8262

Auditing An International Approach 8th
Edition Smieliauskas Solutions Manual

Go to download the full and correct content document:
https://testbankfan.com/product/auditing-an-international-approach-8th-edition-smielia
uskas-solutions-manual/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...
Auditing An International Approach 8th Edition

Smieliauskas Test Bank
https://testbankfan.com/product/auditing-an-international-
approach-8th-edition-smieliauskas-test-bank/
Auditing an International Approach 6th Edition

Auditing an International Approach 5th Edition

Auditing Canadian 7th Edition Smieliauskas Solutions

Manual
https://testbankfan.com/product/auditing-canadian-7th-edition-
smieliauskas-solutions-manual/
Auditing Canadian 7th Edition Smieliauskas Test Bank
https://testbankfan.com/product/auditing-canadian-7th-edition-
smieliauskas-test-bank/
Principles of Auditing An Introduction to International

Standards on Auditing 3rd Edition Heyes Solutions
Manual
https://testbankfan.com/product/principles-of-auditing-an-
introduction-to-international-standards-on-auditing-3rd-edition-
heyes-solutions-manual/
Principles of Auditing An Introduction to International

Standards on Auditing 3rd Edition Hayes Solutions
Manual
https://testbankfan.com/product/principles-of-auditing-an-
introduction-to-international-standards-on-auditing-3rd-edition-
hayes-solutions-manual/
Auditing Cases An Interactive Learning Approach 7th

Edition Beasley Solutions Manual
https://testbankfan.com/product/auditing-cases-an-interactive-
learning-approach-7th-edition-beasley-solutions-manual/
Auditing Cases An Interactive Learning Approach 6th

Edition Beasley Solutions Manual
https://testbankfan.com/product/auditing-cases-an-interactive-
learning-approach-6th-edition-beasley-solutions-manual/
CHAPTER 6
ASSESSING RISKS AND INTERNAL CONTROL
SOLUTIONS FOR REVIEW CHECKPOINTS
6-1 Business risk is the risk to the auditee that it will be unable to achieve its business objectives or execute its
strategies. Understanding management’s risk assessment process helps to assess the risk that the financial
statements could be materially misstated. Auditing standards (e.g., CICA Handbook - Assurance, CAS 315)
emphasize the auditor’s need to understand business risk and the “entity’s risk assessment process” in order to
plan and execute appropriate audit procedures. This is referred to in the text as the business risk approach to
planning and executing the audit. The auditor may identify risks of material misstatement that management’s risk
assessment process failed to identify and if the auditor believes there is a material weakness in the entity’s risk
assessment process, the auditor needs to communicate this to the audit committee or equivalent. Generally, the
business risk approach requires the auditor to take a broader view of the whole organization and assess the risks
of material misstatements that arise from a variety of aspects of the business.
6-2 The two parts of business analysis are strategic analysis and business process analysis. The goal of business analysis
is to learn about the auditee’s analysis of the risks its business faces, in particular, whether the analysis identifies
all material business risks.
6-3 Auditor’s knowledge of the business (e.g., from previous audits of companies in the same or similar industries) is
the key to understanding the risks associated with a particular auditee’s business strategy. Common risks
associated with a business strategy are risks of cost leadership, risks of differentiation, and risks of focus. These are
discussed in the chapter appendix. Senior management is the chief source of information about the auditee
company’s business strategy.
6-4 A business processes is a structured set of activities within the entity that is designed to produce a specific output
in accordance with the business strategy (eg. Revenue Process, Production Process).
6-5 Business processes are the source of the transactions and events that need to be captured in the business’s
information system and its financial statements, so it is important for auditors to understand the business
processes that create evidence that can support the validity and accuracy of the information that ends up in the
financial statements.
If the business process produces value-added output in the way that the strategy intended it to do, it is more likely
that the business will achieve its objectives and not fall prey to the various risks. The purpose of business process
analysis is to identify the system to assure adherence to the business strategy. The auditor must understand the
process and identify key sub-processes to examine in detail these key sub-processes, inherent business risk
associated with the sub-process, and the control environment associated with the sub-process. The information
the auditor seeks to learn about a target business process are the following: process objectives (i.e., role in
achieving the entity’s business objectives), process activities, classes of accounting transactions and cycles
employed, process risks, and process controls. This understanding of the business process helps the auditor to
assess what are the most significant risks of material misstatement of the financial statements.
6-6 External performance measures are key performance indicators reported to analysts, creditors and shareholders
(sales compared to industry benchmark). Internal performance measures are those used for personnel review and
incentive programs like bonus plans (divisional profit compare to other division or last years results). These uses
can create pressures on the business that may increase the risk that managers are motivated to misstate the
financial statements. Events or conditions that indicate an incentive or pressure to commit fraud or provide an
opportunity are referred to as “fraud risk factors”. For example, the need to meet expectations of third parties to
Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-1

Solutions Manual © 2019, McGraw-Hill Education. All Rights Reserved.
obtain additional equity financing or the granting of significant bonuses if unrealistic profit targets are met may
create pressure to manipulate financial reports fraudulently.
6-7 Gimmicks to manipulate earnings include inappropriate revenue or expense recognition to move profits from
future to current period or vice versa, failing to accrue liabilities, fabricating ‘transactions’ that boost profits, etc.
6-8 Quality of earnings refers to the company’s ability to continue to earn profits on a similar basis to its current
earnings, both in terms of the amounts and the trends over relatively long periods of time. Quality earnings will be
consistent and highly associated with the underlying core business activities (eg. Income from operations).
6-9 The auditor has a continuing responsibility to communicate any suspicions or evidence of fraud, to a level of
management higher than the employees involved in the case of lower-level employees. If the possible fraud
involves high-level managers the auditor must communicate this with those charged with governance, such as the
audit committee or the board of directors. The auditor is responsible for communicating any suspected or known
fraud with management and those charged with governance on a timely basis, regardless of the stage of audit
work.
6-10 Five principal assertions in financial statements:
1. Existence assertion:
The practical objective is to establish with evidence that assets, liabilities and equities actually exist and that
sales and expense transactions actually occurred. Cut-off can be considered an aspect of the existence
assertion (Existence in a specified time period). CAS 315 uses the term occurrence when existence is
applied to transactions.
2. Completeness assertion:
The practical objective is to establish with evidence that all transactions of the period are in the financial
statements and all transactions that properly belong in the preceding or following accounting periods are
excluded. Another term for these aspects of completeness is cut-off.
Completeness also refers to proper inclusion in financial statements of all assets, liabilities, revenue,
expense and related disclosures.
3. Ownership (or Rights and Obligations) assertion:

The practical objectives related to rights and obligations are to establish with evidence that assets are
owned (or rights such as capitalized leases are shown) and liabilities are owed.
4. Valuation (or Allocation, Measurement) assertion:

The practical objective is to establish with evidence that proper values have been assigned to things (assets,
liabilities, equities and related disclosures) and events (revenues, expenses and related disclosures).
‘Allocation’ refers to the practical objective of obtaining evidence about “valuations” achieved by cost
allocations such as depreciation and inventory costing methods. ‘Measurement’ is the term used to refer to
application of an appropriate generally accepted method to determine the dollar amount to include in a
financial statement, as in CICA s.1000 or other conceptual accounting frameworks.
5- Presentation and Disclosure assertion:

