ch tax problems

| November 24, 2016

Question
The most important fundamental component of an entity’s internal control is comp:marginal text
LO 5-3
1. Effectivenessandefficiencyofoperations.
2. Peoplewhooperatethecontrolsystem.
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3. Reliabilityoffinancialreporting.
4. Compliancewithapplicablelawsandregulations.

5.34 LO 5-4
The primary purpose for obtaining an understanding of a nonpublic audit client’s internal control is to comp:marginal text
LO 5-4
1. Provideabasisformakingconstructivesuggestionsinamanagementletter.
2. Determinethenature,timing,andextentoffurtherauditteststobeperformed.
3. Providetherationalefortheinherentriskassessmentatthefinancialstatementassertionlevel.
4. Provideinformationforacommunicationofinternalcontrol–relatedmatterstomanagement.
5.35 LO 5-4

Effectiveness of audit procedures would be reduced by comp:marginal text
LO 5-4
1. Selectinglargersamplesizesforaudit.
2. Performingauditproceduresatthefiscalyear-enddateasopposedtotheinterimperiod.
3. Decidingtoobtainexternalevidenceinsteadofinternalevidence.
4. Performingproceduresduringtheinterimperiodasopposedtoatthefiscalyear-enddate.

5.36 LO
5-5 According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to
comp:marginal text LO 5-5
1. Determinewhetherthecompany’scontrolsareprocessingcompanydataeffectively.
2. Determinethatthecompany’scontrolswillsatisfythecompany’scontrolobjectivesandcan effectively prevent or detect errors or fraud that could result in material misstatements, if they operate
3. Determinethatthecompany’semployeesareprocessingthecontrolsaccordingtothepolicyand procedures manuals at the company.
4. Noneoftheabove.

5.37 LO
5-4 To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for:
comp:marginal text
LO 5-4
1. Inquiryofclientpersonnel.
2. Observationofcompanyoperations. 3. Confirmationofbalances.
4. Inspectionofdocumentation.
5.38
LO 5-4
Which of the following is a preventive control? comp:marginal text
1. Reconciliationofabankaccount.
2. Recalculationofasampleofpayrollentriesbyinternalauditors.
3. Separationofdutiesbetweenthepayrollandpersonneldepartments. 4. DetailedfluctuationanalysiscompletedbytheCFOforrevenue.
5.39
LO 5-4
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that comp:marginal text
?1. Thecostofsubstantiveprocedureswillexceedthecostofcontrolevaluationwork.
2. Auditorswillbeabletoreducethecostofsubstantiveproceduresbyanamountmorethanthe control evaluation costs.
3. Thecostofcontrolevaluationworkwillexceedthecostofsubstantiveprocedures.
4. Auditorswillbeabletoreducethecostofsubstantiveproceduresbyanamountlessthanthecost of tests of controls.
5.40 LO
5-4 Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?
comp:marginal text
LO 5-4
1. Anarrativememorandumdescribingthecontrolsystem.
2. Aninternalcontrolquestionnaire.
3. Aflowchartofthedocumentsandproceduresusedbythecompany. 4. Alloftheabove.
5.41 LO 5-4
Tests of controls in a GAAS audit are required for comp:marginal text
LO 5-4
1. Obtainingevidenceaboutthefinancialstatementassertions.
2. Accomplishingcontrolovertheoccurrenceofrecordedtransactions.
3. Applyinganalyticalprocedurestofinancialstatementbalances.
4. Obtainingevidenceabouttheoperatingeffectivenessofclientcontrolactivities.

