Chapter 2

ASSIGNMENT FOR CHAPTER 2
I. Each of the following situations involves possible violations of the AICPA

Code of Professional Conduct. For each situation, state whether it is a violation of
the Code. In those cases in which it is a violation, explain the nature of the
violation and the rationale for the existing rule.
a. The audit firm of Miller and Yancy, CPAs, has joined an association of other
CPA firms across the country to enhance the types of professional services the firm
can
provide. Miller and Yancy share resources with other firms in the association,
including audit methodologies, audit manuals, and common IT systems for billing and
time
reporting. One of the partners in Miller and Yancy has a direct financial interest in
the audit client of another firm in the association.
b. Connor Bradley is the partner in charge of the audit of Southern Pinnacle
Bank.
Bradley is in the process of purchasing a beach condo and has obtained mortgage
financing from Southern Pinnacle.
c. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Crowe’s
nondependent parents also own shares in Polex, and Polex is not an attest client of
Crowe’s firm. The amount of her parent’s ownership in Polex is not significant to
Crowe’s net worth.
d. Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, he left the
firm to become the chief operating officer of Lacy Foods, Inc., which is an audit client
of Bass and Sims. In his new role, Stokely has no responsibilities for financial
reporting. Bass and Sims made significant changes to the audit plan for the upcoming
audit.
e. Odonnel Incorporated has struggled financially and has been unable to pay the
audit fee to its auditor, Seale and Seale, CPAs, for the 2014 and 2015 audits. Seale and
Seale is currently planning the 2016 audit.
f. Jessica Alma has been serving as the senior auditor on the audit of Carolina
BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina
BioHealth extended her an offer of employment to join the internal audit department
as an audit manager. When the discussions with Carolina BioHealth began, Jessica
informed her office’s managing partner and was removed from the audit engagement.
g. Morris and Williams, a regional CPA firm, is providing information systems
consulting to one of their publicly traded audit clients. They are assisting in the
implementation of a new financial reporting system selected by management.
h. Audrey Glover is a financial analyst in the financial reporting department of
Technologies International, a privately held corporation. Audrey was asked to prepare
several journal entries for Technologies International related to transactions that have
not yet occurred. The entries are reflected in financial statements that the company
recently provided to the bank in connection with a loan outstanding due to the bank.
i. Austin and Houston, CPAs, is performing consulting services to help
management of McAlister Global Services streamline its production operations.
Austin and Houston structured the fee for this engagement to be a fixed percentage of
costs savings that result once the new processes are implemented. Austin and Houston
perform no other services for McAlister Global.
II. Discuss how each of the following could affect independence of mind and
independence in appearance, and evaluate the social consequence of prohibiting
auditors from doing each one:
1. Owning stock in a client company.
2. Having bookkeeping services for an audit client performed by the same person
who does the audit.
3. Having a spouse who is the chief financial officer of a client company.
4. Having the annual audit performed by the same CPA firm for 10 years in a
row.
5. Having management select the CPA firm.
6. Recommending adjusting entries to the client’s financial statements and
preparing financial statements, including footnotes, for the client.
7. Providing valuation services on complex financial instruments for an audit
client performed by individuals in a department that is separate from the audit
department.
III> The following are independent cases. Determind related management
assertions to each case.
1. Receivables are appropriately classified as to trade and other receivables in the
financial statements and are clearly described.
2. Sales transactions have been recorded in the proper period.
3. Accounts receivable are recorded at the correct amounts.
4. Sales transactions have been recorded in the appropriate accounts.
5. All required disclosures about sales and receivables have been made.
6. All accounts receivable have been recorded.
7. Disclosures related to receivables are at the correct amounts.
8. Sales transactions have been recorded at the correct amounts.
9. Recorded accounts receivable exist.
10. Disclosures related to sales and receivables relate to the entity.
11. Recorded sales transactions have occurred.
12. There are no liens or other restrictions on accounts receivable.
13. All sales transactions have been recorded.
14. There are no unrecorded receivables.
15. Uncollectible accounts have been provided for.
16. Receivables that have become uncollectible have been written off.
17. All accounts on the list are expected to be collected within one year.
18. The total of the amounts on the accounts receivable listing agrees with the
general ledger balance for accounts receivable.
19. All accounts on the list arose from the normal course of business and are not
due from related parties.
20. Sales cutoff at year-end is proper.
21. Receivables have not been sold or discounted.

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ASSIGNMENT FOR CHAPTER 2

I. Each of the following situations involves possible violations of the AICPA

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