CHAPTER 16

CASE 1 Analyzing a Compilation Report The following report was drafted on October 25, 2009, by Major, CPA, at the completion of the engagement to compile the financial statements of Ajax Company for the year ended September 30, 2009. Ajax is a non-public entity in which Majors child has a material direct financial interest. Ajax decided to omit substantially all of the disclosures required by Philippines generally accepted accounting principles because the financial statements will be for managements use only. The statement of cash flows was also omitted because management does not believe it to be a useful financial statement. To the Board of Directors of Ajax Company: I have compiled the accompanying financial statements of Ajax Company as of September 30, 2009, and for the year then ended. I planned and performed the compilation to obtain limited assurance about whether the financial statements are free of material misstatements. A compilation is limited to presenting information in the form of financial statements. It is substantially less in scope than an audit in accordance with Philippines generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. I have not audited the accompanying financial statements and, accordingly, do not express any opinion on them. Management has elected to omit substantially all of the disclosures required by Philippines generally accepted accounting principles. If the omitted disclosures were included in the financial statements, they might influence the users conclusions about the Companys financial position, results of operations, and changes in financial position. I am not independent with respect to Ajax Company. This lack of independence is due to my childs ownership of a material direct financial interest in Ajax Company. This report is intended solely for the information and use of the Board of Directors and management of Ajax Company and should not be used for any other purpose. Major, CPA

Required: 1. Identify the deficiencies contained in Majors report on the compiled financial statements. Group the deficiencies by paragraph where applicable. Do not redraft the report.

Answers to Case Study Chapter 11 Case 2 1. Auditing around the computer or without using the computer means that the auditor bypass the computer rather than use it in conducting their test. Under this approach, the auditor will process transactions manually on a test basis and the results then compared to those output obtained by the clients CIS and any discrepancies are investigated. This approach is applicable if there is an adequate audit trail (visible input documents).

Chapter 14 Case 2 2. The audit procedures that may be carried out to try to determine whether or not Smithson is a going concern are: (1) Court case - Consider the impact that loss of certain clients services will have on Smithson. - Obtain a solicitors letter. From this, try to deduce the financial impact of any legal claims against Smithson, and whether insurance is available for covering such claims. IN BRIEF: Loss of clients, solicitors letter (2) Senior employee leaving - The auditor can inquire about lack of capital investment that the departing employee claimed existed within the company. He can enquire about purchase policy with the directors, and look into the level of investment rival companies are carrying out. - How important was the senior employee to Smithson? Can he be replaced? And if so, how soon?

IN BRIEF: Lack of capital investment, importance of employee (3) Cash flow - Obtain a copy of the cash flow forecast. Discuss with directors. - Have the directors identified any other forms of finance that can make up the additional cash flow required? IN BRIEF Discuss cash flow forecast, other forms of finance Additionally, here are some general points for you: - Obtain the directors views on whether or not Smithson can continue as a Going Concern. Ask them why they believe what they do, and try and confirm the accuracy of their beliefs. - Review any other events after year end to see if they have any impact on Smithson.

3. The audit procedures the auditor may take where the auditor has decided that Smithson Co is unlikely to be a going concern are : - Discuss situation again with directors. Should additional disclosures in the financial statements be necessary? - If theres no additional disclosures, discuss the need to modify the audit report. - Consider the need for an emphasis of matter paragraph. - Consider the need for a qualification (unable to obtain sufficient audit evidence) or qualification (material misstatement).