5.42 LO
5-4 Atransaction-levelinternalcontrolactivityisbestdescribedas comp:marginal text
?5 A material weakness is a situation in which comp:marginal text
LO 5-5
1. Itisprobablethatanimmaterialfinancialstatementmisstatementwouldnotbedetectedona timely basis.
2. Thereisaremotelikelihoodthatamaterialmisstatementwouldbedetectedonatimelybasis.
3. Itisreasonablypossiblethatamaterialmisstatementwouldnotbedetectedonatimelybasis.
4. Itisreasonablypossiblethatanimmaterialmisstatementwouldnotbedetectedonatimelybasis.
LO 5-4
1. Anactiontakenbyauditorstoobtainevidence.
2. Anactiontakenbyclientpersonnelforthepurposeofpreventing,detecting,andcorrectingerrors and frauds in transactions to eliminate or mitigate risks identified by the company.
3. Amethodforrecording,summarizing,andreportingfinancialinformation.
4. Thefunctioningoftheboardofdirectorsinsupportofitsauditcommittee.
5.43 LO 5-5
When planning the audit of internal controls for an issuer, the audit team should comp:marginal text
LO 5-5
1. Identifysignificantaccounts,locations,andassertions.
2. Conductawalkthroughoftheinternalcontrolprocess.
3. Makeinquiriesofemployeesregardingtheexistenceofcontrolactivities.
4. Reperformcontrolactivitiesperformedbyclientemployeestodeterminetheireffectiveness.
5.44 LO 5-5

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:
?comp:marginal text LO 5-5
1. Whetherthereisareasonablepossibilitythatthecompany’scontrolswillfailtopreventordetecta misstatement of an account balance or disclosure.
2. Whethertheaccounthasahistoryoferrors.
3. Themagnitudeofthepotentialmisstatementresultingfromthedeficiencyorthedeficiencies.
4. Bothaandcarecorrect.
5. Alloftheabovearecorrect.
5.46 LO 5-
5 Which of the following does not accurately summarize auditors’ requirements regarding internal control? comp:marginal text
LO 5-5
Public EntityNonpublic Entity
a. Understanding Yes Yes
b. Documenting Yes Yes
c. Evaluating control risk Yes Yes
d. Test Controls Yes Yes
5.47
LO 5-5
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When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over
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?comp:marginal text LO 5-5
1. Operations.
2. Compliancewithregulations. 3. Financialreporting.
4. Alloftheabove.
5.48 LO 5-
5 When completing the audit of internal controls for a public company, AS 5 requires auditors to report on
comp:marginal text LO 5-5
Management’s Report on Internal ControlAn Audit of Internal Control a. No No
b. Yes No c. No Yes d. Yes Yes
5.49 LO 5-5
When completing the audit of internal controls for a public company, AS 5 requires auditors to test comp:marginal text
LO 5-5
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?1. Operatingeffectivenessonly.
2. Designeffectivenessonly.
3. Bothoperatinganddesigneffectiveness. 4. Neitheroperatingnordesigneffectiveness
5.50 LO 5-5
Which of the following would probably not be considered an indication of a material weakness? comp:marginal text
LO 5-5
1. Evidenceofamaterialmisstatement.
2. Ineffectiveoversightbytheauditcommittee.
3. Immaterialfraudcommittedbyseniormanagement. 4. Overproductionbythemanufacturingplant.
5.51 LO 5-
7 Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?
comp:marginal text LO 5-7
1. Unqualified—nomaterialweaknessesfound.
2. Disclaimerofopinion—unabletoperformallnecessaryprocedures.
3. Disclaimerofopinion—significantdeficienciesexist.
4. Adverse—materialweaknessesexist.
5.52 LO 5-
4 The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the
comp:marginal text LO 5-4
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?1. Authorizationoftransactionsfromthecustodyofrelatedassets. 2. Operationalresponsibilityfromtherecord-keepingresponsibility. 3. Humanresourcesfunctionfromthecontrollershipfunction.
4. Administrativecontrolsfromtheinternalaccountingcontrols.
(AICPA adapted)
5.53 LO 5-
6 Which of the following statements is not true with respect to the auditors’ report on internal control over financial reporting?
comp:marginal text LO 5-6
1. Thereportwillbedatedasofthedateofthefinancialstatements.
2. Thereportwillexpressanopinionontheeffectivenessofinternalcontroloverfinancialreporting.
3. Theauditorwillissueanadverseopinionifoneormorematerialweaknessesexist.
4. Thereportmaybepresentedwiththereportontheentity’sfinancialstatementsasacombined report.
(AICPA adapted)
5.54
LO Page 214 5-
7 If the auditors encounter a significant scope limitation in evaluating a public company’s internal control over financial reporting, which of the following types of opinions on the effectiveness of the company’s internal control over financial reporting would be appropriate?
comp:marginal text LO 5-7
1. Unqualifiedopinionoradverseopinion.
2. Qualifiedopinionoradverseopinion.
3. Unqualifiedopinionordisclaimerofopinion. 4. Disclaimerofopinion.
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?LO 5.55
5-
6
Which of the following information would be included in the introductory paragraph of the auditors’ report on internal control over financial reporting if the report is presented separately from the auditors’ report on the entity’s financial statements?
comp:marginal text LO 5-6
1. Thefactthattheauditorsconductedanauditoftheentity’sfinancialstatements.
2. Thedefinitionofamaterialweaknessininternalcontroloverfinancialreporting.
3. Statementsidentifyingtheresponsibilityoftheauditorsandmanagementforinternalcontrolover financial reporting.
4. Areferencetotheauditors’reportandopinionontheentity’sfinancialstatements.
5.56 LO
5-4 If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must
comp:marginal text LO 5-4
1. Obtainevidencethatthecontrolsselectedfortestingaredesignedeffectivelyandoperated effectively during the entire period of reliance.
2. Assesscontrolriskatlessthanthemaximumforallrelevantassertions.
3. Performonlysubstantiveprocedures.
4. Provideadditionalexamplesofresponsestoassessedfraudrisksrelatingtofraudulentfinancial reporting.
5.57 LO
5-5 When testing a control activity’s operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include
comp:marginal text LO 5-5
1. Inquiryofappropriatepersonnel.
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?2. Readingoverthecompany’scodeofconduct. 3. Reperformanceofthecontrolactivity.
4. Bothaandcarecorrect.
5.58 LO
5-4 Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following:
comp:marginal text LO 5-4
1. Thefrequencyoftheperformanceofthecontrolbythecompanyduringtheperiodbeingaudited.
2. Thelengthoftimethattheauditorisplanningtorelyontheoperatingefficiencyofthecontrol activity.
3. Theexpectedrateofdeviationforacontrolactivity.
4. Therelevanceandreliabilityoftheauditevidencetobeobtainedtotesttheoperatingeffectiveness of a control activity.

