The Lakeside Company: Auditing Cases

The Lakeside Company: Auditing Cases SOLUTIONS MANUAL 11e Table of Contents John M. Trussel and J. Douglas Frazer A Not on Ethics, Fraud and Sox Questions 2 A Note on Research Assignments 4 Introductory Case 6 Case 1 13 Case 2 21 Case 3 29 Case 4 39 Case 5 51 Case 6 67 Case 7 74 Case 8 83 Case 9 92 Case 10 100 Case 11 105 Case 12 115 Case 13 127 1 A NOTE ON ETHICS, FRAUD, AND SOX QUESTIONS The Lakeside Company: Auditing Cases, 11th edition, has been updated in light of the accounting scandals of the early 2000s and the passage of the Sarbanes-Oxley Act of 2002, and the renewed interest in ethics within the accounting and auditing profession. Ethics questions are now specifically identified with an ethics logo. The ethics questions are often open ended, and this solutions manual does not try to give exact answers to these questions. Rather, we intend to give some ideas for classroom discussion, and to help with student research on these questions. Fraud questions are now specifically identified with a fraud triangle The introduction of Sarbanes-Oxley issues has been accomplished in two ways. First, case content has been altered to include Lakeside’s consideration of financing expansio n through an initial public offering, and the resulting impact such a decision would have on Lakeside and on Abernathy and Chapman, CPAs. Second, the discussion questions and exercises have been expanded to include consideration of Sarbanes￾Oxley and new auditing and independence standards, both by adding a section in the end-of-chapter material and by reference in the other questions where appropriate. The following list includes all the questions with the location of the question and a brief learning objective. (Intr-1) The case states that the firm of Abernethy and Chapman is considering the acceptance of clients that are publicly traded. What specific steps would the firm have to take before they could accept an audit client that is publicly traded? Objective – Initial PCAOB registration. (1-1) According to this case, the Lakeside Company is considering a public offering of stock to finance its growth. What steps would the Lakeside Company have to take before issuing stock to the public? In particular, how would the p rovisions of the Sarbanes-Oxley Act impact this decision? How does the possible public sale of stocks impact the Lakeside Company financial reporting requirements? Objective – Public reporting requirements in the PCAOB context. (1-2) Explain how the acceptance of a public company would impact a CPA firm. In particular, how would Roger's decision about offering stock to the public impact Abernethy and Chapman's decision of whether or not to accept Lakeside as a client? Objective – Client 1 acceptance in the PCAOB and in this case the effect of an initial public client. (2-1) According t o Case 1, the Lakeside Company is considering a public offering of stock to finance its growth. The firm of Abernethy and Chapman does not presently have any audit clients that are public companies. How would the Sarbanes-Oxley Act impact the firm's decision to accept such a company as an audit client? What additional requirements are there for a CPA firm that is registered to practice before the SEC compared with a CPA firm that is not registered? Is the firm of Abernethy and Chapman capable of meeting these standards? Objective- Client acceptance in general compared to public clients. (2-2) According to Case 1, the Lakeside Company is considering a public offering of stock to finance its growth. What additional requirements are there for a publicly traded company compared with a nonpublic company? What issues have arisen so far in the case that should be addressed as Lakeside considers going public? Objective- Lakeside issues related to public reporting requirements. (4-1) Lakeside’s consideration of an initial public offering would require significant changes in Lakeside’s organizational structure and governance, including the structure and operation of the board of directors and the need to assess the functioning of the company's internal control systems. Discuss these topics and make specific recommendations to Lakeside. Objective – Corporate governance and internal control in the public reporting context. (4-2) Discuss the assessment of control risk for audit clients that are public companies. If Lakeside were to become a public company, what impact would that have on Abernethy and Chapman's assessment of Lakeside's control risk and the evaluation of internal control? Objective – Internal control both in the public reporting context. Section 404 audits. (5-1) As noted in Case 1, Lakeside in considering the issuance of stock to the public. Write a report discussing tests of controls for clients that are public companies compared with those that are not public companies. If Lakeside were to become a public company, what impact would that have on Abernethy and Chapman's tests of controls? Objective – Comparison of internal auditing in the general case and in the public case. 2