Solved by verified expert :3-27 (Objectives 3-1, 3-2, 3-4, 3-6, 3-7) Patel, CPA, has completed the audit
of the financial statements of Bellamy Corporation as of and for the year ended
December 31, 2011. Patel also audited and reported on the Bellamy financial
statements for the prior year. Patel drafted the following report for 2011.
We have audited the balance sheet and statements of income and
retained earnings of Bellamy Corporation as of December 31, 2011. We conducted
our audit in accordance with generally accepted accounting standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of misstatement.
We believe that our audits provide a reasonable basis for our
In our opinion, the financial statements referred to above present
fairly the financial position of Bellamy Corporation as of December 31, 2011,
and the results of its operations for the year then ended in conformity with
generally accepted auditing standards, applied on a basis consistent with those
of the preceding year.
• Bellamy is presenting comparative financial
• Bellamy does not wish to present a statement
of cash flows for either year.
• During 2011, Bellamy changed its method of
accounting for long-term construction contracts and properly reflected the
effect of the change in the current year’s financial statements and restated
the prior year’s statements. Patel is satisfied with Bellamy’s justification
for making the change. The change is discussed in footnote 12.
• Patel was unable to perform normal accounts
receivable confirmation procedures, but alternative procedures were used to
satisfy Patel as to the existence of the receivables.
• Bellamy Corporation is the defendant in a
litigation, the outcome of which is highly uncertain. If the case is settled in
favor of the plaintiff, Bellamy will be required to pay a substantial amount of
cash, which might require the sale of certain fixed assets. The litigation and
the possible effects have been properly disclosed in footnote 11.
• Bellamy issued debentures on January 31, 2010,
in the amount of $10 million. The funds obtained from the issuance were used to
finance the expansion of plant facilities. The debenture agreement restricts
the payment of future cash dividends to earnings after December 31, 2015.
Bellamy declined to disclose this essential data in the footnotes to the
a. Identify and explain any items included in
“Other Information” that need not be part of the auditor’s report.
Explain the deficiencies in Patel’s report as drafted.*
3-32 (Objectives 3-1, 3-2, 3-4) The following tentative auditor’s report was drafted by a
staff accountant and submitted to a partner in the accounting firm of Better
& Best, CPAs:
To the Audit Committee of American Broadband, Inc.
We have examined the consolidated balance sheets of American
Broadband, Inc. and subsidiaries as of December 31, 2011 and 2010, and the
related consolidated statements of income, retained earnings, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
Our audits were made in accordance with auditing standards
generally accepted in the United States of America as we considered necessary
in the circumstances. Other auditors audited the financial statements of
certain subsidiaries and have furnished us with reports thereon containing no
exceptions. Our opinion expressed herein, insofar as it relates to the amounts
included for those subsidiaries, is based solely upon the reports of the other
As fully discussed in Note 7 to the financial statements, in
2011, the company extended the use of the last-in, first-out (LIFO) method of
accounting to include all inventories. In examining inventories, we engaged Dr.
Irwin Same (Nobel Prize winner 2009) to test check the technical requirements
and specifications of certain items of equipment manufactured by the company.
In our opinion, the financial statements referred to above
present fairly the financial position of American Broadband, Inc. as of
December 31, 2011, and the results of operations for the years then ended, in
conformity with accounting principles generally accepted in the United States
To be signed by Better & Best, CPAs
March 1, 2012
deficiencies in the staff accountant’s tentative report that constitute
departures from the generally accepted standards of reporting.*
24-26 (Objective 24-1, 24-2) Elizabeth Johnson, CPA, has completed the audit of notes
payable and other liabilities for Valley River Electrical Services and now
plans to audit contingent liabilities and commitments.
a. Distinguish between contingent liabilities and
commitments and explain why both are important in an audit.
Describe how Johnson’s testing in phases I-III of the audit of notes payable
might help her obtain evidence about the four presentation and disclosure
c. Identify three useful audit procedures for
uncovering contingent liabilities that Johnson will likely perform in the
normal conduct of the audit, even if she had no responsibility for uncovering
Identify three other procedures Johnson is likely to perform specifically for
the purpose of identifying undisclosed contingencies.
24-28 (Objective 24-3) In analyzing legal expense for the Boastman Bottle
Company, Mary Little, CPA, observes that the company has paid legal fees to
three different law firms during the current year. In accordance with her CPA
firm’s normal operating practice, Little requests standard attorney letters as
of the balance sheet date from each of the three law firms.
last day of field work, Little notes that one of the attorney letters has not
yet been received. The second letter contains a statement to the effect that
the law firm deals exclusively in registering patents and refuses to comment on
any lawsuits or other legal affairs of the client. The third attorney’s letter
states that there is an outstanding unpaid bill due from the client and
recognizes the existence of a potentially material lawsuit against the client
but refuses to comment further to protect the legal rights of the client.
a. Evaluate Little’s approach to sending the
attorney letters and her follow-up on the responses.
should Little do about each of the letters?
25-22 (Objective 25-1) You are doing a review services and related tax work
engagement for Murphy Construction Company. You have made extensive inquiries
of management about their financial statements and have concluded that
management has an excellent understanding of its business and is honest, but
lacking in knowledge of technical accounting issues. In doing the review you
determine the following:
Repairs and maintenance expense has increased significantly compared to the
preceding year. The president states that this seems to have been a year with a
lot of repairs, in part because their equipment is getting older.
Property tax expense is the same as last year even though Murphy purchased a
new building, including the land. The president states that there are no real
estate taxes on the new building and land until next year.
on your knowledge of the construction industry you know that the pipes Murphy
uses in construction have had a decrease in selling price to construction
companies near the end of the current year. The president states that even
though they have a large pipe inventory it will all be used in the next year or
two, so the current price doesn’t matter because they won’t need to buy any.
Accounts receivable has increased almost 25% compared to the previous year, but
the allowance for uncollectible accounts has stayed the same. The president
states that even though receivables have increased, they still expect
uncollectible accounts to be less than the stated allowance.
discussions with the president you determine that there is a material uninsured
lawsuit against the company from a former customer. The president believes it
is a frivolous lawsuit and will not permit a footnote about it for fear that it
will result in similar lawsuits from other customers.
a. Beyond inquiries and analytical procedures,
what are the accountant’s responsibilities in performing review service
Describe what you should do in each of the preceding situations, assuming each
one is material.