5.59 LO
5-4 The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including
comp:marginal text LO 5-4
1. Theauditor’stestingofcontrolsfortheauditofinternalcontrolonapubliccompany. 2. Misstatementsdetectedduringthefinancialstatementaudit.
3. Anycontroldeficienciesidentifiedduringtheaudit.
4. Alloftheabove.

5.60 LO 5-5
Once the auditor detects a control deficiency, which of the following steps must he or she take first? comp:marginal text
LO 5-5
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?1. Performtestsofothercontrolsrelatedtothesameassertionasthecontroldeemedineffective. 2. Evaluatetheseverityofthedeficiencyontheauditor’scontrolriskassessmentforthatassertion. 3. Modifytheplannedsubstantiveproceduresasaresultofthedeficiency.
4. Testthedeficientcontrol,assumingamaximumlevelofrisk.
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Exercises and Problems
All applicable Exercises and Problems are available with McGraw-Hill’s Connect® Accounting

5.61 LO
5- Internal Control Audit Standards. Auditors are required to obtain a sufficient understanding of each
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of the client’s financial statements.
component of a client’s internal control. This understanding is used to assess control risk and plan the audit
comp:marginal text LO 5-2
Required:
1. Forwhatpurposesshouldanauditors’understandingoftheinternalcontrolcomponentsbeusedin planning an audit?
2. Whatisrequiredforanauditteamtoassesscontrolriskbelowthemaximumlevel?
3. Whatshouldanauditteamconsiderwhenseekingtoreducetheplannedassessedlevelofcontrol risk below the maximum?
4. Whatarethedocumentationrequirementsconcerningaclient’sinternalcontrolcomponentsandthe assessed level of control risk?
(AICPA adapted)
5.62 LO
5- Separation of Duties. Your small business client, Phillip’s Computer Repair Shop, is experiencing
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to determine what duties should be assigned to the three remaining employees—Abigail, Bryan, and Chris —to maintain the best separation of duties.
financial difficulties and has to lay off one of its four employees in the accounting area. Phillip has asked you
comp:marginal text
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?LO 5-3
Required:
Assign the following 10 duties to each of the three employees.
1. Reconcilebankstatement.
2. Openmailandlistchecks.
3. PreparechecksforPhillip’ssignature.
4. Preparepayrollchecks.
5. Maintainpersonnelrecords.
6. Preparedepositandtaketobank.
7. Maintainpettycash.
8. Maintainaccountsreceivablerecords.
9. Maintaingeneralledger.
10. Reconcileaccountsreceivablerecordstogeneralledgeraccount.

