Busch Corporation has an existing loan in the amount of $6 million with an

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1-17 (Objective 1-3)Busch Corporation has an existing loan in the amount of $6 million with an annual interest rate of 6.0%. The company provides an internal company- prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Busch Corporation’s existing loan agreement with a new one. United National Bank has offered to loan Busch $6 million at a rate of 5.0% but requires Busch to provide financial statements that have been reviewed by a CPA firm. First City Bank has offered to loan Busch $6 million at a rate of 4.0% but requires Busch to provide financial statements that have been audited by a CPA firm. Busch Corporation’s controller approached a CPA firm and was given an estimated cost of $35,000 to perform a review and $60,000 to perform an audit.

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

2. Calculate Busch Corporation’s annual costs under each loan agreement, including interest and costs for the CPA firm’s services. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from First City Bank.

3. Assume that United National Bank has offered the loan at a rate of 4.5% with a review, and the cost of the audit has increased to $80,000 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.

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

5. e. Explain how a strategic understanding of the client’s business may increase the value of the audit service.

1-19 (Objective 1-1)James Burrow is the loan officer for the National Bank of Dallas. National has a loan of $325,000 outstanding to Regional Delivery Service, a company specializing in delivering products of all types on behalf of smaller companies. National’s collateral on the loan consists of 25 small delivery trucks with an average original cost of $24,000.

Burrow is concerned about the collectibility of the outstanding loan and whether the trucks still exist. He therefore engages Samantha Altman, CPA, to count the trucks, using registration information held by Burrow. She was engaged because she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks. Burrow requests that Altman issue a report stating the following:
Which of the 25 trucks is parked in Regional’s parking lot on the night of June 30, 2013.
Whether all of the trucks are owned by Regional Delivery Service.
The condition of each truck, using the guidelines of poor, good, and excellent.
The fair market value of each truck, using the current “blue book” for trucks, which

states the approximate wholesale prices of all used truck models, and also using the poor, good, and excellent condition guidelines.

a. For each of the following parts of the definition of auditing, state which part of the preceding narrative fits the definition:
(1) Information
(2) Established criteria

(3) Accumulating and evaluating evidence (4) Competent, independent person
(5) Reporting results

b. Identify the greatest difficulties Altman is likely to have doing this audit.

1-22 (Objectives 1-3, 1-5)Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend James Foley asks him, “Doesn’t it bother you that your clients don’t look forward to seeing their auditors each year?” Dave responded, “Well, auditing is only one of several services we provide. Most of our work for clients does not involve financial statement audits, and our audit clients seem to like interacting with us.”
Identify ways in which a financial statement audit adds value for clients.
List other services other than audits that Czarnecki and Hogan likely provides.
Assume Czarnecki and Hogan has hired you as a consultant to identify ways in which they can expand their practice. Identify at least one additional service that you believe the firm should provide and explain why you believe this represents a growth opportunity for CPA firms.

2-18 (Objective 2-6)Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class and it was clear that he didn’t really understand the nature of the audit process as he asked the following questions:

a. What is the main objective of the audit of an entity’s financial statements?
b. The audit represents the CPA firm’s guarantee about the accuracy of the financial statements, right?

c. Isn’ttheauditor’sprimaryresponsibilitytodetectallkindsoffraudattheclient?

D. Given the CPA firm is auditing financial statements, why would they need to understand anything about the client’s business?

E. Whatdoestheauditordoinanauditotherthanverifythemathematicalaccuracyof the numbers in the financial statements?

If you were Sarah, how would you respond to each question?

2-20 (Objectives 2-5, 2-6)You have been asked to make a presentation in your Inter- national Business class about how globalization is impacting the auditing profession. In preparation, you met with your auditing professor and discussed these questions:

a. What organizations are responsible for establishing U.S. auditing standards used by CPA firms when auditing financial statements prepared by organizations based in the U.S.?

B. What organization is responsible for establishing auditing standards internationally?

C. To what extentareAICPAauditingstandardsandinternationalauditingstandardssimilar?
What is the process the AICPA Auditing Standards Board (ASB) uses to develop AICPA auditing standards?
To what
extent are PCAOB auditing standards impacted by international standards?
Briefly outline key points that you would make in your presentation to address these questions.

2-22 (Objective 2-5)For each engagement described below, indicate whether the engage- ment is likely to be conducted under international auditing standards, U.S. generally accepted auditing standards, or PCAOB auditing standards.

A. An audit of a U.S. private company with no public equity or debt.
B. An audit of a German private company with public debt in Germany.
C. An audit of a U.S. public company.
D. An audit of a United Kingdom public company that is listed in the United States and whose financial statements will be filed with the SEC.
E. An audit of a U.S. not-for-profit organization.
F. An audit of a U.S. private company to be used for a loan from a publicly traded bank. G. An audit of a U.S. public company that is a subsidiary of a Japanese company that will be used for reporting by the parent company in Japan.
H. An audit of a U.S. private company that has publicly traded debt.

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