Introduction to Financial Audit

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Acct 4400.002
Case Set 2

Case 2a
1. Read AU 110
(a) What are management’s responsibilities pertaining to the independent audit? According to the PCAOB Standards, section AU 110.03 clearly states that management shall bear responsibility for all issued financial statements, the adoption of sound accounting policies, and for establishing and maintaining a system of internal controls that will record, track and process transactions, events and conditions. Management shall also maintain an understanding of all transactions made within the entity being audited. Due to this fact, management is also responsible for the fair presentation of financial statements in compliance with generally accepted accounting principles. (b) What are the auditor’s responsibilities pertaining to the independent audit? Be sure to cite paragraph numbers as appropriate, and do not simply copy and paste from the standard. Explain the responsibilities in your own words. According to the PCAOB Standards, section AU 110.02, it is the responsibility of the auditor to express an opinion once an audit has been planned and performed and has attained a reasonable assurance, the financial statements are free of material misstatement, which includes fraud or error. This by no means indicates there are no immaterial misstatements due to fraud or error, but that it is the responsibility of the auditor to detect and report only material misstatements. Once a material misstatement is found, it is up to management to fix the issue, not the auditor. (United States)

2. What are some advantages to your firm of accepting the Hood audit? One advantage is that in the past few years Hood has made no significant changes to its IT systems or manufacturing process outside of routine improvements to increase efficiency. This means that there should be little or none misunderstandings when it comes to the treatment of financial transactions since there has been no major change from the year before. They also have a time span of 10 years worth of unqualified opinions, which indicates that Hood should have all documents and records easily accessible for our audit team. As described in the case, this will also be our first client in the automotive industry. This could possibly lead to new clients in the automotive market as well has giving our company a reputation within the field. 3. Assume you have a meeting tomorrow with Beth Hood. List the top four issues, in order of importance, that you will discuss with her, and briefly describe why you believe each issue is important. My first issue I would bring up with Beth Hood is that there is no presence of a financial expert on the audit committee as well as the fact that she herself should not be included on the audit committee due to that fact she is the CEO of the company. Section 407 of the Sarbanes-Oxley Act clearly states it ‘requires a public company to disclose that it has at least one "financial expert" on its audit committee or, otherwise, to explain why it does not’. Since the company is interested in pursuing an IPO in 2014, it would be wise to make sure they are aware of Section 407. It is also against SOX to allow a member of management to sit on audit committee as it creates a lack of independence. The next issue I would like to discuss would be the promotion of Frank Dodd as the company’s CFO. Normally candidates are required to have at least a bachelor’s or master’s degree in business administration, accounting, finance or economics. It is also common for CFO’s to obtain some sort of certification, typically CPA or CMA. Frank Dodd’s only credentials lie in a few accounting courses he took online after he was promoted. The third issue I would like to discuss would be the invoices that are in contention with Otto’s Auto Parts. The accounts are material to the accounts payable account and may lead to serious consequences if not discussed thoroughly with management. Lastly I would like to...
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