25-11
25–24 (continued)
■ A material increase in the gross margin percent
■ A material decrease in allowance for uncollectible accounts
divided by accounts receivable
sales cutoff procedures
e. The achieved level of assurance for audits is ordinarily much higher
25–25 The following changes would need to be made to Jennifer’s draft of the
review report:
A report title should be added:
“Report of Independent Registered Public Accounting Firm”
Changes to Introductory Paragraph:
The financial statements reviewed would include those
prepared for the three–month period and nine–month
period ending at the end of the third quarter. The first
sentence needs to reference both the three–month and
nine–month financial statements.
testing of internal controls.
Changes to Middle Paragraph:
The review would be conducted in accordance with PCAOB
standards, not the SSARS standards issued by the AICPA.
correct standards.
25-12
25–25 (continued)
scope than an audit in accordance with PCAOB standards.
A final sentence should be added at the end of the middle
Changes to Final Paragraph:
accompanying interim financial statements.”
The financial reporting framework used by management to
present the financial statements would be generally accepted
Note: The report would include the audit firm’s signature and be dated
as of the end of the completion of the review procedures.
25–26 Note: The company does not archive its Sustainability Reports on its
Web site. While there are other sources for locating corporate sustainability
reports, we suggest you have students locate the most recent Sustainability
Report posted at the Home Depot Web Site under the “Corporate
Responsibility” tab. The topics addressed in this problem are likely to continue
25-13
25–26 (continued)
a. The Sustainability Integration System assigns leaders to each
of these areas of focus: Energy, Water, Information
Technology, Supply Chain, Stores, and Packaging.
Collectively, they are working to make structured
emissions, sustainable operations, sustainable product
assortment, and supply chain impact. The company is
focused on the biggest impacts like energy use, rainwater
b. During 2014, the company recycled 725,000 pounds of CFL bulbs,
940,000 pounds of rechargeable batteries, and over 107,000 lead
per year per store.
c. Users who would like to rely on many of the claims included by
management in the Home Depot sustainability report may desire
some assurance that the assertions made are accurate and
reliability of those assertions.
d. Because some of the other assertions made by management in
their report are based on scientific data, an independent
measured based on information provided by third-party energy
providers (e.g., power company billings). However, assertions
related to the company’s efforts that led to a reduction of 3.6
million tons of Green House Gas (GHG) emissions from
25-14
25-26 (continued)
energy costs through energy saving products” may be difficult to
verify.
25–27 a. When clients outsource some or all of their IT needs to an
independent computer service organization rather than maintain an
internal IT function or data center, their auditors may face difficulty
when obtaining an understanding of the client’s internal control over
financial reporting because many of the controls reside at the
b. When clients outsource some or all of their IT needs to an
independent computer service organization, their auditors could
examine a Type 1 SOC 1 report on management’s description of a
service organization’s system and the suitability of the design of
controls to obtain information about the design of controls at the
the description is fairly presented. In making that assessment, the
service auditor evaluates whether management used suitable
criteria in preparing and presenting the service organization’s
system description. The service auditor also performs procedures
prevent achievement of control objectives.
25-15
25–27 (continued)
controls at the service organization, in addition to procedures
performed in the Type 1 engagement. The service auditor’s Type 2
report contains the two opinions about the description and
d. SOC 1 reports address internal controls over financial reporting.
But, in this situation, management of a service organization that
processes quality control reports related to the user entity’s
Relevant to Security, Availability, Processing Integrity,
Confidentiality, or Privacy. A SOC 2 report is intended to meet the
needs of a broad range of users who need information and
assurance about controls at a service organization that affect the
security, availability, and processing integrity of the systems the
systems.
25–28 a. It would be acceptable to undertake the engagement only if all of
the following conditions exist:
The accountant has sufficient competence to properly
complete an examination of the forecasted financial
statements.
Statements.
The accountant believes a reasonably accurate forecast is
practicable in the circumstances.
25-16
25–28 (continued)
the report, again to avoid a misunderstanding later.
c. The primary information the CPA firm will need to help in completing
the forecast are the following:
for performing the audits.
Information about the offer he has made for the new business
and the offer he has received for the existing assets.
Because the financial statements will be a forecast, and not
d. The report will be a report on a forecast and will include the
following components:
An identification of the prospective financial statements
presented.
presentation guidelines and that the underlying assumptions
provide a reasonable basis for the forecast.
A caveat that the prospective results may not be achieved.
25–29 a. We have audited, in accordance with generally accepted auditing
standards in the United States of America, the financial statements
25-17
25–29 (continued)
noncompliance. Accordingly, had we performed additional procedures,
other matters may have come to our attention regarding the
Company’s noncompliance with the above–referenced provisions
of the indenture insofar as they relate to accounting matters.
This report is intended solely for the information and use
b. The supplemental report would have to state that the company
was not in compliance with the provisions of the indenture because
net earnings did not exceed dividends by at least $1,000,000.
indenture and potential default cannot be dismissed as being
immaterial.
d. Contingencies due to a lawsuit may affect the liabilities of the
supplemental report.
25–30 a. Jones will probably have to conduct additional audit tests in order
to report on these items individually. It will be necessary for Jones
to accumulate additional evidence because the materiality of the
individual items is much lower than for the overall financial statements.
The additional evidence will enable the auditor to obtain a higher
25-18
25–30 (continued)
b. The following additional tests are likely to be needed before the
special report can be issued:
Sales
Cutoff tests of sales may be expanded
Depending upon the previous results, tests of controls and
substantive tests of transactions for sales may be increased
Net fixed assets
used
Recalculate depreciation
Increase vouching of additions in the current year
Inventory
It should be noted that the extent of these tests depends on the
results attained in these areas in the audit, the amount of
evidence gathered in the audit, and the client’s internal controls.
The audit procedures above are vague because of this and are
satisfy the objective by alternative methods.
c. To answer this question, students will need to access the AICPA
auditing standards to find the specific reporting guidance. The
following solution is based on Exhibit A – Illustration 4 contained in
Items of a Financial Statement.”
We have audited the schedules of sales, net fixed assets, and
inventory valued at FIFO (as defined in the lease agreement dated
between (lessor) and Sarack Lumber Supply Co.) of
Sarack Lumber Supply Co. for the year–ended .
25-19
25–30 (continued)
The procedures selected depend on the auditor’s judgment,
including the assessment of risks of material misstatements of the
schedules, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
significant accounting estimates made by management, as well as
evaluating the overall presentation of the schedule.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
the basis of accounting. The schedules were prepared by Sarack
Lumber Supply Co. on the basis of the financial reporting provisions
contained in the lease agreement referred to above, which is a basis
of accounting other than accounting principles generally accepted in
modified with respect to this matter.
Our report is intended solely for the information and use of