The practical objective is to establish with evidence that accounting principles used by management are
appropriate in the circumstances and are applied properly, and that disclosures contain all information
required by generally accepted accounting principles.
6-11 Assertions are the focal points for all audit procedures because they are the fundamental management claims that
are being audited. Audit procedures produce evidence that relates to one or more specific assertions. As will be
explained in in Chapter 8, auditors use “audit objectives” that are derived from the five principal assertions to

design specific evidence gathering procedures.
6-12 Auditing completeness involves getting evidence about what is not there. Auditors have to depend on
management’s representations to some extent, and corroborate these with evidence from a variety of sources,
including internal controls. There is rarely a ‘slam dunk’ type of procedure that provides strong conclusive evidence
that everything that should have been included has been included.
6-13 Auditors should think about what could go wrong in a particular assertion because this is an effective thought
process for assessing the risk that there is a material misstatement related to the assertion. There are many ways
that error and fraud can affect the assertions, so a creative thinking technique is helpful for assessing risk in an
audit.
6-14 An audit plan will be made up of a set of audit programs, which contain specific descriptions of the ‘audit work’ -
this refers to all the audit procedures that will be performed by the audit team to gather evidence and give them
assurance about whether or not there is a material misstatement. If you are given an audit program with a list of
audit procedures and are using them to plan this year’s audit, you need to consider: “What are the assertions
management is making by reporting this financial information?” Which assertion(s) does this procedure produce
evidence about?” “Does the list of procedures (the audit program) test all the assertions?”
6-15 The four risks included in the audit risk model and their descriptions are:
Inherent risk: the probability that material misstatements, due to errors or fraud, have entered the data
processing system.
Control risk: the probability that the auditee’s system of internal control will fail to detect material
misstatements, provided any enter the accounting system in the first place.
Detection risk: the probability that audit procedures will fail to find material misstatements, provided any
have entered the system and have not been detected or corrected by the auditee’s internal
control system.
Audit risk (also sometimes called “overall risk” or “tolerable risk” or “ultimate risk”): a concept applied both to the
probability of giving an inappropriate opinion and to the probability of failing to discover
material misstatements in a particular disclosure or account balance. It represents the
amount of risk the audit is accepting, for example if audit risk is 5% the auditor is accepting a
5% probability of giving the wrong audit opinion. Another way of thinking of audit risk is the
complement of assurance - so at 5% audit risk the auditor is 95% sure that the financial
statements are not misstated
The audit risk model is a conceptual model of how the four types of risk are related. Audit risk is a combination of
the other risks:
Audit Risk = Inherent Risk x Control Risk x Detection Risk.
6-16 The audit risk level an auditor will be willing to accept varies according to auditee and engagement circumstances.
Generally, the riskier the auditee or the more users rely on the audited financial statements, the lower the planned
audit risk. As the possibility of being sued for material misstatement increases, an auditor will decrease planned
audit risk to compensate for the increased risk associated with the engagement. This possibility of negative
consequences for the auditor tends to be higher when the company is listed on a public stock exchange, when the
company is in financial difficulty, and when users are making significant financial decisions based directly on
audited financial statement information.
6-17 Inherent risk assessment will vary from auditee to auditee and is an important application of the auditors
understanding of the business risks. It is helpful to assess inherent risk on an assertion by assertion basis, as
sometimes the risk arises mainly from one assertion (e.g. valuation of accounts receivable when the auditee has a
liberal credit policy). Accounts with high inherent risk are those subject to misstatement because of complexity
(inventory valuation in a manufacturing business), volume (sales transactions in a large retail business), likelihood

of theft (jewelry or small consumer electronic gadgets), or because they are difficult to control (cash receipts in a
charity). Inherent risk tends to be low in accounts that change little (share capital), are low volume (dividend
payment) or calculated from other amounts (amortization).
6-18 Some well accepted control frameworks are: Canadian Criteria of Control Committee (COCO); Committee of
Sponsoring Organizations of the Treadway Commission, Internal Control – Integrated Framework (COSO); and
Control Objectives for Information and Related Technology, published by the IT Governance Institute (COBIT).
6-19 In connection with auditor’s judgments about internal control, anchoring is the mental carryover of prior
knowledge and the application of prior conclusions to the current control system, usually without gathering much
new evidence.
6-20 For example, from a recent Audit Risk Alert:
Some of the effects of bad economic times that create risk of material misstatement, and auditors should be alert
to detect in auditees’ financial statements, include:
• Asset valuations--recoverability and bases of accounting.

• Inappropriate offsetting of assets and liabilities.
• Changes in cost-deferral policies and the reasonableness of amortization periods.
• Allowances for doubtful accounts, in general, and loan-loss allowances for financial institutions, in particular.
• Compliance with financial covenants and the necessity to obtain waivers from lending institutions to meet
current requirements.
• Changes in sales practices or terms that may require a change in accounting.
• Changes in revenue recognition approaches and assumptions
6-21 “Audit risk in an overall sense” refers to the audit taken as a whole and the probability that an auditor will give an
inappropriate opinion on financial statements. Generally, this is the risk of giving the standard unqualified report
when the financial statements contain material misstatements or the report should be qualified or modified in
some manner.
“Audit risk applied to individual account balances” refers to the probability that auditors will fail to discover
misstatement in a particular account balance at least equal to the tolerable misstatement assigned to the audit of
that balance. This version of audit risk is applied in concept at the individual account balance level.
6-22 In theory, the materiality decision (how much precision is required in the audit opinion) is independent of audit
risk decision (how much assurance is required in the audit opinion). It is helpful for an auditor to keep these two
considerations separate since the materiality decision focuses on what dollar amount of misstatement is likely to
affect users’ decisions, while the audit risk level decision is focused on the audit firm and how careful it wants to
be to avoid providing a clean opinion on materially misstated financial statements. In practice, the two concepts
are related because they have a similar impact on the amount of audit evidence required, for example when a
fraud is suspected a smaller materiality level is used - this has the same result as using a lower tolerable audit risk
level. Materiality and audit risk decisions both have an impact on the auditor’s decisions on the nature, extent and
timing of audit evidence to be gathered.
6-23 Business risk needs to be considered in assessing audit risk. Audit risk relates to accurate reporting on business
risks, thus, the higher the business risks the greater the need to report them accurately. As a consequence, the
general relationship is that the higher the auditee’s business risk the lower the planned audit risk needs to be.
6-24 Four “processes” and accounts in them:
Revenue process

| Purchases process
| | Production process
| | | Finance process
| | | |
| | | |
-- -- -- --
X X X X Cash
X Accounts receivable
X Allowance for doubtful accounts
X Sales
X Sales returns
X Bad debt expense
X X Inventory
X Fixed assets
X Accum depreciation
X Accounts payable
X Accrued expenses
X General expense
X Cost of goods sold

X Depreciation expense
X Bank loans
X Long term notes
X Accrued interest
X Capital stock
X Retained earnings
X Dividends declared
X Interest expense
X Income tax expense
An accounting process can also be referred to as a ‘cycle’, because transaction information from the same type of
business process (e.g., a sale on account) will run through the same set of accounts over and over during an
accounting period (e.g., sales revenue, accounts receivable and cash are the main accounts involved in recording
sales on account). A cycle perspective groups the set of accounts affected by a particular class of transaction
together for audit examination, which often increases efficiency.
6-25 The cash account is represented in all the processes/cycles, because: (a) cash receipts are involved in cash sales
and collections of accounts receivable (revenue process), (b) cash receipts arise from issuing shares and loan
proceeds (finance process), (c) cash disbursements are involved in buying inventory and capital assets and paying
for expenses purchases process), and (d) cash disbursements are involved in paying wages and overhead expenses
(production process).
6-26 Predictable relations should exist among the accounts in each process/cycle. Also, the audit evidence that is
available for one component of the process often also contains information for other components, because high-
volume routine transactions are recorded using the journal entries. A process groups the accounts related
because a typical routine transaction (e.g. recording a sale, or paying salaries) affects them all.

MULTIPLE CHOICE ANSWERS
MC 6-1 [LO1] Business risk is related to business strategy because:

a.auditors assess business risk so they can provide their auditees with a business strategy.
b.business risks are events or actions that cause changes in technology.
c. managers frequently change their business risks in response to changes in the business strategy.
d. business risks are events or actions that may have a negative effect on the audit client’s ability to achieve its
strategic objectives.
MC 6-2 [LO1] The CFO of a small business recorded sales before the goods were shipped. He managed to commit this fraud
because the accounting system allowed him to override the shipping controls. As a result, the net income increased
and the CFO received his bonus. From the above description, what would represent an incentive for the CFO to commit
fraud?
a. the CFO would receive a bonus if the sales were booked before the year-end.
b. the CFO was not aware that recording the sales was incorrect.
c. the accounting system had a control weakness as it allowed for management override.
d. the CFO felt that he deserved a bonus due to his hard work for the past year that would not be rewarded otherwise.
MC 6-3 [LO1] The auditor assesses a business risk as high when:
a.it is unlikely and moderate.
b. it is likely and significant.
c. it is possible and insignificant.
d.it is likely and insignificant.
MC 6-4 [LO2] If the XYZ company reports a $355,000 balance of accounts receivable, the existence assertion means
a. there are no accounts receivable by XYZ that have not been included in the balance
b. all the amounts making up the $355,000 balance will be collected in full, in cash
c. all the amounts included in the $355,000 balance represent valid sales on account that are still outstanding and
due to the company
d. the receivables have not been sold to another company
MC 6-5 [LO3] The risk that the auditors’ own work will lead to the decision that material misstatements do not exist in
the financial statements, when in fact such misstatements do exist, is:
a.Audit risk.
b.Inherent risk.
c. Control risk.
d. Detection risk.
MC 6-6 [LO4] As part of the audit of property plant and equipment, you review the sales agreement for a new the building to
confirm the auditee’s name appears as the buyer. This procedure aims to cover which of the following assertions
a.Valuation
b.Cut-Off
c. Ownership
d. Presentation
MC 6-7 [LO5] The cash account is included in more than one accounting process because:
a. all the business processes involve either receiving or paying out cash at some point.
b.cash is the most difficult asset to control.
c. cash is the easiest asset to steal.
d.cash can be either an asset or a liability.
MC 6- 8 [LO5] The revenue process of a company generally includes these accounts:
a. inventory, accounts payable, and general expenses
b. inventory, general expenses, and payroll
c. cash, accounts receivable, and sales
d. cash, notes payable, and capital stock
MC 6-9 [LO5] Auditors find it easier to audit related accounts with a set of coordinated procedures instead of attacking each
account on its own because:
a. predictable relationships should exist among these accounts.
b. CAS require the auditor to proceed this way