5.63 LO
5- Types of Audit Tests. Indicate whether each of the following audit procedures is a test of controls, a
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each audit procedure.
substantive test, or dual-purpose test. Next, indicate the financial statement assertion most closely related to
comp:marginal text LO 5-4
1. Vouchrecordedsalesinvoicestosupportingshippingdocuments.
2. Inspectrecordedsalesinvoicesforcreditapproval.
3. Vouchrecordedsalesinvoicespricestotheapprovedpricelist.
4. Sendconfirmationstoallcustomersregardingaccountsreceivable.
5. Recalculatethearithmeticaccuracyoftherecordedsalesinvoices.
6. Comparetheshipmentdateofrecordedsalesinvoiceswiththeinvoicerecorddate.
7. Tracerecordedsalesinvoicestopostinginthegeneralledgercontrolaccountandinthecorrect
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?customer’s account.
8. Selectasampleofshippingdocumentsfromtheshippingdepartmentfileandtraceshipmentsto recorded sales invoices.
9. Scanrecordedsalesinvoicesandshippingdocumentsformissingnumbersinsequence.
10. Vouchsalesinvoicesandshippingdocuments.
11. Evaluatetheadequacyoftheallowancefordoubtfulaccounts.
12. Obtainfinancialstatementsorcreditreportsonlargepastdueaccountsandinquireofthecredit manager about collections.
13. Calculateanestimateoftheallowancefordoubtfulaccountsusingpriorrelationsofwrite-offsand sales.

5.64
LO Page 216 5-
Impact of Sarbanes-Oxley Act. Your long-time client, Central Office Supply, has been rapidly
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expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has
heard that costs of operating a public company have increased significantly as a result of the Sarbanes- Oxley Act. Puckett is particularly concerned with reports that audit fees have doubled because of internal control provisions of the act and PCAOB Auditing Standard No. 5. Puckett has asked you to explain the possible effects on the audit of complying with the requirements of Sarbanes-Oxley.
comp:marginal text
LO 5-5
Required:
Draft a letter to Puckett outlining the changes in the company’s responsibilities for internal control and changes in the audit due to Sarbanes-Oxley and PCAOB Auditing Standard No. 5.
5.65 LO
5-4 Internal Control Questionnaire Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from the payroll processing internal control questionnaire in Exhibit 5.11.
comp:marginal text LO 5-4
1. Arenamesofterminatedemployeesreportedinwritingtothepayrolldepartment?
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?2. Areauthorizationsfordeductionssignedbytheemployeeonfile?
3. Isthereatimekeepingdepartment(function)independentofthepayrolldepartment?
4. Aretimekeepingandcostaccountingrecords(suchashours,dollars)reconciledwithpayroll department calculations of hours and wages?
Required:
For each of the four preceding questions:
1. Identifytheassertiontowhichthequestionapplies.
2. Specifyonetestofcontrolsanauditorcouldusetodeterminewhetherthecontrolwasoperating effectively.
3. Provideanexampleofanerrororfraudthatcouldoccurifthecontrolwereabsentorineffective.
4. Identifyasubstantiveauditingprocedurethatcoulddetecterrorsorfraudsthatcouldresultfromthe absence or ineffectiveness of the control items.

