Conversations between the board of directors of Acme Inc. and

Conversations between the board of directors of Acme Inc. and the engagement partner of the audit, Angelo Del Santo, have revealed that Acme uses three law firms. Ball & Partners performs all legal work related to property transfers, mortgages, and leases. Brown & Associates handle all employment matters, such as claims for unfair dismissal and complex employment contracts. Zimmerman & Co. are retained for all other matters, such as agreements relating to products and suppliers and any international matters.

Required

a. Discuss the information that Angelo wants to obtain from the attorneys and how this information is obtained.

b. What procedures could Angelo perform to discover if any other law firms have performed work for Acme during the fiscal year?

Fabrication Holdings Inc. (FH) has been a client of KFP

Fabrication Holdings Inc. (FH) has been a client of KFP LLP for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year-end June 30, 2022. During March 2022, you are completing the risk assessment for PPE, which is one of FH’s most material accounts. You are also aware that FH has made a large investment in a new manufacturing process to place itself in a more competitive position. Your analytical procedures indicate an increase in acquisitions of PPE.

Required

a. What is the key assertion at risk for the PPE additions? Why is it at risk? Explain.

b. Identify the relevant substantive tests of details that would be appropriate to address the assertion at risk identified in (a) above.

c. How would your answers to the previous questions change if the PPE additions had been manufactured in-house by FH’s engineers and toolmakers, rather than purchased?

The following transactions and events relate to financing transactions at

The following transactions and events relate to financing transactions at Weber Inc.

1. Declare cash on common stock.

2. Issue bonds.

3. Pay bond interest.

4. Purchase 500 shares of treasury stock.

5. Pay cash declared in 1 above.

6. Issue additional for cash.

7. Accrue bond interest payable at year-end.

8. Redeem outstanding bonds.

9. Establish appropriation for bond retirement.

10. Announce a two-for-one stock split.

Required

a. Identify the substantive test that should verify each transaction or event.

b. For each test, indicate the financial statement assertion(s) to which it pertains.

c. Indicate the source of evidence obtained from the substantive test (i.e., outside party, client-generated, auditor personal knowledge or observation, documented, oral. (Use a tabular format for your answers with one column for each part.)

A. Analysis: Explain your responsibilities with respect to the kitchen

a. Analysis: Explain your responsibilities with respect to the kitchen fire.

b. Evaluation: Recommend how this event should be handled in the financial statements.

Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-for-profit hospital. The fiscal year-end for Brookwood Pines is June 30. You are the audit partner reviewing the working papers for the BPH audit for the fiscal year end June 30, 2023. Today is August 2, 2023, and it is expected that fieldwork will be completed in three weeks.

BPH provides medically necessary care to patients, regardless of their ability to pay. Both uninsured and underinsured patients are offered discounts of up to 100% of charges based on their income as a percentage of the federal poverty level guidelines. BPH does not pursue collection of these accounts; therefore, they are not reported in patient service revenue and accounts receivable. The cost of providing the charity care is included in operating expenses.

BPH’s investments consist of mutual funds, common equities, corporate and U.S. government debt issues, state and municipal government debt issues, and trusts. A majority of the investments are the result of charitable contributions to the hospital by generous donors. Earnings from the investments are used to cover the costs of the charity care. BPH is also eligible for certain government grants to help cover the costs of the charity care.

During your review, you note that during the third and fourth quarters the financial markets performed well and BPH recorded strong returns for its equity investments. However, beginning toward the end of the fourth quarter through today, the financial markets have taken a hit. Enacted future tax law changes, increasing interest rates, higher unemployment, and trade conflicts with other countries are negatively impacting the economy and the financial markets. Analysts are predicting a continued drop in the overall market performance and a bear market for some time. Since BPH relies on investment returns to cover the costs of charity care, you consider how smaller investment returns could impact BPH’s ability to operate. Also, in times of economic downturns, individuals may not be as charitable. Therefore, BPH could see a drop in donations.

Another situation that is on your mind is a kitchen fire that occurred at BPH last week. Thankfully no one was seriously injured, but BPH did not have full insurance coverage for the accident. The kitchen was badly damaged and had to be shut down along with the cafeteria seating area used for hospital visitors. Until the kitchen can be repaired, BPH is paying an outside catering service to deliver meals daily to patients and employees only. Visitors can no longer purchase items from the cafeteria. You are concerned that negative publicity from the kitchen fire incident could lead to decreased revenues if physicians decide to contract with a competing hospital.

You spoke with BPH’s controller yesterday about the fire incident. The controller said they do have the funds to repair the kitchen and are currently accepting bids from contractors for the repair work. They hope to have a contractor selected by next week so work can get started quickly. They are anticipating having the kitchen open in about six weeks. The controller did express concern over the added expense of the repairs and the high cost of having an outside service provide daily meals to patients and employees. He also said they have received concerned calls from many of the doctors who use BPH for their patient services. BPH administration is working very hard at “damage control” to assure the doctors that the hospital is safe and abiding by all codes required by the state department of health and hospitals.