c. it represents significant cost savings
d. it is a personal preference
MC 6-10 [LO2] Management assertions are
a. Stated in the footnotes to the financial statements.
b. Implied or expressed representations about the financial statements.
c. Explicitly expressed representations about the financial statements.
d. provided to the auditor in the assertions letter, but not disclosed on the financial statements.
MC 6-11 [LO3] In the Audit Risk Model, Audit Risk (AR) refers to
a. the probability that a material misstatement occurred in an assertion of a class of transactions, account balance or
disclosure.
b. the probability that management’s internal controls did not catch a misstatement once it has occurred
c. the probability that audit procedures don’t catch a misstatement that has occurred and was not caught by the
auditee’s internal control
d. the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially
misstated
MC 6-12 [LO3] In the Audit Risk Model, Inherent Risk (IR) refers to
a. the probability that a material misstatement occurred in an assertion of a class of transactions, account balance
or disclosure.
b. the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially
misstated.
c. the probability that audit procedures won’t catch a misstatement that has occurred and was not caught by the
auditee’s internal control.
d. a misstatement that would probably affect users of the financial statements.
MC 6-13 [LO3] In the Audit Risk Model, control risk refers to
a. the risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially
misstated
b. the probability that management’s internal controls did not catch a misstatement once it has occurred
c. the probability that audit procedures won’t catch a misstatement that has occurred and was not caught by the
auditee’s internal control
d. the probability that a material misstatement occurred in an assertion of a class of transactions, account balance or
disclosure.
MC 6-14 [LO2] Assertions are used in financial statement auditing for
a. defining aspects of the classes of transactions, account balances and disclosures in the financial statements to
help auditors to specify the impact of business risks on fair presentation.
b. providing specific substantive evidence auditors can rely on to indicate material misstatements
c. providing auditors with independent evidence and reasonable assurance about whether the financial statement
information is fairly presented
d. supporting the auditor’s conclusions and the opinion in the auditor’s report regarding what could have gone wrong
in the financial statements
MC 6-15 [LO2] Harrington coat company produces a wide variety of coats. A change in customer taste in the current year has
led to lower sales of coats with real fur trim. Harrington hasn’t adjusted the value of the inventory for fur-trimmed
coats because the CFO indicated that the change in customer taste is temporary. The assertion that may be
materially misstated for Harrington’s inventory balance is:
a. the completeness assertion
b. the existence/occurrence assertion
c. the valuation assertion
d. the ownership assertion
MC 6-16 [LO2] LMN Co. is holding consignment inventory for another company, which must be excluded from LMN’s financial
statements to comply with
a. the completeness assertion
b. the ownership/rights and obligations assertion
c. the existence/occurrence assertion
d. the valuation assertion

MC 6-17 [LO2] If XYZ Co. records sales revenues in its current year financial statements for shipments that were made the
first day of its following fiscal year, the assertion affected is
a. valuation (the sales amounts are not correctly calculated)
b. completeness (the sales were not completed at year end)
c. existence/occurrence (the sales did not occur during the fiscal year)
d. ownership/rights & obligations (XYZ does not have the rights to the sales at year end)
MC 6-18 [LO3] Oakland Hills (OH) is a ski resort, and the revenue it reports each year is greatly affected by the temperature
and snowfall in the winter months. The variation in revenues from year to year is difficult for management, as their
bonus is based on increasing income year over year. This situation best describes which kind of risk?
a. Audit Risk
b. Inherent Risk
c. Control Risk
d. Detection Risk
MC 6-19 [LO3] Evelyn is the controller of Mylan Connections (MC), a Public Relations firm with 50 account managers. Travel
expenses for the consultants represent one of the largest expenses for MC. Evelyn does a thorough review of each
expense report at the end of the month to ensure that all expenses are valid. The expense reports are then passed
on to the VP Operations for his approval. When Evelyn is on vacation, the VP Operations simply approves the expense
reports to ensure there are no delays in reimbursing the consultants. The situation above best describes what kind
of risk?
a. Audit Risk
b. Inherent Risk
c. Control Risk
d. Detection Risk
MC 6-20 [LO4] The auditor performing the audit risk assessment determined that the audit risk for GXP’s current-year audit
increased from moderate to high. As a result, the auditor should
a. proceed with the audit in a similar manner to the prior year as this is a recurring engagement and he is familiar
with the client.
b. refuse the mandate for the current year to avoid an audit risk that is too high.
c. adjust the audit work performed in the current year as compared to the prior year to reduce audit risk to an
acceptable level.
d. accept the engagement only if GXP agrees to a review level engagement which would reduce the auditor’s
liability.
SOLUTIONS FOR EXERCISES AND PROBLEMS
EP6-1 Industry risks include: competition, product integrity, labelling, suppliers of organic products may be hard to find,
demand for products and willingness to pay higher prices is very uncertain.
Regulatory risks include: ‘organic’ registration and certification is required, standards need to be complied with to
qualify, and this requires appropriate compliance systems and monitoring by management.
Operating risks include: real estate investments’ location and value, new store acquisitions, perishable inventory to
be managed, possibility of product liability if unsafe food products are sold, etc.
All these risks have an impact on accounting in this business. Product inventory valuation is complex because
estimates of costs are required and valuation depends on determining salability of the various organic food
products. There are valuation issues related to whether products are eligible for ‘organic’ labelling, and can be sold
for adequate prices that cover costs on a timely basis given the perishable nature. Accounting for real estate used
in the business also raises issues such as whether locations are viable, whether investments are recoverable as any
impairment must be identified for valuation of these assets. There are also possible and contingent liabilities that
need to be disclosed or recorded if required by the accounting framework.

It is important for the auditor to ensure appropriate accounting information is reported about the business’s
financial performance and conditions, and that disclosure of risks is adequate and in accordance with the financial
reporting framework’s requirements
EP6-2 Audit issues that affect audit risk and risk of material misstatement include:
• Cyclical industry: This increases volatility in the net income and reported numbers. This may make it harder to
identify trends or do analytical procedures where year end balances are compared to prior years. It could
also create the incentive for managers to do earnings management in order to present smoother earnings
year over year and result in a higher risk of misstatement.
• Related party transactions: The company has significant revenues coming from a related company. This could
raise a concern that the sales are not done at fair value. Evidence will need to be obtained to consider the fair
market value of the services. The auditor will also need to ensure that related parties, and the transactions
and balances are accounted for and disclosed in accordance with the reporting framework.
• Large Acquisition: A large unusual and complex transaction occurred in the current year as there was a
business acquisition. This makes the accounting more complex and increases the risk of an error in the
financial reporting as the new business needs to be consolidated with Bellows Home Inspection. The auditor
will need to do additional procedures on the acquisition and consolidation of the financial statements at the
date of acquisition.
• Weak internal controls in the acquired company: Weak internal controls over financial reporting increase the
risk that an error in the financial statements will not be detected by the entity’s existing set of internal
controls. This will likely require that additional audit procedures to be done, especially for the financial
results provided for Home Guards.
• New User: The bank is a new user this year as they are one of the main creditor for the company. The
auditor will need to gain an understanding of the bank’s needs with the financial statements, so they can
ensure they can respond to their needs and adjust materiality if needed. The increased distribution increases
risk of the audit as there are more users relying and making decisions based on the financial statements.
EP6-3
The following accounts would be affected by the financing transaction:
• Cash: The cash balance would increase by the amount received for the loan
• Bank Debt: The liabilities would increase as a new loan needs to be recorded for the balance owed to the
bank.
• Accrued Interest: The accrued interest will need to be adjusted at month end for any interest expense
incurred by the company that hasn’t been paid.
• Interest Expense: Interest expense would need to be recorded for the portion of the interest incurred during
the year.
• Income Tax expense: Will be impacted by the amount of interest as interest is tax deductible.
EP6-4 Business Processes, different industries

a) Bicycle manufacturer
• Revenue processes - processes for accumulating customer orders, credit approval, tying in to
production and delivery scheduling, record keeping for units shipped, customer relations management
processes, issuing invoices, tracking receivables, cash collections, etc.
• Purchases processes - processes for materials procurements tying into production scheduling, supplier
relations management, recording materials received, setting up payables, cash payments, etc.
• Production processes - tying in to customer order process, lead time for materials procurement and
manufacturing labour scheduling, cost accumulation for materials, labour and overheads, quantity
tracking, transfers from work-in-progress to finished goods inventory, etc.
• Finance processes - cash flow projections tying in to borrowings to cover negative cash balance phases
after paying for materials and labour, borrowing and repayment, investing surplus cash, etc.

