Instructor’s Solutions Manual
for Assurance Module
@
Comprehensive Assurance
Ap
& Systems Tool: An
lu
Integrated Practice Set
ss
Fourth Edition
tu
Laura R. Ingraham
vi
J. Gregory Jenkins
a
New York, NY
@Aplusstuvia
, This work is protected by United States copyright laws and is provided
solely for the use of instructors in teaching their courses and assessing
student learning. Dissemination or sale of any part of this work (including
on the World Wide Web) will destroy the integrity of the work and is not
permitted. The work and materials from it should never be made available
to students except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and the needs
of other instructors who rely on these materials.
Director of Portfolio Management: Adrienne D’Ambrosio
Senior Sponsoring Editor: Neeraj Bhalla
@
Editorial Assistant: Elisa Marks
Content Producer: Sugandh Juneja
Ap
Copyright © 2019, 2014, 2010 by Pearson Education, Inc. or its affiliates. All Rights Reserved.
Manufactured in the United States of America. This publication is protected by copyright, and
permission should be obtained from the publisher prior to any prohibited reproduction, storage in
a retrieval system, or transmission in any form or by any means, electronic, mechanical,
lu
photocopying, recording, or otherwise. For information regarding permissions, request forms, and
the appropriate contacts within the Pearson Education Global Rights and Permissions department,
please visit www.pearsoned.com/permissions/.
ss
PEARSON and ALWAYS LEARNING are exclusive trademarks owned by Pearson Education,
Inc. or its affiliates in the U.S. and/or other countries.
tu
Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in
this work are the property of their respective owners, and any references to third-party
trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only.
Such references are not intended to imply any sponsorship, endorsement, authorization, or
vi
promotion of Pearson’s products by the owners of such marks, or any relationship between the
owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.
a
Aplusstuvia @Aplusstuvia
, INSTRUCTIONAL NOTES
CLIENT ACCEPTANCE:
The Winery at Chateau Americana
@
INSTRUCTIONAL OBJECTIVES
Understand types of information used to evaluate a prospective audit client
Evaluate background information about an entity and key members of management
Ap
Brainstorm relevant financial and non-financial factors related to client acceptance
Perform and evaluate preliminary analytical procedures
Make and justify a client acceptance decision
Describe matters that should be included in an engagement letter
lu
KEY FACTS
Chateau Americana (CA) is a family-owned winery that is currently considering whether to hire a
ss
new public accounting firm.
Current year sales - $21,945,000; net income - $1,997,000; total assets - $42,029,000.
CA operates a 125-acre vineyard which yields one-fourth of the winery’s production needs. CA is a
modest winery with annual production of 385,000 cases of wine.
tu
The wine industry is a fragmented industry with more than 8,000 wineries in the United States.
Most key management positions are held by members of the Summerfield family. The exception to
this rule is Rob Breeden, the CFO.
vi
The winery implemented a new accounting information system some fourteen months ago. There has
been some employee turnover as a result of the new system.
Discussions with the predecessor auditor, William Lawson, revealed no significant disagreements
a
with management; however, Mr. Lawson indicated that Rob Breeden was “more aggressive” than the
winery’s former CFO.
Copyright © 2019 Pearson Education, Inc.
Assurance - 1
Aplusstuvia @Aplusstuvia
, Ingraham & Jenkins
SUGGESTED SOLUTIONS
The following solutions relate to steps from the audit program that students were asked to complete.
1. Brainstorm about and briefly describe financial and non-financial factors that are relevant to the
decision to accept the potential client.
Student responses to this requirement will vary. The following is a partial list of the factors that are
likely to be relevant to the firm’s decision.