5.66 LO
5- Obtaining a “Sufficient” Understanding of Internal Control. The 12 partners of a regional public
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all certainly appreciate the firmwide policies set up by Martin and Smith, especially in connection with the
accounting firm met in special session to discuss audit engagement efficiency. Jones spoke up, saying, “We
audits of the large clients that have come our way recently. Their experience with a large public accounting firm has helped build our practice. But I think the standard policy of conducting reviews and tests of internal control on all audits is raising our costs too much. We can’t charge our smaller clients fees for all of the time the staff spends on this work. I would like to propose that we give engagement partners discretion to decide whether to do a lot of work on assessing control risk. I may be old-fashioned, but I think I can finish a competent audit without it.” Discussion on the subject continued but ended when Martin said, with some emotion, “But we can’t disregard generally accepted auditing standards like Jones proposes!”
comp:marginal text
LO 5-4
Required:
What do you think of Jones’s proposal and Martin’s view of the issue? Discuss.
5.67 LO
5- Fraud Opportunities. Simon Blfpstk Construction Company has two divisions. The president (Chris
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modular manufacturing division to John Gault. The company has a competent accounting staff and a full- time internal auditor. Unlike Simon’s procedures, however, Gault and his secretary handle all bids for
Simon) manages the roofing division. Simon delegated authority and responsibility for management of the
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?manufacturing jobs, purchase all materials without competitive bids, control the physical inventory of materials, contract for shipping by truck, supervise the construction activity, bill the customer when the job is finished, approve all bid changes, and collect the payment from the customer. With Simon’s tacit approval, Gault has asked the internal auditor not to interfere with his busy schedule.
comp:marginal text
LO 5-4
Required:
Discuss this situation in terms of internal control and identify frauds that could occur.
5.68
LO Page 217 5-4
Internal Control Questionnaire Items: Errors that Could Occur from Control Weaknesses. Refer to the internal control questionnaire on a payroll system (Exhibit 5.11).
comp:marginal text LO 5-4
1. Assumethattheanswertoeachquestionisno.Prepareatablematchingthequestionstoerrorsor frauds that could occur because of the absence of the control. Your column headings should be
QuestionPossible Error or Fraud Due to Weakness
2. Whichcontrolsarepreventivecontrolsandwhicharedetective?
5.69 LO
5- Reports on Internal Control over Financial Reporting (Report Modifications). For each of the
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modified from the standard, unqualified report. Do not write the actual reports.
following situations, describe how the auditors’ report on internal control over financial reporting would be
comp:marginal text LO 5-7
1. Theauditorshaveidentifiedamaterialweaknessintheprocessingofsalestransactions.
2. Becausearelativelyshortperiodoftimehaspassedsinceacontrolweaknesswasremediated,the auditors do not believe that sufficient evidence can be obtained with respect to the operating
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?effectiveness of the entity’s internal control over financial reporting.
3. Componentauditorshaveauditedasignificantcomponentofthegroupfinancialstatements,including internal control over financial reporting relating to that component. They did not find a material weakness in internal control, and the group auditor believes the component auditor’s work can be relied on.
4. Theauditorsbelievethattheentity’smanagementhasnotadequatelydisclosedamaterialweakness in its internal control over financial reporting.
5.70 LO
5- Role of a Board of Directors in Internal Control. Assume that the local newspaper just ran the
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lavish expenses, concert tickets, and even gentlemen’s club tabs
following headline and article: Audit Results: Airport executives from Kentucky racked up $500K in
comp:marginal text LO 5-3