b) Architect firm
• Revenue processes - processes for obtaining client projects, credit approval, tracking hours and
progress billing, record keeping for hours, issuing invoices, tracking receivables, cash collections, etc.
• Purchases processes - processes for procuring supplies and services, setting up payables, cash
payments, etc.
• Production processes - project planning and staff scheduling, tying in to tracking hours and billings, etc.
after paying for staff hours/salaries, borrowing and repayment, investing surplus cash, etc.
c) Retail grocery store

• Revenue processes - processes for pricing stock on store shelves, cash register control procedures for
sales, cash receipts reconciliations, cash deposits, etc.
• Purchases processes - processes for goods procurement tying into sales projections and economic
ordering quantities, modifications to purchasing plans for special promotions and seasonal demand
items, supplier relations management, recording goods received, inventory management processes,
setting up payables, cash payments, etc.
• Production processes - not applicable
after paying for inventory procurement, borrowing and repayment, investing surplus cash, etc.
EP6-5 Auditors should pay particular attention to external and internal performance measures for the following reasons:
Quality of earnings refers to a company’s ability to replicate its earnings, both in terms of the amounts and the
trends over relatively long periods of time. While users are particularly interested in high quality earnings that are
informative about future performance, managers likewise have incentives to paint the best picture possible.
Auditors have to consider whether the earnings reported reflect actual underlying economic performance and also
provide a realistic basis for users to assess whether the performance is repeatable in future.
External performance measures reported to analysts, creditors and shareholders and internal performance
measures used for personnel review and incentive programs like bonus plans can create pressures on the business
that may increase risk that managers are motivated to misstate financial statements.
For example, the need to meet expectations of third parties to obtain additional equity financing or the granting of
significant bonuses if unrealistic profit targets are met may create pressure to manipulate financial reports through
aggressive accounting choices even to the point of that an auditor may assess that the risk of fraudulent reporting
is significant.
EP-6-6 Existence: It is important to ensure that the accounts received exist (i.e. it comes from a third client and does
represent an amount owed to the company for a service or good provided).
Rights and Obligation: It is important to ensure that client is the rightful owner of the Accounts Receivable. If he
is not the rightful owner, then this would not represent an asset for the company as they are not legally entitled to
the money.
Completeness: It is important to ensure that all outstanding accounts receivable of the client as at the balance
sheet date are included in the account receivable balance. If an account receivable is not recorded, this would
understate the value of the assets.
Valuation and allocation: It is important to audit the allowance for doubtful accounts that is linked to the Accounts
Receivable. This will ensure that the proper provision for uncollectible debt has been taken and that, on a net
basis, the accounts receivable will be presented for the amount of cash the company can expect to collect in the

future.
SOLUTIONS FOR DISCUSSION CASES
DC6-1 Audit risk model

Evaluation of risk assessment conclusions with AR = IR x CR x DR as a model.
a) Ohlsen is not justified in acting upon a belief that IR = 0. He may have seen no adjustments proposed
because (1) none were material or (2) Limberg’s control system has functioned well in the past and
prevented/detected/corrected material errors. If IR = 0, then AR = 0 and no further audit work need be
done. Auditing standards and practice do not permit this level of (non)work based on this little evidence
and knowledge.
b) Jones is not justified in acting upon a belief that CR = 0. She may well know that Lang’s internal accounting
control is exceptionally good, but (1) her review did not cover the last month of Lang’s fiscal year and (2)
control procedures are always subject to lapses, and management override is always a possibility.
Therefore, CR can never equal zero. If CR = 0, that implies AR = 0 and no further audit work would need be
done. Audit practice does not permit an initial assessment of control risk at zero to the exclusion of other
audit procedures.
c) Insofar as audit effectiveness is concerned, Fields’ decision is within the spirit of audit standards. Even if IR =
1 and CR = 1, if DR = 0.02, the AR = 0.02. This audit risk (AR) seems quite small. However, Fields’ decision
may result in an inefficient audit.
d) This case was deliberately left ambiguous, without putting probability numbers on the audit risks. Students
will need to experiment with the model. One approach is to compare the current audit to a hypothetical
last year’s audit when “everything was operating smoothly.” Assume:
Last Year: AR = IR (0.50) + CR (0.20) x DR (0.20) = 0.02

Current year: AR = IR (1.0) + CR (1.0) x DR (0.25) = 0.25
Features of the hypothetical comparison:

1. Inherent risk is greater than last year.
2. Control risk is greater than last year.
3. The audit was done in less time, and maybe the detection risk is a little greater.
4. Audit risk appears to be very high.
An alternative analysis is that Shad perceived higher inherent and control risk early, and he did not put audit time
into trying to assess the risks at less than 100%. He proceeded directly to performance of extensive substantive
procedures and worked a lesser total number of hours, yet still performed a high-quality audit by keeping AR low
by keeping DR low. In this case, however, Shad would still need to do at least a cursory examination of controls,
and document the conclusion, to provide support in the audit file for the assessment of control risk as being very
high, and the decision not to rely on internal control (see CAS 200, paragraph 7).
DC6-2 Planning, inherent and control risk, manufacturing business

The case requires one to apply one’s knowledge of the business, given the facts provided in the case and other
reasonable assumptions, to judge the relevant inherent and control risks for different financial statement
components, to designing appropriate and cost-effective controls and assessing the adequacy of these controls.
Various valid considerations and procedures can be generated.
a) The inherent risk assessments can take into consideration the nature of the item and the risk that an error
can have occurred in accounting for that item in the first place

b) The general tendency for high value items that have higher inherent risks to require stronger controls can
be discussed. This can lead to recognizing the constraint that more extensive controls are more costly and at
some point the additional benefit is not justified. The risk will remain that errors that have occurred will not
be caught by control procedures - this is control risk.
c) Procedures can be described that relate to identifying risk and the controls in place to mitigate those risks.
The assessment involves judgment as to whether the inherent risk is adequately reduced by the control
procedure, and whether the procedure is being followed so as to effectively reduce the risk to a reasonable
level.
DC6-3 a)
Incentive: Taking out a loan for yourself or a close family member would result in a direct increase in cash for the
individual and their family. This could be spent in a variety of ways that could directly improve one’s lifestyle.
Further, by closing more loans (even if it was to oneself) the bonus of the sales person would increase as they had
closed more loans during the given year.
Opportunity: The lack of controls on small business loans of $500K or less was at the center of this fraud. With
no credit review, it was easy for the sales people to issue loans to themselves or close family member. They didn’t
need to collude with anyone. With no one reviewing the disbursement, it was also easy for them to get away with
this for a long period of time.
Rationalization: It appears that some of the sales people rationalized the initial loans by saying this was temporary
– they needed the money now as their bonuses were only paid after year end, so they technically had “earned”
this money and would pay it back. Also, as 20 sales people are reported to have done this, there is a possible
“everyone is doing it” effect. If all the sales people are taking out small business loans, it will make the act look
much more normal and some may use this as a rational to justify their actions.
DC6-4 Obtaining a ‘sufficient’ understanding of internal control
The primary reason for conducting an evaluation of an auditee’s existing internal control system is to give the
auditors a basis for finalizing the details of the account balance audit program--to determine the nature, timing
and extent of subsequent substantive audit procedures. (See CAS 200, paragraph 7.)
A secondary purpose for conducting an evaluation of internal control is to be able to make constructive
suggestions for improvements. Officially, the profession considers these suggestions a part of the audit function
and does not define the work as management consulting.
Another purpose of the evaluation is to report to management and the board of directors or its audit committee
any discovery of “any reportable conditions” of internal control deficiencies. These conditions may suggest a high
risk of error, fraud or other irregularities.
DC6-5 Comprehensive audit planning decisions

a) Factors to consider to support accepting/continuing OMS, based on facts given in OMS case:
Obtaining and reviewing financial information about prospective client