Evaluation: You are drafting a document with items to discuss

Evaluation: You are drafting a document with items to discuss with BPH’s audit committee closer to the end of the audit. In addition to the kitchen fire incident, what else should you communicate to the audit committee?

Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-for-profit hospital. The fiscal year-end for Brookwood Pines is June 30. You are the audit partner reviewing the working papers for the BPH audit for the fiscal year end June 30, 2023. Today is August 2, 2023, and it is expected that fieldwork will be completed in three weeks.

BPH provides medically necessary care to patients, regardless of their ability to pay. Both uninsured and underinsured patients are offered discounts of up to 100% of charges based on their income as a percentage of the federal poverty level guidelines. BPH does not pursue collection of these accounts; therefore, they are not reported in patient service revenue and accounts receivable. The cost of providing the charity care is included in operating expenses.

BPH’s investments consist of mutual funds, common equities, corporate and U.S. government debt issues, state and municipal government debt issues, and trusts. A majority of the investments are the result of charitable contributions to the hospital by generous donors. Earnings from the investments are used to cover the costs of the charity care. BPH is also eligible for certain government grants to help cover the costs of the charity care.

During your review, you note that during the third and fourth quarters the financial markets performed well and BPH recorded strong returns for its equity investments. However, beginning toward the end of the fourth quarter through today, the financial markets have taken a hit. Enacted future tax law changes, increasing interest rates, higher unemployment, and trade conflicts with other countries are negatively impacting the economy and the financial markets. Analysts are predicting a continued drop in the overall market performance and a bear market for some time. Since BPH relies on investment returns to cover the costs of charity care, you consider how smaller investment returns could impact BPH’s ability to operate. Also, in times of economic downturns, individuals may not be as charitable. Therefore, BPH could see a drop in donations.

Another situation that is on your mind is a kitchen fire that occurred at BPH last week. Thankfully no one was seriously injured, but BPH did not have full insurance coverage for the accident. The kitchen was badly damaged and had to be shut down along with the cafeteria seating area used for hospital visitors. Until the kitchen can be repaired, BPH is paying an outside catering service to deliver meals daily to patients and employees only. Visitors can no longer purchase items from the cafeteria. You are concerned that negative publicity from the kitchen fire incident could lead to decreased revenues if physicians decide to contract with a competing hospital.

You spoke with BPH’s controller yesterday about the fire incident. The controller said they do have the funds to repair the kitchen and are currently accepting bids from contractors for the repair work. They hope to have a contractor selected by next week so work can get started quickly. They are anticipating having the kitchen open in about six weeks. The controller did express concern over the added expense of the repairs and the high cost of having an outside service provide daily meals to patients and employees. He also said they have received concerned calls from many of the doctors who use BPH for their patient services. BPH administration is working very hard at “damage control” to assure the doctors that the hospital is safe and abiding by all codes required by the state department of health and hospitals.

Information gathering: If Leo & Lee does not have an

Information gathering: If Leo & Lee does not have an internal qualified individual to serve as engagement quality control reviewer, what options does the firm have? Research AS 1220 to provide a full response (www.pcaobus.org). What characteristics should the engagement quality control reviewer possess? Describe the actual engagement quality control review process, such as when it is conducted and the primary tasks of the reviewer.

Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI’s products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured.

The auditors are nearing the final wrap-up stages of the audit for the year ended June 30, 2023. The following table shows final financial information for all four quarters of fiscal year end June 30, 2023 (amounts in millions).

In October 2022, MSI installed a new cloud-based inventory costing system. During interim work, the audit team found some errors with the costing calculations in the new system, which led to errors in recommended sales prices used in MSI’s competitive bidding process. There were also problems with proper inventory cutoff at year-end. Some raw materials that were in transit were not recorded in inventory when they should have been. The audit team has a meeting scheduled for the afternoon to discuss the findings and next steps to wrap up the engagement.

For the past five years, the engagement quality control reviewer was Sally Pickering, a partner with Leo & Lee. Sally retired three months ago. For the past month, the firm has been considering who would take Sally’s place as the engagement quality control reviewer for the MSI audit. The industry and operations of MSI are very specialized. Unfortunately, no other partner in the firm, other than the engagement partner on the audit team, has experience in the industry or with MSI.

Evaluation and conclusions: Evaluate whether the recall qualifies as a

Evaluation and conclusions: Evaluate whether the recall qualifies as a subsequent event and its impact on the 2022 financial statements, if any.

King Companies, Inc. (KCI) is a private company that owns five auto parts stores in urban Los Angeles, California. KCI has gone from two auto parts stores to five stores in the last three years, and it plans continued growth. Eric and Patricia King own the majority of the shares in KCI. Eric is the chairman of the board of directors of KCI and CEO, and Patricia is a director as well as the CFO. Shares not owned by Eric and Patricia are owned by friends and family who helped the Kings get started. Eric started the company with one store after working in an auto parts store. To date, he has funded growth from an inheritance and investments from a few friends. Eric and Patricia are thinking about expanding by opening three to five additional stores in the next few years.

