Concept explainers
A
Introduction: A material misstatement arises when there is a difference between what is written in the financial statements and what it actually should be. The difference can be in amounts, classification, presentation or disclosure.
To ascertain: Assessment of risk of material misstatements and the effect of this assessment on detection risk.
B
Introduction: A material misstatement arises when there is a difference between what is written in the financial statements and what it actually should be. The difference can be in amounts, classification, presentation or disclosure.
To ascertain:Assessment of risk of material misstatements and the effect of this assessment on detection risk.
C
Introduction: A material misstatement arises when there is a difference between what is written in the financial statements and what it actually should be. The difference can be in amounts, classification, presentation or disclosure.
To ascertain:Assessment of risk of material misstatements and the effect of this assessment on detection risk.
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Chapter 4 Solutions
EBK AUDITING & ASSURANCE SERVICES: A SY
- The OakTree Group is a 75-year old company founded in Hong Kong. The Group comprises of two majorbusinesses: a publishing business known as Fairmont Publishing and an insurance business namedGeneralife. The Group is currently organized in a decentralized manner with two businesses running asinvestment centers. However, with the recent retirement of many senior staff in OakTree, the CEO is verymuch concerned regarding the performance of the company under a new generation of leadership. In fact,the CEO is considering the possibility of restructuring the Group into a centralized structure.Fairmont Publishing is organized as a divisional structure with the presence of two divisions: Printed Mediaand Online Media. The following are summary financial information for 2019 and 2020: Printed Media Online Media 2019 2020 2019 2020 sale $18900 $19320 $25200 $26880 SG&A expenses $6590 $6520 $6092 $8564 Current assets $5670 $6600 $4050…arrow_forwardThe OakTree Group is a 75-year old company founded in Hong Kong. The Group comprises of two majorbusinesses: a publishing business known as Fairmont Publishing and an insurance business namedGeneralife. The Group is currently organized in a decentralized manner with two businesses running asinvestment centers. However, with the recent retirement of many senior staff in OakTree, the CEO is verymuch concerned regarding the performance of the company under a new generation of leadership. In fact,the CEO is considering the possibility of restructuring the Group into a centralized structure.Fairmont Publishing is organized as a divisional structure with the presence of two divisions: Printed Mediaand Online Media. The following are summary financial information for 2019 and 2020: Printed Media Online Media 2019 2020 2019 2020 sale $18900 $19320 $25200 $26880 SG&A expenses $6590 $6520 $6092 $8564 Current assets $5670 $6600 $4050…arrow_forwardThe OakTree Group is a 75-year old company founded in Hong Kong. The Group comprises of two majorbusinesses: a publishing business known as Fairmont Publishing and an insurance business namedGeneralife. The Group is currently organized in a decentralized manner with two businesses running asinvestment centers. However, with the recent retirement of many senior staff in OakTree, the CEO is verymuch concerned regarding the performance of the company under a new generation of leadership. In fact,the CEO is considering the possibility of restructuring the Group into a centralized structure.Fairmont Publishing is organized as a divisional structure with the presence of two divisions: Printed Mediaand Online Media. The following are summary financial information for 2019 and 2020: Printed Media Online Media 2019 2020 2019 2020 sale $18900 $19320 $25200 $26880 SG&A expenses $6590 $6520 $6092 $8564 Current assets $5670 $6600 $4050…arrow_forward
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- You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and specialty products worldwide. Because of recent events, Mal Clissold, the company president, is concerned about the company’s risk, so he asks for your input. In your discussion with Mal, you explain that the CAPM proposes that the market risk of the company’s stock is the determinant of its expected return. Even though Mal agrees with this, he argues that his portfolio consists entirely of Clissold Industry stock and options, so he is concerned with the total risk, or standard deviation, of the company’s stock. Furthermore, even though he has calculated the standard deviation of the company’s stock for the past five years, he would like an estimate of the stock’s volatility moving forward. Mal states that you can find the estimated volatility of the stock for future periods by calculating the implied standard…arrow_forwardSimpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president. Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail. Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations. Vice president: What about the walkout we had last month when employees were upset about their commission income? Would this situation not…arrow_forwardSimpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president. Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail. Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations. Vice president: What about the walkout we had last month when employees were upset about their commission income? Would this situation not…arrow_forward
- Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation's CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation's cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.) Instructions Answer the following questions. a. Who are the stakeholders in this situation? b.…arrow_forwardRandall, Inc. is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and Howard Kress, the company chief financial officer. The audit committee meets quarterly to provide oversight of financial reporting, including reviewing new accounting policies and unusual transactions. Howard Kress personally reviews and approves any related party transactions. Internal audit of operating units are performed by the internal auditor, who reports directly to Laura Howe, the chief operating officer. The company has written code of conduct and employees agree to adhere to the code when they are hired. The company also has a hotline for confidential reporting of unethical behavior that is staffed by the corporate controller. The audit committee reviews summaries of all incidents and investigations performed. Required: Identify the weaknesses in Randall’s system of corporate…arrow_forwardEco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange. As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table: Source of capital weight Long term debt 30 % Preferred stock 20 % Common stock equity 50 % Total 100 % At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5%…arrow_forward
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