- are there unusual accounts or business practices that audit firm is not familiar with? Need to understand
business risks.
- OMS provides moving and storage services to offices, we need to understand their business process,
nature of sales agreements, liabilities for damage/losses of customer property and related insurance
policies, etc. There may be issues of completeness of liabilities, and valuation of sales that will present
challenges in doing audit. The use of fuel futures is new to OMS

- this raises risks to assess related to valuation issues, whether an accounting policy per GAAP, etc.
Is the financial condition good?
--OMS profits are around $1.6 million, and have Assets-Liabilities around $1.3 million. With such a strong
balance sheet & earnings, there is high certainty it will continue as a going concern
Evaluation of audit firm’s independence
-- if OMS is a continuance decision, our firm needs to consider if it should assign new partner or manager so
he/she will be less familiar and more objective about the OMS audit. We need to re-check that all audit firm
staff still have no conflicts of interest with OMS.
Does audit firm have competency and resources to do an effective audit?
--Considering OMS’s size, location, nature of operations, it is not an unusual or complex business model and
there is no indication of major changes this year (assuming a continuing audit) so the audit firm should still
be capable to complete audit
Determine management’s willingness to accept responsibility for financial statements that are fairly presented in
accordance with GAAP/acceptable framework and accept responsibility for adequate internal control
--OMS management includes the 3 shareholders, this suggests management has integrity and enforces good
controls in their own interest as owners. However, the plans to bring in passive investors could create risks
as the current owner managers might want to bias income upwards to get higher price for new shares…
Predecessor auditor communication
-- This would be required if first time audit assumed, the audit firm will need to find out if any reasons not to
accept the engagement.
b)
Current Assets =2,392,421
Current Liabilities =1,451,844
Current ratio = 1.6 to 1.0
Credit revenues =34643256.99

Net A/R =1,428,583
A/R turnover =24.3 times
CR analysis can tell you liquidity is good - CA can support paying CL. The auditor might do more a rigorous
test with fuel futures excluded (then CR = 1.2 to 1, so not as safe but still okay) - low risk of bankruptcy
A/R turnover tells us that the net A/R balance is collected about twice a month - with 10-day payment terms
this is longer than their collection policy. It suggests there may be some collection delays that can result in
higher risk of bad debts - need to investigate sufficiency of AFBD provision.
c) Materiality levels
Quantitative starting point: 5-10% normal operating income
Base: Calculate “normal income” from trial balance data
NIBT= $1.6 million
Materiality level determination:

Objective is to determine a reasonable Overall Materiality level for financial statements as a whole, consistent
with reasons
Start by taking 5% of NIBT to provide lower end of range (or other reasonable approaches can be considered)
Pre-tax income $1.6 m @ 5% = $80,000
Justification for judgment considers the following:

Qualitative considerations -
Outside investors may look at financial statements to support share price they will pay, for example they
may be using a multiple-of-earnings approach -

Consider the preliminary level in relation to other financial statements components that users may look at,
such as revenues, total assets, etc.
Calculate performance materiality as 70% of materiality level chosen, based on the guidance given in the case. So if
$80,000 chosen above, $56,000 will be used as Overall Performance Materiality.
d) The auditor’s decision on acceptable audit risk level is based on nature of engagement, consequences of audit
failure
Factors to note, with appropriate impact on audit level acceptance:
• Public vs. private company -- OMS is private, would raise AR willing to accept
• Users making risky financial decisions from f/s -- new investors will use audited f/s to check trends using
this year’s audited f/s, possible to calculate and earnings based purchase price, would lower AR
• Auditee financial health/risk of business failure -- OMS financially sound, may raise AR acceptable
• --OMS has plans to grow so faces new risks if strategy doesn’t work - may lower acceptable AR
• Management’s reputation/integrity, willingness accept responsibilities for preparing GAAP f/s,
designing and implementing adequate I/C and to provide written representations -- at OMS this
appears as no problems stated in case, also can support raising acceptable AR level
• Overall, some factors indicate the auditor can accept higher risk and other suggest it should be lower.
This indicates the auditor can accept a moderate level of AR for the OMS audit. Using the guidance in
the case, of the three choices ‘low, lower, lowest’ the ‘lower’ level is appropriate.
e) In order to design an effective audit, auditors must understand the business and the economic environment of
the business including factors such as:
• economic conditions -
• geographic locations -
• developments in taxation and regulation -
• specific industry characteristics & risks -
• business objectives-
• key strategies employed to meet those objectives - quality control, research/improve production
processes, etc.
• risks that threaten achievement of those objectives -
Consider the following case facts in relation to the above business risk factors:
• 80% credit sales - collection risk
• Extras not well controlled as main moving contract since no segregation of collection and ability to not
report - risk of incorrect billings
• Manager discounts may be inappropriate - could allow kickback scheme
• Unrealized gains on futures as revenues - could be risky if lack internal expertise, use of estimates
creates misstatement risk
• Plan to expand, may fail and bring whole company down
• Destroying customer property - insurance can increase,
• Economic - interest rates, increase insurance premiums overall
• Geographic - spread out
• Few assets for amount of services selling - could lower quality and damage reputation and future sales
f) Revenues transactions arise from credit and cash sales. There are different services with different revenue
transactions streams: moving, extra moving services, storage services
Assertions and related IR assessments:

• Existence: No case specific facts suggest a high risk of recording false revenues, so low IR
• Completeness: Depends on good controls over recording all sales & extras, possible to miss recording
unless controls are good, especially extras since may not be contracted through segregated office staff
(movers might arrange these with customers unknown to office staff and pocket extra cash) - so high IR

• Valuation: -- case facts suggest a risk of errors of calculating customer charges due to the different
types of revenue and extra charges that are difficult to monitor, so high IR
• Ownership: - no case specific facts suggest a risk of billing unauthorized amounts, so low IR
• Presentation: classification not complex, accounting policies for revenue & disclosure are clear to apply,
management has strong accounting skills - so low IR (An exception may be for the recording unrealized
gain on futures in revenues - not ‘held for trading’ so it’s not GAAP to put with ordinary revenues, OCI
would be appropriate - this seems to be a specific risk on this aspect of the revenue total only)
DC 6-6 FINANCIAL PERFORMANCE ANALYSIS LO1, LO2
i- Stock up your freezer promotion: This may indicate be a strategy to shift revenues from a future period to the
current period as customers were encouraged to purchase goods in December even if they were only going
to be used in future periods. Revenues should only be recognized when they are earned. If the transaction
was completed (paid and shipped to the client) prior to year-end, then the revenue recognition criteria have
been met, even if the client only uses the product at a future date (BCI completed their end of the deal).
The risk of material misstatement is however increased as Jackie indicated that they had trouble keeping up
with deliveries, so some of the sales claimed for December may not have actually been delivered before
year end. This suggests a cut-off issue and additional testing should be done on these sales to ensure all
sales recorded were in fact shipped prior to year-end. There is a risk of material misstatement related to the
revenue existence/occurrence assertion.
ii – Revenue Recognition – Weddings: The change in the revenue recognition policy could indicate a bias to
increase net income for the current year by recognizing a portion of the revenues from an event that is to
take place in the following accounting period. The fact that no one else in the industry seems to adopt this
policy suggests it is an aggressive accounting policy and increases the risk of a material misstatement for the
audit. There is a risk of material misstatement related to the revenue existence/occurrence assertion.
Additional procedures and enquiries will be needed to decide if this change in accounting policy is
acceptable. Jackie does have a point that an effort to secure the contract and go over the initial planning is
made in the current period and it could be argued that a portion of the revenues should be recognized in
the current period. However, the fact that they currently recognize 20% of the revenues while only 10% is
non-refundable. Since it can be argued that only the 10% non-refundable portion should be recognized
before the wedding is held, the company’s preferred approach suggests once again that BCI is adopting an
aggressive revenue recognition policy. There is a risk of material misstatement related to the revenue
existence/occurrence assertion.
iii- Contingency – Organic Lunch Box
BCI is currently the subject of a lawsuit for misrepresentation with regards to the content of their organic
lunch boxes. Accounting guidelines normally require that a provision be booked if it is likely that BCI will be
liable and an amount can be reasonably estimated. Jackie is dismissing the lawsuit, however, BSP cannot
simply rely on Jackie’s statement. The fact that no provision was booked is in line with a bias to increase net
income for the period. This increases the risk of material misstatement in relation to the completeness
assertion for liabilities.
Additional procedures such as discussion with management and confirmations with external legal counsel
should be performed on this particular claim to determine if it is likely that BCI will be found liable.

