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AFM101 Chapter Notes - Chapter 6: Asset, Financial Statement, Retained Earnings

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scarletpanda765
25 Aug 2016
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM101
Professor
Duane Kennedy

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Document Summary

Answers to questions: the primary responsibility for the accuracy of the financial records and preparation of financial statements in accordance with generally accepted accounting principles (gaap) rests with management, normally the ceo and cfo. The board of directors, elected by the shareholders to represent their interests, is responsible for ensuring that processes are in place for maintaining the integrity of the company"s accounting, financial statement preparation, and financial reporting. Independent auditors conduct an examination of the statements in accordance with generally accepted auditing. Standards, and based on that examination, attest to the fairness of the financial presentations in accordance with gaap. Both management and the auditors assume a financial responsibility to users of the statements: financial analysts normally work in the research departments of brokerage and investment banking houses, mutual funds, and investment advisory services. They gather extensive financial and nonfinancial information about a company, on which they base forecasts and stock purchase and sale recommendations.

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Related Questions

The following report was drafted on October 25, 2015, by Major,CPA, at the comple-
tion of an engagement to compile the financial statements of AjaxCompany for the fis-
cal year ended September 30, 2015. Ajax is a non-public entity inwhich Major’s child

has a material direct financial interest. Ajax decided to omitsubstantially all of the

disclosures required by generally accepted accounting principlesbecause the financial

statements will be for management’s use only. The statement ofcash flows was also

omitted because management does not believe it to be a usefulfinancial statement.

To the Board of Directors of Ajax Company:

I have compiled the accompanying financial statements of AjaxCompany as of

September 30, 2015, and for the year then ended. I planned andperformed the compila-
tion to obtain limited assurance about whether the financialstatements are free of material

misstatements.

Management is responsible for the preparation and fairpresentation of the financial

statements in accordance with accounting principles generallyaccepted in the United

States of America and for designing, implementing, andmaintaining internal control rel-
evant to the preparation and fair presentation of the financialstatements.

My responsibility is to conduct the compilation in accordancewith Statements on Stan-
dards for Accounting and Review Services issued by the AmericanInstitute of Certified

Public Accountants. It is substantially less in scope than anaudit in accordance with gen-
erally accepted auditing standards, the objective of which is theexpression of an opinion

regarding the financial statements taken as a whole. I have notaudited the accompanying

financial statements and, accordingly, do not express anyopinion on them.

Management has elected to omit substantially all of thedisclosures required by

accounting principles generally accepted in the United States ofAmerica. If the omit-
ted disclosures were included in the financial statements, theymight influence the user’s

conclusions about the company’s financial position, results ofoperations, and cash flows.

I am not independent with respect to Ajax Company. This lack ofindependence is due

to my daughter’s ownership of a material direct financialinterest in Ajax Company.

This report is intended solely for the information and use ofthe board of directors and

management of Ajax Company and should not be used for any otherpurpose.

Major, CPA

Required:

Identify the deficiencies contained in Major’s report on thecompiled financial state-
ments. Group the deficiencies by paragraph where applicable. Do notredraft the

report.

(AICPA, adapted)

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Amazon.com, Inc.

We have audited Amazon.com, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Amazon.com, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Amazon.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Amazon.com, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 of Amazon.com, Inc. and our report dated January 30, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, Washington

January 30, 2014

Please answer the following:

review the audit report prepared by the auditors. Let us know the name of the company, the name of the CPA firm that prepared the audit report and tell us the type of opinion that was provided. Also, discuss the role of the audit firm in the audit process.

2–31. Simulation
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an
audit of the fi nancial statements for the current year. Howard Smythe, the partner in charge of
the audit, drafted the following unmodifi ed report:

To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and
its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income,
retained earnings, and cash fl ows for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
fi nancial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated fi nancial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these fi nancial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free of material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated fi nancial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated
fi nancial statements, whether due to fraud or illegal acts. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of
the consolidated fi nancial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of signifi cant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material
respects, the fi nancial position of Casa Royale, Inc., and its subsidiaries as of December 31,
20X1, and the results of their operations and their cash fl ows for the years then ended in accordance
with auditing standards generally accepted in the United States of America.
Howard Smythe , Partner
Phoenix, Arizona
February 12, 20X2
Reviewer’s Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have “audited,” rather than “examined,”
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning management’s
responsibility for internal control.
d. The report should state that the auditors’ responsibility is to express
“reasonable assurance,” not an opinion (fi rst paragraph under “auditor’s”
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term “illegal acts” is incorrect (second paragraph
under auditor’s responsibility).
f. The report should not refer to the auditors “evaluating the appropriateness
of accounting policies,” since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than “adequate”
(third paragraph under auditor’s responsibility).

Reviewer’s Comments
Comment Is
Correct (yes or no)
h. The opinion should not include “in all material respects” since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on “accounting principles generally accepted in the
United States of America,” not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA fi rm, not that of
the partner.