BUSI0006 Auditing

Ch. 1 Audit and Assurance Services

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1-18

1-18 - Question
CPA Cost of Lender Service service Existing None $0 loan Loan amount $4.5 million Annual interest rate 5.5% 4.5%

United Review $20,000 $4.5 National million Bank First Audit $45,000 $4.5 City million Bank

3.5%

1-18 (a)

Explain why the interest rate for the loan that requires a review report is lower than that for the loan that did not require a review.
Review

report:

provides

moderate assurance lowers information risk

1-18 (a)

Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans.
Audit

report:

provides

further assurance even lowers the information risk

1-18 (b)
Calculate Busch Corporations annual costs under each loan agreement, including interest and costs for the CPA firms services. Indicate whether Busch Corporation should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.

1-18 (b)
Lender Existing loan United National Bank CPA Cost of Service service None $0 Loan amount $4.5 million $4.5 million $4.5 million Annual interest Annual rate interest 5.5%
$247,500

Annual loan cost

$247,500

Review $20,000

4.5%

$202,500

$222,500

First City Audit Bank

$45,000

3.5%

$157,500

$202,500

additional audit cost is less than the reduction in interest due to lower information risk
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18-1 (c)
Assume the United National Bank has offered the loan at a rate of 4% with a review, and the cost of the audit has increased to $55,000 due to new auditing standards requirements. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.

1-18 (c)
Lender Existing loan United National Bank CPA Cost of Service service None $0 Loan amount $4.5 million $4.5 million $4.5 million Annual interest Annual rate interest 5.5%
$247,500

Annual loan cost

$247,500

Review $20,000

4.5% 4%

$180,000

$200,000

First City Audit Bank

$45,000 $55,000

3.5%

$157,500

$212,500

higher audit cost and reduced interest rate

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18-1 (d)

Discuss why Busch may desire to have an audit, ignoring the potential reduction in interest costs.
provide

Buschs management with assurance about annual financial information used for decision-making purposes may detect errors or fraud provide management with information about the effectiveness of controls may result in recommendations to management that will improve efficiency or effectiveness
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1-20

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1-20 Question
Danville Bus Services (Bus Co.,) has an outstanding loan of $380,000 from National Bank. Missed a loan payment Gregor Olson (Olson) working in the Bank concerned about whether Bus Co., will be able to repay the full amount of the loan.

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1-20 Question
Collateral 20 large buses @$25,000 Olson has to make sure that these buses still exist

Hire

an auditor to count the buses Engages Annaliese Haraldsson (Anna), CPA (auditing automobile, bus and trucking companies)

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1-20 Question

Anna has to investigate and write a report:

Which

of the 20 registered buses is parked in Bus Co.,s parking lot on the night of Aug 31, 2008 If Bus Co., actually owns or is responsible for maintaining the buses The physical condition of each bus, using the guidelines poor, good and excellent

Fair market value use blue book Blue book Kelley Blue Book a US automotive vehicle valuation company that gives used vehicle pricing information
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1-20 (a)

For each of the following parts of the definition of auditing, state which part of the preceding narrative fits the definition:
1. 2. 3. 4. 5.

Information Established criteria Accumulating and evaluating evidence Competent, independent person Reporting results
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1-20 (a) (1) Information

Issue a report about qualitative and quantitative information for the buses Information concerned

Buses Value

of buses

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1-20 (a) (2) Established criteria

Four established criteria

Existence

of the buses on the night of August

31, 2008 Ownership of each bus by Bus Co., Physical condition of each bus Fair market value of each bus

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1-20 (a) (3) Accumulating and evaluating evidence

Four types of evidence

Existence

Count the buses Use registrations documents held by Olson for comparison to the serial number on each bus Examine the buses to determine each bus (can examine the buss condition herself or hire an expert) Examine the blue book
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Ownership

Physical condition

Fair market value

1-20 (a) (4) Competent, independent person

Annaliese Haraldsson
CPA spends

most of her time auditing used automobile, bus, and truck dealerships has experience that is consistent with the nature of the engagement

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1-20 (a) (5) Reporting results

Report results include:

which of the 20 buses are parked in Bus Co.,'s parking lot the night of August 31, 2008 whether all of the buses are owned by Bus Co., the condition of each bus, using established guidelines fair market value of each bus using the current blue book for buses
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1-20 (b)

What difficulties might Anna encounter when performing this audit?

Evaluating the condition

Using the guidelines of poor, good, and excellent highly subjective If she uses a different criterion than the blue book, the fair market value will not be meaningful. Her experience will be essential in using this guideline. unless it is clearly defined in the blue book for each condition
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Determining the fair market value

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Financial statement audit

To determine whether the financial statements are stated in accordance with specified criteria E.g. US GAAP / IAS

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Operational audit
Evaluates the efficiency and effectiveness of any part of an organizations operating procedures and methods Management normally expects recommendations for improving operations

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Compliance audit
To determine whether the company is following specific procedures, rules or regulations set by some higher authority E.g. review wage rates for compliance with minimum wage laws

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Compliance Operational Operational Financial statement Operational Financial statement Financial statement Compliance Financial statement Compliance Operational Compliance

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