Another random document with
no related content on Scribd:
fighting me, and, like large bodies, they move slowly. It will be all the
better for the success of my plans if they don’t bite too quickly.”
“Then you’re not quite ready for them?”
“Not quite, but I shall be in a day or so. Meanwhile, let the ad run.
They’ve seen it and are a bit puzzled over what course to take, I’m
sure.”
“Well, I’ll leave it to you,” Ned remarked. “I’ve got my own
troubles, Tom.”
“You mean about finances?”
“Yes. We’re sailing pretty close to the wind. You’ve sunk much
money in these talking pictures.”
“I realized that when you showed me the figures. But, as I said,
it’s sink or swim now, and I think we’ll swim after I get through with
these fellows who are hounding me.”
It was three days after this that Ned, coming away from a bank
the president of which had suggested that some of the Swift loan
had better be reduced soon, stopped in at the Graphic office. He
presented the slip calling for any replies that might have been
received for Mr. Quick of Box 123, and, somewhat to his surprise, he
was handed an envelope. The paper was of good quality, though
perfectly plain, and the address was neatly printed.
“They’re taking no chances of handwriting being traced,”
remarked Ned, as he hurried back to the laboratory with the missive.
“This may mean business, Tom,” he said to his chum, “or it may
be a suggestion from some other paper that you would do well to put
the ad in their columns. That’s a newspaper trick, you know.”
“I know it is,” assented the young inventor. “However, this may
mean business.” He tore the envelope open and he had no sooner
scanned the few lines on a single sheet of paper within than he
cried: “Hurray!”
“Is it from your enemies?” asked Ned.
“I think it is. Read it!”
Ned let his eyes rove over this:
“If Mr. Quick will present himself at a certain house on
Rattlesnake Island he will learn something to his advantage. Mr.
Quick must present himself absolutely alone. If there is any attempt
at trickery all negotiations will be called off and vigorous retaliatory
measures at once undertaken. Come this midnight.”
“Are you going, Tom?” asked Ned.
“I certainly am!”
“Alone—and to Rattlesnake Island where we were held
prisoners?” cried Ned.
“Why not? They won’t try any trick like that again. They’ll know I
wouldn’t walk into a trap like that without leaving word where I am
bound for and my non-appearance in due time would mean a
search. They aren’t such fools as that. I’ll go and see what they have
to say. I’ll be there when the clock strikes twelve.”
“They aren’t giving you much time for preparation. It’s after two
o’clock now.”
“It’s all the time I need. I’ve been anticipating this and I’m ready.
Now, Ned, I’ll let you into some of my secrets that I’ve been holding
out on you.”
Thereupon Tom told Ned something which made that young man
open his eyes. But even at the end, when the plans were all detailed,
the business manager was a bit doubtful.
“It’s risky, Tom,” he said. “I’m afraid to have you go there alone to
meet these fellows.”
“There’s no danger, I tell you. I’m not afraid. My plans have been
too carefully made to permit of failure.”
But Ned’s face was serious, and when Mr. Swift heard of what his
son proposed to do he added his appeals to the young inventor,
asking him to try some other and less risky method.
“This is the only way,” declared Tom. “I’m going to that midnight
meeting.”
When the time came, Tom Swift set off in one of his motorboats
alone, heading across Lake Carlopa in the darkness, guiding his
craft toward the sinister black shape of Rattlesnake Island.
CHAPTER XX
MASKED MEN
Tom Swift sat at the wheel of his craft, his hands on the spokes
and his eyes gazing ahead through the darkness. He had set a
straight course for Rattlesnake Island and wondered what would
happen after he arrived. In spite of his bold words to Ned Newton,
the young inventor was a little apprehensive, as well he might be.
He scanned the water on either side of him for a possible sight of
other craft that might be heading in the same direction. But though in
the distance he saw and heard other motorboats, none seemed to
be laying a course for Rattlesnake Island.
“I wonder if they’ll be there—and on time,” mused Tom. He did
not whisper, even to the unoccupied darkness about him, any
designation of those he had in mind. He merely said: “I wonder if
they’ll be there.”
It was not a long run, in Tom’s speedy craft, to the sinister, dark
island where he and Ned had lately been prisoners, and almost
before he had finished going over in his mind the various
occurrences that had taken place since he had begun working on his
talking-picture machine, the young inventor found himself
approaching the place.
“Wonder if I’m to land at the dock where Snogg and Janner tied
up the Turtle. Or am I to circle the island until I get a sign?” mused
Tom. “From the fact that they have named as a rendezvous the old
house, I should think it would be at the same dock where Ned and I
saw those rascals working on their boat the time we gave them the
slip. Think I’ll try there first, anyhow.”
Tom was a good navigator, and it did not take him long to get his
bearings and head for the dock in question. As he approached it, he
saw a dim light on it and this convinced him that he was to tie up
there. Slowing his boat to half speed, for he was not sure about the
state of water, and thinking there might be rocks, the young man
stood up and strained his eyes to pierce the gloom. The single
lantern on the end of the dock gave illumination enough to make
certain that the way was clear, as far as obstructions in the water
were concerned.
“Well, here I go—for better or for worse,” said Tom grimly to
himself as he shut off power and allowed his craft to glide up to the
stringpiece. The dock was rather a ruin, but he found a ring in a
beam and made his rope fast there.
Then, before getting out of the boat, Tom looked sharply about as
well as he could by such illumination as a smoking lantern gave.
There was no sight nor sound of any other visitor to Rattlesnake
Island. Tom seemed to be the only one there. Yet he knew there
were others.
“I suppose I’m to go right up and knock at the front door,” and
Tom chuckled a little. “They don’t seem to have appointed a
reception committee with a brass band. Guess those fellows don’t do
business that way. Well, might as well get started.”
Before getting out of his boat, however, he made sure that the
mooring rope was tied in such a way that, if need be, he could make
a running jump into the craft, pull the knot out with one tug of the free
end and so be loosed from the dock. Also he made certain that his
motor would start at once. It was a powerful and speedy craft in
which Tom had come to the island—one that would start with a throw
of a switch, not needing any laborious cranking.
“I might want to get away in a hurry,” he had reasoned.
Thus having taken all precautions to serve him in case of
emergency, Tom clambered up on the dock and started for the shore
end.
As he left the circle of friendly rays from the lantern, he could not
prevent a slight feeling of uneasiness creeping over him. After all, it
was a risky thing that he was doing—trusting himself alone to
unknown men who had every motive for wishing him out of the way
or, if not exactly out of the way, at least prevented from pursuing his
activities in certain directions.
“But I think I’m going to beat them at their own game,” mused
Tom, as he walked along.
His feet made ghostly echoes on the rattling planks of the old
dock, and, now and then, he paused to ascertain if any one else in
the neighborhood were stirring. However, he appeared to be the only
one.
“Let’s see,” mused the young inventor as he was about to step off
the dock to the shore. “As I remember it, the dock was to the east of
the house when Ned and I looked out of the window and saw the
three men. So I must turn right now.”
Accordingly he swung in that direction as he started up a path
that was partly overgrown with weeds. It was quite dark, once he had
left the glow of the dock lantern, and Tom was glad he had brought a
pocket flashlight with him.
Switching this on, he let the bright rays fall in front of him to guide
his steps so he would not get off the path. For he had in mind the
sinister name of the island to which he was paying a midnight visit.
“They say the rattlesnakes are all gone,” mused Tom, as he kept
as nearly as he could to the middle of the path, “but I’m taking no
chances of stepping on one. I don’t want to tread on a tail and be
bitten. Even if their bite isn’t always deadly, it’s bad enough.”
In spite of himself, Tom could not prevent a creepy feeling coming
over him at times as he walked along on the path. He almost wished
he had not selected this means of tricking the plotters. But it was too
late to turn back now. He had made his choice.
Suddenly, when he judged that he was half way to the old house,
Tom heard a noise in the bushes just ahead of him and off to the left.
For a moment he had a fear that it might be the rustle caused by the
passage of a rattlesnake through the underbrush. He flashed his
light in that direction, but instead of the beams picking up the gliding
form of a serpent they illuminated the feet and legs of a man.
