1.Place letters of an accountant's career position in front of each description of services that ?t. You may use any number of letters on each line and use the letters as many times as they ?t.
(a) An accountant working for a public accounting ?rm performing audits and quarterly reviews of public companies
(b) An accountant working for a public accounting ?rm providing audits and reviews of nonpublic companies
(c) An accountant working for the GAO
(d) An internal auditor working for a public company
(e) An accountant working for a consulting ?rm that specializes in forensics
_____1. Audit activities focusing on ef?ciency
_____2. Specialists in physical evidence indicating fraud
_____3. Independence from the organization receiving the service is required
_____4. May be involved with accomplishing a company's SOX requirements
_____5. May be involved with assessing whether ICFR operates effectively
_____6. Service is based on inquiry and analytical procedures
_____7. Findings from activities are expected to be used as evidence in court
_____8. Uses procedures such as inquiry, document inspection, reperformance
2.Match the accountants with the services provided
_____1. Attest a. Independent auditors
_____2. Financial statement review b. Forensic accountants
_____3. Financial statement compilation c. Auditors employed by governments
_____4. Agreed-upon procedures d. GAO employees
_____5. Comfort letters for underwriters
_____6. Special projects for those in governance
3..You have been engaged by Markus Industries to examine its projected ?nancial statements for 2011.
Required:
For each of the following, state the evidence sources and procedures you would use to evaluate the reasonableness of the assumption.
(a) The Molding Division's sales forecast assumes that the Orlando facility will be completed and operating at 42% of capacity on February 2, 2011. It is highly improbable that the facility will be operational before December 31, 2010. For every month's delay in opening the facility, the sales of the Molding Division are reduced by $82,000 and operating earnings are reduced by $32,000.
(b) Markus intends to sell certain real estate and facilities held by the Assembly Division at an after-tax pro?t of $625,000. The proceeds of this sale will be used to retire outstanding debt (described in c).
(c) Markus will call and retire all outstanding 8% subordinated debentures (callable at 107). Given the present interest rate of 7% on similar debt, it is expected that the debentures will require the full call premium. A rise in market interest rates to 8% would reduce the loss on bond retirement from the projected $195,000 to $185,000.
4.Smothers & Nelson, CPAs, have previously been engaged by Garrison Corporation to perform compilations and tax returns. Henry Garrison, the company's president, indicated to the accountants that he needed "something more" than they previously provided. Mr. Garrison told Jose Vegas, the partner in-charge of the engagement, that the resulting ?nancial statements from this proposed engagement would be used primarily for management's purposes internally, as well as short-term bank loans. Vegas recommended that a review of the ?nancial statements be performed, and work commenced without an engagement letter. As Vegas proceeded with the work, he indicated an uneasiness about certain ?gures and conclusions but said he would take the client's word about the validity of some entries, since the review was primarily for internal use and was not an audit. If Vegas had not relied on the representations of management, he would have detected a material act of fraud committed by management.
Required:
(a) Explain the role that an engagement letter could have played in this scenario and indicate what should have been covered in the letter.
(b) What was Vegas's duty in this review? What is the potential liability faced bySmothers & Nelson, CPAs? Who may assert claims against the ?rm?