are on the starboard side of the freighter. This means that the port side is usually loaded with 6 tons more cargo to equalize the weight. The owner may carry any combination of the two cargoes in the same hold without a problem. How should this freighter be loaded to maximize total revenue?
3-37
A paint company has two types of bases from which it blends two types of paints: Tuffcoat and Satinwear. Each base has a certain proportion of ingredients X, Y, and Z, as shown in the table at the top of p. 114 , along with their costs. |
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Table for Problem 3-37
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Ingredient X |
Ingredient Y |
Ingredient Z |
Cost/Gallon |
Paint base A |
25% |
34% |
10% |
$4.50 |
Paint base B |
35% |
42% |
15% |
$6.50 |
The specifications for the two paints are shown in the following table.
Tuffcoat |
Satinwear |
Must contain at least 33% ingredient X |
Must contain at least 30% ingredient X |
Must contain at least 35% ingredient Y |
Must contain at least 38% ingredient Y |
Must contain no more than 14% ingredient Z |
Must contain no more than 13% ingredient Z |
Demand = 1,600 gallons |
Demand = 1,250 gallons |
How should the two bases be blended to manufacture the two paints at a minimum cost? What is the cost per gallon for each paint?

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