Before Tom could cry out or step back, he heard another noise on
his right, and there, too, his flashlight revealed the feet and legs of
another man.
Suddenly the four feet and four legs made a rush and Tom felt
himself caught by the arm on either side. His flashlight was knocked
from his hand, but, falling to the ground, still glowed and its rays
showed Tom that he had been caught by two Negroes.
“Let me go!” he cried, fiercely struggling to free himself. But the
black men held him fast.
Then one spoke, in rather soothing accents, saying:
“It’s all right, sir. We don’t aim to be rough with you, but we got
our orders. I’m sorry I knocked your light down. I’ll pick it up for you,”
and, stooping, he retrieved the flashlight which he gave to Tom.
“Better put it in your pocket, sir,” suggested the other Negro. “You
won’t need it where you’re going. We know the path in the dark. And
don’t be worried. We aren’t going to hurt you.”
“I’m not worried,” declared Tom boldly. “But this is an outrage! I
came here of my own free will for a conference and——”
“That’s all right, sir,” went on the first black man, still soothingly.
“You’re going to be taken to the conference. That’s what we came
down for—to meet you and show you the way.”
Tom was at once struck by the fact that the language of these
Negroes was above the average. They did not talk like poor, old
Eradicate. Rather their talk was that of the man who has seen
service in wealthy families. As this was in line with Tom’s theories
regarding the identity of the men persecuting him, he ceased to
struggle and said:
“Very well. Lead me to the men with whom I have an
appointment.”
“That’s just what we’ll do, sir,” said the man who had picked up
the flashlight. “It’s just a bit farther on.”
The Negroes seemed able to find their way in the dark, which,
Tom reflected, was more than he could have done. In a short time
they led him, gently enough, into a little clearing and there, showing
dimly in the light of the stars, was the house where Tom and Ned
had been prisoners.
If Tom had any compunctions about entering the house again he
had no time to exercise them. Nor, be it known, had he the
inclination. He was there for a purpose and intended to carry it out.
“Right this way, sir,” said one of the Negroes, letting go of Tom’s
right arm and preceding him to the front door. “They’re expecting
you.”
He knocked—whether in a signal code or not Tom was unable to
determine—and the door was opened, letting out a flood of light. The
place seemed to have been prepared for the reception of the young
inventor.
“Go straight ahead,” said the Negro who had opened the door, as
he stepped back to allow Tom to enter.
Tom walked into a hall, furnished only with a chair. One of the
three Negroes—which he could not determine—glided ahead of him,
tapped on a door at the end of the corridor, and opened it in
response to a voice that said:
“Enter!”
Tom Swift saw before him a brilliantly lighted room. Gathered
around a table in the middle were half a dozen men. Each one wore
a black mask and through the eye-holes in them Tom felt himself
being sharply scrutinized.
“You may go, Richard,” said one of the men in cultured tones to
the Negro who had opened the door.
Then the masked faces silently regarded the young inventor.
CHAPTER XXI
A TEMPTING OFFER
“Sit down, please!”
The masked man at the head of the table—who seemed to be
the leader—thus spoke to Tom and motioned to a chair, the only one
in the room that was not occupied. Tom looked at it a bit suspiciously
at first. He knew something of trick chairs—seats that, once
occupied, gripped the sitter in arms of steel. Also this chair might be
over some trapdoor which opened into a pit or into a tunnel that led
to the lake.
But Tom reflected that if the men had contemplated treachery
they could have exercised their will upon him when he first landed on
the island. They need not have waited until now.
The chair seemed an ordinary one, and as the leader motioned
toward it another of the masked men pulled it slightly forward.
Clearly it had no mechanism connected with it.
“Well, I’m here,” said Tom, as he settled back in the chair, noting
that it felt all right.
“So we see, and we are glad of this chance to do business with
you,” remarked one, who, for want of a better designation at present,
shall be denominated Mr. X. “It did not occur to us,” he went on in
cultured tones, “that you would care for this method of arriving at a
settlement. But, since you have, it appears to be a very good one.
We are ready to do business with you.”
Tom was at once impressed by something that was very evident.
These were substantial business men—men of some culture and
presumably position in the world—though they did stoop to
desperate means to gain their ends. They were of an entirely
different class from Snogg and Janner who had kidnapped Tom and
Ned. Nor were they like Greenbaum, though from two or three little
signs Tom had an idea that some of these men were very wealthy.
“Yes, I am here,” went on Tom, holding himself well in hand and
gazing from one masked face to the other. “And I am glad to hear
that you are ready to talk business. But there is one objection.”
“What is it, Mr. Swift?” asked Mr. X courteously. “If you object to
the method of meeting us, remember it was your own suggestion.”
“I am not complaining of the place of meeting nor the manner in
which I was received,” stated Tom. “But I’m not used to doing
business in the dark.”
“In the dark?” wonderingly exclaimed a heavy-set man on the left
of Mr. X. “Why, it’s light here. Should we spend a lot more money in
having more electricity? No!”
“I was not referring to the actual lighting of the place,” returned
Tom, with a little smile. “It’s bright enough in one way. But when I
said I was not in the habit of doing business in the dark, I referred to
your masks. I like to see to whom I am talking.”
“Oh, so he means that!” exclaimed the heavy man.
“I am sorry, Mr. Swift,” put in Mr. X, who seemed affable enough.
“But you will realize that at present we must, for obvious reasons,
remain unknown to you. Perhaps you would not recognize us if we
laid aside our masks, but that we cannot do. There are too many
interests, aside from our own, involved in this to allow it. So if you
feel that you cannot talk freely under the present circumstances you
are at liberty to depart as you came and matters will be the same as
before.”
“Do you mean,” asked Tom sharply, “that I shall be subjected to
the same spying observations and attempts made to destroy my
plant and my talking-picture machine?”
“I have not said so,” was the calm answer. “You are at liberty to
put any construction you like on my decision.”
“There can be but one decision!” snapped Tom.
Mr. X nodded his head in assent.
“You must take us or leave us just as you find us—masked,” he
said slowly. “But I, repeat my offer that you may withdraw at any time
and you will not be harmed in the least.”
“No! No!” exclaimed the heavy man, with a gesture of dissent.
“We want to settle this business now. It is a big business—it must be
settled! I cannot sleep nights thinking what I may lose. It is terrible!”
“You will please let me conduct these negotiations,” said Mr. X
coldly, turning to the interrupter. “Mr. Swift must decide for himself.
He asked for this interview and he must accept our conditions of
granting it. Our masks remain!”
“Very well,” replied Tom, with a shrug of his shoulders. “It is a
small matter, perhaps. We will talk business, as you suggest. You
read my advertisement?” he questioned.
“Doubtless, or we should not be here, nor you, either,” replied Mr.
X, lightly.
“And you said you would pay a good sum to be let alone!” broke
in the stout man, who might be called Mr. B, for he resembled that
letter in build.
“Yes, I said that,” answered Tom. “And I am willing to keep my
word. But I may as well say, here and now, that I am not prepared to
pay cash. I have used so much money in perfecting my machine for
showing in private homes talking pictures of theatrical plays and the
broadcasting of opera and vaudeville that——”
“Oh, is it perfect? Will it work?” anxiously gasped Mr. B.
“It works!” answered Tom. “All I need do now is to put it on the
market and——”
“That is just what we do not intend to let you do!” broke in Mr. X.
“You will not be allowed to do that.”
“Not allowed?” came from Tom quietly. “Those are big words.”
“And we are big men in more senses than one,” said Mr. X, still
softly. “There is no use beating about the bush. We know who you
are, it is only fair you should know who we are, Mr. Swift.”
“Then you will unmask, after all?” inquired Tom.
“No, but we will tell you what interests we represent—if you have
not already guessed it.”
“I think I can guess,” stated Tom. “You are a big syndicate of
moving picture operators.”
“The guess does credit to your intelligence, Tom Swift,” said Mr.
X. “We represent many large moving picture and theatrical interests
of the United States, and we are frank to say that we see ruin ahead
of us if your invention goes on the market uncontrolled, at least in
part, by our interests. I admit that your invention may revolutionize
our industry. If a man can sit in his own home and listen to a radio
program, and, at the same time, see the performers, he certainly
won’t put on a starched shirt and a stiff collar and pay from two to