Financial Factors:
a. CA has strong and upwardly trending sales and has been profitable for the last three years and
beyond as evidenced by the retained earnings balance.
b. Although CA’s current ratio is below the industry average, its AR and Inventory turnover
@
compare favorably.
c. The company’s debt load is lower than the industry average (debt-to-equity ratio for the company
is 0.52 [calculation shown in solution to question 3 below] compared to the industry average of
0.99 in the most recent year). The company’s strong sales and earnings have provided sufficient
Ap
cash to cover debt and interest payments and produce a Times Interest Earned measure above the
industry average (9.41 [calculation shown in solution to question 3 below]compared to 6.91 in
the most recent year).
d. CA’s balance sheet appears to be strong with increasing current assets. Much of the increase in
the last year is in the company’s Investments and Production Inventories balances. In addition,
lu
the company has invested more than $2,000,000 in productive assets in the last year.
e. Accounts payable have increased by more than 35% since the prior year and long term debt has
increased slightly.
ss
Non-financial Factors:
a. The company is considering an initial public offering in the near future.
b. The wine industry is a highly fragmented industry that is dominated by a small number of large
companies such as Ernest & Julio Gallo and Constellation Brands.
tu
c. Wine distribution is primarily achieved through supermarket chains and mass merchandisers.
Other distribution outlets offer substantially less growth opportunity.
d. The wine industry appears to have a bright future and the industry, as a whole, has significant
vi
growth opportunities in the US. Wine consumption is highest among adults 35-64 years of age,
the generation that tends to have the greatest amount of disposable income.
e. Significant consolidation has taken place in the wine industry and the trend is likely to continue.
a
f. CA has entered into exclusive distribution agreements with outlets in several large metropolitan
areas and is seeking similar opportunities in other areas.
g. The Summerfield family owns the winery and members of the family hold most management
positions.
h. Rob Breeden became the winery’s CFO just two years ago after the company’s CFO of more
than 15 years resigned. There are rumors that the resignation was in response to disagreements
between the CFO and the president, Edward Summerfield, regarding the need for a new IS.
i. The vice-president of winery operations, Jacques Dupuis, was accused of theft of trade secrets
form a former employer, but the charges were ultimately dropped due to insufficient evidence.
j. CA implemented a new IS some fourteen months ago. The new system is fully integrated with
modules for purchasing and accounts payable, sales and accounts receivable, production and
inventory, payroll, and the general ledger. Each of these modules provides data that are critical to
Copyright © 2019 Pearson Education, Inc.
Assurance - 2
Aplusstuvia @Aplusstuvia
for Assurance Module
@
Comprehensive Assurance
Ap
& Systems Tool: An
lu
Integrated Practice Set
ss
Fourth Edition
tu
Laura R. Ingraham
vi
J. Gregory Jenkins
a
New York, NY
@Aplusstuvia
, This work is protected by United States copyright laws and is provided
solely for the use of instructors in teaching their courses and assessing
student learning. Dissemination or sale of any part of this work (including
on the World Wide Web) will destroy the integrity of the work and is not
permitted. The work and materials from it should never be made available
to students except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and the needs
of other instructors who rely on these materials.
Director of Portfolio Management: Adrienne D’Ambrosio
Senior Sponsoring Editor: Neeraj Bhalla
@
Editorial Assistant: Elisa Marks
Content Producer: Sugandh Juneja
Ap
Copyright © 2019, 2014, 2010 by Pearson Education, Inc. or its affiliates. All Rights Reserved.
Manufactured in the United States of America. This publication is protected by copyright, and
permission should be obtained from the publisher prior to any prohibited reproduction, storage in
a retrieval system, or transmission in any form or by any means, electronic, mechanical,
lu
photocopying, recording, or otherwise. For information regarding permissions, request forms, and
the appropriate contacts within the Pearson Education Global Rights and Permissions department,
please visit www.pearsoned.com/permissions/.
ss
PEARSON and ALWAYS LEARNING are exclusive trademarks owned by Pearson Education,
Inc. or its affiliates in the U.S. and/or other countries.
tu
Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in
this work are the property of their respective owners, and any references to third-party
trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only.
Such references are not intended to imply any sponsorship, endorsement, authorization, or
vi
promotion of Pearson’s products by the owners of such marks, or any relationship between the
owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.
a
Aplusstuvia @Aplusstuvia
, INSTRUCTIONAL NOTES
CLIENT ACCEPTANCE:
The Winery at Chateau Americana
@
INSTRUCTIONAL OBJECTIVES
Understand types of information used to evaluate a prospective audit client
Evaluate background information about an entity and key members of management
Ap
Brainstorm relevant financial and non-financial factors related to client acceptance
Perform and evaluate preliminary analytical procedures
Make and justify a client acceptance decision
Describe matters that should be included in an engagement letter
lu
KEY FACTS
Chateau Americana (CA) is a family-owned winery that is currently considering whether to hire a
ss
new public accounting firm.