KCI employs 20 full-time staff. These workers are employed in store management, sales, parts delivery, and accounting. About 40% of KCI’s business is retail walk-in business, and the other 60% is regular customers where KCI delivers parts to their locations and bills these customers on account. During peak periods, KCI also uses part-time workers.

In mid-February 2023, while the December 31, 2022, audit was nearing the final wrap-up stage, KCI was contacted by the manufacturer of its most popular line of brake pads and rotors. The manufacturer notified KCI of a major defect recently discovered with its brake pads and rotors produced during August 2022 through November 2022. Several deadly car accidents have been attributed to the faulty brake parts, and the manufacturer is moving as quickly as possible to recall the affected parts. The manufacturer stated that KCI should pull the affected products off its shelves immediately and notify as many customers as possible who may have purchased the defective product. KCI management acts quickly and starts looking through its sales records to see which customers purchased the affected parts. KCI also contacts its attorney about the situation to begin discussions on how this might adversely affect KCI.

On October 14, Montevista Inc. made deposits with an overseas

On October 14, Montevista Inc. made deposits with an overseas supplier totaling $500,000 for the production of specialty items. On October 27, the supplier closed due to political unrest in the country. Montevista hired an international trade consultant to gain more information about the situation. The consultant concluded on January 11 that it is unlikely that the deposit will be recovered. Montevista purchases over $3 million worth of items from this supplier every year. Year-end for the Montevista audit is December 31, and the is due to be signed on February 26.

Required

a. Discuss what audit procedures would be used to gather evidence about this situation.

b. What is the appropriate treatment of this item in the December 31 financial statements?

A. Analysis and evaluation: Evaluate the impacts the costing errors

a. Analysis and evaluation: Evaluate the impacts the costing errors and inventory cutoff errors have on the audit and the assessments of control risk, fraud risk, and materiality. Does your evaluation change depending on whether the errors are material or immaterial?

b. Evaluation and conclusions: Refer to C3.4 in Chapter 3 in which you calculated planning materiality for MSI based on results from the first two quarters and estimates for the last two quarters. Now that you have the results of all four quarters (see table above), evaluate your calculation of planning materiality from C3.4. Would you have adjusted your planning materiality during the year-end fieldwork based on the actual results from the third and fourth quarters? If so, what would be the adjusted amount? What effect, if any, would your adjustment have on your planned audit procedures for year-end fieldwork?

Mobile Security, Inc. (MSI) has been an audit client of Leo & Lee, LLP for the past 12 years. MSI is a small, publicly traded aviation company based in Cleveland, Ohio, where it manufactures high-tech unmanned aerial vehicles (UAV), also known as drones, and other surveillance and security equipment. MSI’s products are primarily used by the military and scientific research institutions, but there is growing demand for UAVs for commercial and recreational use. MSI must go through an extensive bidding process for large government contracts. Because of the sensitive nature of government contracts and military product designs, both the facilities and records of MSI must be highly secured.

The auditors are nearing the final wrap-up stages of the audit for the year ended June 30, 2023. The following table shows final financial information for all four quarters of fiscal year end June 30, 2023 (amounts in millions).

In October 2022, MSI installed a new cloud-based inventory costing system. During interim work, the audit team found some errors with the costing calculations in the new system, which led to errors in recommended sales prices used in MSI’s competitive bidding process. There were also problems with proper inventory cutoff at year-end. Some raw materials that were in transit were not recorded in inventory when they should have been. The audit team has a meeting scheduled for the afternoon to discuss the findings and next steps to wrap up the engagement.

For the past five years, the engagement quality control reviewer was Sally Pickering, a partner with Leo & Lee. Sally retired three months ago. For the past month, the firm has been considering who would take Sally’s place as the engagement quality control reviewer for the MSI audit. The industry and operations of MSI are very specialized. Unfortunately, no other partner in the firm, other than the engagement partner on the audit team, has experience in the industry or with MSI.

Brad Scarlett is reviewing the results of the subsequent events

Brad Scarlett is reviewing the results of the subsequent events audit procedures. Brad is writing a report for the audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss them. The issue will be whether the should be amended or additional notes included for these subsequent events.

Many of the items are not material and Brad will recommend that no action be taken with respect to these. However, there are several items that Brad believes are material and should be discussed at the meeting. These are:

• The board is planning to issue shares in a private offering on February 15.

• The share issue is to fund the purchase of a 60% stake in another company. The negotiations are in the final stages and although the contract is not yet signed, it will be signed by February 15.

• A lawsuit was filed in court in the week after year-end claiming damages for illness allegedly caused by chemicals used at a subsidiary company’s manufacturing plant in the 2000s. This is the tenth such lawsuit filed and the client has denied responsibility in all cases because it was unreasonable to believe at that time that these chemicals had adverse health effects. The claimant has new scientific evidence that counters this defense.

• The review of subsequent cash receipts has revealed that several of the receivables that were considered doubtful have now been paid.

The year-end for the company is December 31 and the is due to be signed on February 20.

Required

For each item, discuss what type of subsequent event it is and the appropriate treatment in the financial statements.