LEXINGTON, Ky. (AP)—A small commercial airport in Kentucky—and the taxpayers who support it— picked up top executives’ tabs in recent years for Hannah Montana concert tickets, Nintendo Wii video game bundles and even a $4,400 gentlemen club check, according to a state auditor’s report.
The report released Wednesday outlines indulgences ranging from pricey electronics and exercise equipment to lavish meals and champagne. In three years, officials tallied more than $500,000 in questionable personal expenses. [Author’s note: general fund expenses were approximately $10,000,000 annually.]
Kentucky Auditor Crit Luallen said the former executive director at Lexington’s Blue Grass Airport created a culture of wasteful spending so vast, employees sometimes were paid twice for the same expense and used airport credit cards as if they were personal checkbooks.
“I don’t think we have ever seen an audit where so many different individuals involved in the management of a public agency abused the trust with such arrogance and lack of ethical standards,” she said.
Luallen says she has forwarded the case to the Kentucky attorney general, the U.S. attorney’s office and the FBI.
Although the audit only covered the past three years, it does refer to one of the more glaring examples reported by the Herald-Leader: a $4,400 charge Michael Gobb and two other directors incurred at a Dallas strip club in 2004.
The charge, which appeared on the credit card statement of the airport’s director of planning, was listed as going to Millennium Restaurant. The word “marketing” was handwritten next to the amount. The Associated Press obtained that receipt and others through an open records request.
The audit found that airport employees also used the coffers for tuxedos and other expensive clothing; more
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?than 400 DVDs—many of them currently missing—for the internal airport library; $14,000 in holiday hams given out as gifts; and $7,400 for a NASCAR driving experience excursion for staff described as “team building.”
More than 92 percent of the things Gobb charged to his airport card lacked proper documentation, Luallen said.
While Luallen acknowledged that Gobb was responsible for the free-spending culture, she said the board and its public accounting firm should have supervised the airport more closely.
Excerpted from Ky. Airport Execs Racked Up Lavish Expenses, Jeffrey McMurray, Associated Press, February 26, 2009.
Required:
Page 218
1. Discusstheroleoftheboardofdirectorsinmonitoringthebehaviorofachiefexecutiveofficer.
2. Ifthechiefexecutiveofficerhassubordinatesincurexpensesthatheorsheapproves,howcanthe board prevent abuse?
3. Shouldexternalauditorsbeexpectedtodetectabusessuchasthese?
4. Howshouldtheuseofcreditcardsbecontrolled?
5.71 LO
5- Reports on Internal Control over Financial Reporting (Identify Report Deficiencies). Sorrell,
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procedures and other tests indicated that Van Dyke’s financial statements were prepared in accordance
CPA, is auditing the financial statements of Van Dyke as of December 31, 2014. Sorrell’s substantive
with generally accepted accounting principles and, accordingly, Sorrell expressed an unqualified opinion on those financial statements. Because Van Dyke’s securities are registered with the Securities and Exchange Commission, Van Dyke is subject to the reporting requirements of AS 5. During its assessment of internal control over financial reporting, Van Dyke’s management identified material weaknesses related to (1) the method of accounting for sales commissions and (2) separation of duties related to purchase transactions. Sorrell was able to gather sufficient evidence and did not encounter any limitations with respect to the evaluation of Van Dyke’s internal control over financial reporting. Sorrell prepared the following draft report on Van Dyke’s internal control over financial reporting:

comp:marginal text LO 5-7
Required:
Identify the deficiencies in the audit report drafted by Sorrell. Group the deficiencies by paragraph and in the order in which they appear. Do not rewrite the report. Cite the relevant sections from the professional
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?standards.
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Van Dyke:
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?We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Van Dyke has not maintained effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO criteria). Van Dyke’s management is responsible for assessing the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Two material weaknesses were identified in the design and operation of internal controls over the accounting for sales commissions and separation of duties related to purchases of inventory. Given the nature of the transactions and processes involved and the potential for a misstatement to occur as a result of the internal control deficiencies existing on December 31, 2014, we have concluded that there is more than a remote likelihood that a material misstatement in the annual or interim financial statements would not have been prevented or detected by internal controls.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 financial statements.
In addition to the material weaknesses noted above, we identified several deficiencies in internal control over financial reporting that we deemed to be less significant than a material weakness. These deficiencies
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?have been separately communicated to Van Dyke’s management.
In our opinion, because Van Dyke has not maintained an effective internal control over financial reporting, we are unable to evaluate management’s assessment that Van Dyke did not maintain effective internal control over financial reporting as of December 31, 2014. Also in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Van Dyke has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Van Dyke as of December 31, 2014 and 2013, and related statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.
5.72
LO 5-3
5.73 LO

5-1 Mini-Case: Effect of Internal Control Evaluation on Auditors’ Fees. Refer to the mini-case “How Much Are Auditors Paid?” shown on page C23 and respond to Questions 5 and 6.
comp:marginal text LO 5-1
5.74 LO 5-8
Kaplan CPA Exam Simulation: Internal Control Matters. comp:marginal text
LO 5-8
Page 219
Mini-Case: Control Environment. Refer to the mini-case “Unhealthy Accounting at HealthSouth” shown on page C14 and respond to Questions 3 and 4.
comp:marginal text LO 5-3
Sorrell, CPA December 31, 2014
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Go to the Kaplan website link at www.mhhe.com/louwers6e, click on Audit Client Letter (Internal Control Matters) AUD TBS, and complete your answer.
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