Current year sales - $21,945,000; net income - $1,997,000; total assets - $42,029,000.
CA operates a 125-acre vineyard which yields one-fourth of the winery’s production needs. CA is a
modest winery with annual production of 385,000 cases of wine.
tu
The wine industry is a fragmented industry with more than 8,000 wineries in the United States.
Most key management positions are held by members of the Summerfield family. The exception to
this rule is Rob Breeden, the CFO.
vi
The winery implemented a new accounting information system some fourteen months ago. There has
been some employee turnover as a result of the new system.
Discussions with the predecessor auditor, William Lawson, revealed no significant disagreements
a
with management; however, Mr. Lawson indicated that Rob Breeden was “more aggressive” than the
winery’s former CFO.
Copyright © 2019 Pearson Education, Inc.
Assurance - 1
Aplusstuvia @Aplusstuvia
, Ingraham & Jenkins
SUGGESTED SOLUTIONS
The following solutions relate to steps from the audit program that students were asked to complete.
1. Brainstorm about and briefly describe financial and non-financial factors that are relevant to the
decision to accept the potential client.
Student responses to this requirement will vary. The following is a partial list of the factors that are
likely to be relevant to the firm’s decision.
Financial Factors:
a. CA has strong and upwardly trending sales and has been profitable for the last three years and
beyond as evidenced by the retained earnings balance.
b. Although CA’s current ratio is below the industry average, its AR and Inventory turnover
@
compare favorably.
c. The company’s debt load is lower than the industry average (debt-to-equity ratio for the company
is 0.52 [calculation shown in solution to question 3 below] compared to the industry average of
0.99 in the most recent year). The company’s strong sales and earnings have provided sufficient
Ap
cash to cover debt and interest payments and produce a Times Interest Earned measure above the
industry average (9.41 [calculation shown in solution to question 3 below]compared to 6.91 in
the most recent year).
d. CA’s balance sheet appears to be strong with increasing current assets. Much of the increase in
the last year is in the company’s Investments and Production Inventories balances. In addition,
lu
the company has invested more than $2,000,000 in productive assets in the last year.
e. Accounts payable have increased by more than 35% since the prior year and long term debt has
increased slightly.
ss
Non-financial Factors:
a. The company is considering an initial public offering in the near future.
b. The wine industry is a highly fragmented industry that is dominated by a small number of large
companies such as Ernest & Julio Gallo and Constellation Brands.
tu
c. Wine distribution is primarily achieved through supermarket chains and mass merchandisers.
Other distribution outlets offer substantially less growth opportunity.
d. The wine industry appears to have a bright future and the industry, as a whole, has significant
vi
growth opportunities in the US. Wine consumption is highest among adults 35-64 years of age,
the generation that tends to have the greatest amount of disposable income.
e. Significant consolidation has taken place in the wine industry and the trend is likely to continue.
a
f. CA has entered into exclusive distribution agreements with outlets in several large metropolitan
areas and is seeking similar opportunities in other areas.
g. The Summerfield family owns the winery and members of the family hold most management
positions.
h. Rob Breeden became the winery’s CFO just two years ago after the company’s CFO of more
than 15 years resigned. There are rumors that the resignation was in response to disagreements
between the CFO and the president, Edward Summerfield, regarding the need for a new IS.
i. The vice-president of winery operations, Jacques Dupuis, was accused of theft of trade secrets
form a former employer, but the charges were ultimately dropped due to insufficient evidence.
j. CA implemented a new IS some fourteen months ago. The new system is fully integrated with
modules for purchasing and accounts payable, sales and accounts receivable, production and
inventory, payroll, and the general ledger. Each of these modules provides data that are critical to
Copyright © 2019 Pearson Education, Inc.
Assurance - 2
Aplusstuvia @Aplusstuvia
