Questions   None of these questions has a style component, thus you don't have to write in complete sentences and well-formed paragraphs

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None of these questions has a style component, thus you don't have to write in complete sentences and well-formed paragraphs. You can use lists where appropriate if you want.1) You have been approached by a local lumber producer who specializes in buying logs that have been thinned from the local forests around Las Vegas, NM and turning them into high quality lumber for things like flooring and molding in homes and businesses. The firm is a small, closely held corporation where the founder and his family members hold all the stock and, therefore, does not register with the SEC. You will be doing the first external audit that this firm has had done in its short lifetime. You currently are a member of the AICPA and you are a CPA with a license to practice in New Mexico.a) Develop a checklist of five areas or issues that you would want to research before you accepted this firm as an audit client and give an example of where you might go to get some information about each issue. Also, explain why you selected the area or issue, other than it is required by standards. That is, I want an explanation how the information might affect your client acceptance decision. Make your explanation and selections specific to this firm.b) Describe three organizations, boards, or groups that have legal authority to regulate aspects of your audit of this client and discuss how that organization, board, or group would regulate your work on this audit.c) Describe two reasons why this firm might be seeking an audit. I am looking for substantive reasons that show that you understand the importance of auditing in capital markets. That is, I am not just looking for a possible transaction the firm might engage in that might be facilitated by an audit. I want an explanation of how an audit would facilitate that transaction.2) Each of the following situations involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why. If you don't think it violations a rule, explain why as well.2. Mitch Rider is the partner-in-charge of the audit of ABC, Inc. Over the years, he has become a golfing buddy of ABC's CEO, Shelly Rhoades. During the current year Rider and Rhoades jointly purchased an exclusive vacation home in North Carolina. The vacation home represents more than 10 percent of Rider's personal wealth.a) You are auditing a firm that you have audited for years. However, the auditee has yet to pay their full fee from last year's audit and you have turned the matter over to a collection agency.b) During the audit of a client, you found that the manager on the job had not reviewed a staff accountant's verification of the auditee's inventory balance at year-end. The client was a manufacturing firm and inventory represented 30% of their assets.c) During the audit of client, you found out that the manager on the job, who you had recently hired from a major competitor on the auditee, had secretly shared details the auditee's pricing strategies with his former employer.3) For the following independent situations, assume that you are the audit partner on the engagement. For each situation, explain how you would modify your audit report and why. All situations apply to non-SEC firms and so the internal control report isn't required and not part of this question. Be sure to cover all changes required to the report and be specific about which paragraphs must be changed and why. If you don't recommend any changes, explain why not.3. During your audit of XYZ, Inc., you conclude that there is a possibility that inventory is materially overstated. The Client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is actually misstated. Inventory represents 12% of XYZ's total assets.a) You are auditing HIJ, Inc. and you have substantial doubt about their ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.b) You complete the audit of Happy Time Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in Happy Time.c) During your audit of DEF company you found a material misstatement of their Other Income account. DEF refused to restate the account balance.4) XYZ, Inc. is planning a major plant expansion recently expanded its plant. It plans to finance the expansion through a combination of a bank loan and stock offering. XYZ has engaged your CPA firm to audit its 2013 financial statements. They told you that they were going to give the financial statements to ABC Bank and other, unnamed banks and, that they would be included in the registration statement for the stock offering.When you performed the audit of the 2013 financial statements, you did not discover a material overstatement of inventory because you did not test XYZ's physical inventory at the end of 2013. XYZ is a manufacturing firm and so inventory tends to make up a significant portion of their total assets. You were also aware of a pending product liability lawsuit that XYZ had not disclosed in its footnotes despite the fact that XYZ's attorney informed you that XYZ's liability under the lawsuit would result in material losses for XYZ. However, you issued an unqualified opinion on their 2013 financial statements and issued your report at the end of January, 2014.In early February, 2014, ABC Bank relied on XYZ's financial statements and your audit report and granted XYZ a $750,000 loan. In addition, XYZ raised $12,000,000 in June 2014 in a public offering of common stock. They included their financial statements and your audit report in their registration statement for the stock offering.By July, 2014, XYZ was in financial trouble, but was able to stay in business because of the funds raised in the stock offering. They had lost the product liability law suit and could not pay the plaintiff the full amount of the loss. In addition, they defaulted on their bank loan and petitioned for bankruptcy. The bank lost most of the $750,000 loan and XYZ's stock price fell sharply.ABC bank has sued you for failure to exercise due professional care and for common law fraud. The stockholders also are alleging fraud under the Securities Act of 1933. All these transactions took place in a jurisdiction that provides for auditor liability for ordinary negligence to known and intended users of the financial statements.Answer the following questions and include your reasons for them.a) Will ABC bank be successful in their law suit against you for:i) ordinary negligence?ii) fraud?b) Will the stockholders who purchased their stock in the stock offering for which XYZ used your audit financial statements succeed in against you with their claim of fraud under the Securities Act of 1933?Questions 5, 6, and 7 were taken from the CPA exam and reprinted in the text. My normal warnings about attempting to access the solutions apply. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.5) The following questions address fraud risk factors and the assessment of fraud risk.a) Which of the following characteristics is most likely to heighten an auditor's concern about the risk of material misstatements due to fraud in an entity's financial statements?i) The entity's industry is experiencing declining customer demand.ii) Employees who handle cash receipts are not bonded.iii) Internal auditors have direct access to the board of directors and the entity's management.iv) The board of directors is active in overseeing the entity's financial reporting policies.Answer:Explanation:b) Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?i) Property and equipment are usually sold at a loss before being fully depreciated.ii) Unusual discrepancies exist between the entity's records and confirmation repliesiii) Monthly bank reconciliations usually include several in-transit items.iv) Clerical errors are listed on a computer-generated exception report.Answer:Explanation:6) The following questions concern the auditor's responses to the possibility of fraud.a) If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should firsti) request that management investigate to determine whether fraud has actually occurred.ii) make the investigation necessary to determine whether fraud has actually occurred.iii) consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management.iv) consider whether fraud was the result of a failure by employees to comply with existing controls.Answer:Explanation:b) Which of the following is least likely to suggest to an auditor that the client's management may have overridden internal control?i) There are numerous delays in preparing timely internal financial reports.ii) Management does not correct internal control weaknesses that it knows about.iii) Differences are always disclosed on a computer exception report.iv) There have been two new controllers this year.Answer:Explanation:7) The following question addresses fraud risks in specific audit areas and accounts.a) Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?i) Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.ii) Have an independent auditing firm examine and report on management's assertion about the design and operating effectiveness of the control activities relevant to inventory.iii) Have separate warehouse space for the more valuable items, with sequentially numbered tags.iv) Require an authorized officer's signature on all requisitions for the more valuable items.Answer:Explanation:8) During audit planning, an auditor obtained the information listed in the following table. For each item, indicate whether or not you believe it is a fraud risk (yes or no), which element of the fraud triangle is involved, and explain why you believe it is a fraud risk. Note that we are not talking about evidence of fraud, just factors that might increase the risk of fraud.1ItemFraud Risk?Fraud ConditionExplanation1. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.2. The company's financial performance is threatened by a high degree of competitor and market saturation.3. Significant operations are located and conducted across international borders or jurisdictions where differing business environments and cultures exist.4. The company's board of directors includes a majority of directors who are independent of management.5. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry.6. The company has experienced low turnover in management and its internal audit function.7. The company's controller works very hard, including evenings and weekends, and has not taken a vacation in two years.8. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate.9. The company is marginally able to meet exchange listing and debt covenant requirements.7