seven dollars for a seat in the theater.”
“And he won’t even come to a fifty cent movie!” lamented Mr. B.
“True enough,” agreed Mr. X.
“You seem to know something of my affairs,” said Tom, with a
rueful smile. “You have not missed much.”
“We know more than you think we do,” boasted Mr. X. “At the
same time we realize that you are far from beaten, so we wish to
suggest a compromise.”
“We are going to make you a handsome offer!” broke in Mr. B,
much to the evident annoyance of his colleague. “You will be
tempted by it, I am sure. In short——”
“I thought I was to do the talking,” interrupted Mr. X.
“That’s right. Let him do it,” put in two others of the masked men.
Each looked like a hard-headed American business man.
“I’ll listen to any offer you wish to make,” Tom stated. “I came
here prepared to make an offer myself. But I will first listen to yours.”
He could not help admitting that the men knew more than he had
suspected. In spite of the fact that he had tried to keep his invention
a secret, the general principle of it had become known to these
theatrical and moving picture men. Doubtless they had paid their
spies and plotters well.
“To get down to business,” resumed Mr. X, “we are prepared to
offer you a million dollars, Tom Swift. A million dollars!” he repeated
unctuously.
“Think of that, my friend!” broke in Mr. B, who could not keep still.
“A whole million!” His voice capitalized the word. “All your own to do
as you like with! A million dollars! Think of it!”
CHAPTER XXII
FLASHING LIGHTS
Grave though the situation was, Tom Swift could not help smiling
a little at the evident sincerity and anxiety of Mr. B. Nor were the
others less vitally interested. They leaned forward over the table,
staring at Tom’s face, which was in the full glare of a powerful light.
They wanted to see if Tom would give under the strain.
But the young inventor held himself well in hand. Though he was
not quite prepared for the offer, it did not catch him napping. He still
had some cards to play.
“Well,” asked Mr. X, slowly, when there had been a few seconds
of silence following his offer, “what do you say?”
“I’d like to ask a few questions,” Tom replied.
“That’s only fair,” conceded Mr. X. “We’ll not promise to answer
anything you want to know, however,” he stipulated.
“I think you’ll answer this one,” said Tom, with a smile. “There are
always two sides to an offer,” he went on. “One is money, or some
other payment. You have that on your side. Now what am I to give in
exchange for this million dollars? That’s a fair question, isn’t it?”
“Very much so,” agreed Mr. X. “And a natural one. In exchange
for the million we will agree to give you, you, on your part, will hand
over to us all patent and other papers, including sketches, designs,
patterns and blue prints of your so-called talking-picture machine. In
short, you will turn the complete invention over to us, and further
make a promise.”
“What sort of a promise?”
“A promise to go no farther in that field. In other words, you will
forget that such a machine is capable of being made. You will wipe it
out of your mind after you have turned all your rights in it over to us.”
“And may I inquire what you will do with my machine when you
get it?” asked Tom, with a curious smile as he shifted about in his
chair, as though it was no longer comfortable. “If you do get it in
exchange for a million dollars,” he added.
“We’ll burn it up—destroy it!” excitedly cried Mr. B.
Tom Swift could not help starting in surprise. The answer was not
quite what he had expected. He looked for confirmation toward the
masked Mr. X, thinking the big man might have spoken impulsively.
But, somewhat to the astonishment of the young inventor, the leader
nodded in assent.
“Once you turn your invention over to us in exchange for the
million dollars,” stated Mr. X, “it becomes our exclusive property for
us to do with as we please. And, very likely, we shall destroy it.”
“What for?” Tom could not help impulsively asking.
“To prevent our business from being ruined, young man! That’s
why!” burst out Mr. B. “Do you think,” he went on in spite of the effort
Mr. X made to silence him, “we want people to stay at home listening
to music and seeing pictures of a performance on your screen?
Where would we be if millions of people did about pictures what they
are doing right now with their radio receivers? We’d be ruined in six
months and we have millions tied up in our theaters—millions! No,
sir. Once we get your machine we’ll destroy it!”
“You haven’t got it yet,” Tom saw fit to remind him quietly. “And
now, since you have been frank with me I will be the same with you.
Your offer of a million dollars seems big to you. But let me tell you
this. If you offered me ten millions with the proviso that my machine
be destroyed I’d snap my fingers at you as I do now!” and Tom suited
the action to his words, rising from the chair as he did so.
“Gentlemen, I shall bid you good evening!” he went on. “I have
found out what I wanted to know.”
Suddenly Mr. B’s fingers went to the mask on his face. Evidently
he feared it had slipped and revealed his identity. Tom could not help
smiling as he said:
“Oh, I don’t know who you are personally, and I don’t know that I
care. It may make no difference. But I can discover your identities if I
choose. That is neither here nor there. The point is I refuse your offer
and I’m going back to my laboratory and perfect my machine. Inside
of a month it will be on the market!”
“Oh! oh!” wailed Mr. B. Some of the others showed evidence of
perturbation, but Mr. X remained calm.
“Sit down again, Mr. Swift,” he said, and his tone was not as
smooth as before.
“Is that a command or an invitation?” asked Tom sharply.
“You may regard it either way you like,” was the reply. And Tom
did not need to be told that the playing was over—stern reality was
now to the fore. The men still had masks on their faces, but they no
longer masked their intentions.
“Just a minute,” said Tom, still standing by the chair. “You said, at
the beginning that I was here of my own free will—that I could walk
out of here any time I wished.”
“That was true at the time it was stated,” said Mr. X. “I may
withdraw my offer any time.”
“Have you withdrawn it?”
There was a moment’s pause and then came the low reply:
“I have. Yes.”
“Then I am not free to go?”
“Not until you listen further to me,” said Mr. X. “I think you are
very unwise, Tom Swift. We have made you a liberal offer. It is much
more than you can make for a long time if you market your
apparatus. We are interested in controlling it. What difference does it
make to you whether we buy the machine and manufacture it in such
quantities as we please or if we buy it and destroy it—as long as you
get your price?”
“That’s just it!” replied Tom angrily. “I’m not getting my price.”
“We might increase our offer,” suggested Mr. X.
“A certain man once said,” remarked Tom slowly, “that he was
poor, but, poor as he was, the King of England was not rich enough
to buy him. I say the same to you now. I am in need of funds—I do
not hesitate to admit that. But, slender as my bank balance is, there
is not enough cash among you masked men to pay me for
destroying a machine I have worked so hard over—a machine which
I hope will prove to be a delight to humanity. That’s my answer. In
other words, I defy you! I’m through! I’m going to walk out of here
now. This conference is ended!”
“Oh, no, it isn’t ended yet,” said Mr. X in sinister tones as he
arose and stepped toward a push button on the wall. “We have
something else to say to you, Tom Swift. I didn’t want to resort to
harsh means, but there seems to be no hope for it.”
“Wait a minute!” exclaimed the young inventor. “I think I
understand your game. Perhaps you think you can torture me into
giving in. Or you may even have it in mind to kill me, thinking,
thereby, to prevent my machine from being perfected and going on
the market.
“Listen to what I say. If you do away with me it will make no
difference to that machine. It is complete and will be made and
marketed. Full details of the invention are already in Washington to
be patented. More than this—four models have been made. One is
in my laboratory where you may get at it and destroy it—I don’t say
you can’t.
“But there are three other complete and working models in the
hands of three friends of mine in different parts of the country. They
have orders in case I do not reappear by a certain time to make
public all the facts and to put the machine on the market.”
“Oh! oh! He’s got us beat!” lamented the big man.
“No, he hasn’t!” snarled Mr. X. “I’ll force him to do as we want him
to.”
“Oh, so you talk of force now, do you?” asked Tom.
“Since you compel me—yes.”
“Then it is time for me to play the same game,” went on the
young inventor, with a tantalizing smile.
“What do you mean?” came from three of the men, in evident
alarm.
“My instructions were,” said Tom, “to come to this island alone. I
did so, as you doubtless know. But early this morning a number of
my friends preceded me here—and they are here now. Gentlemen,
this house is entirely surrounded. None of you can possibly escape
—neither you nor your Negro thugs. If I am not permitted to walk out
of here unmolested whenever I please, I will give the signal and you
will at once be arrested.”
“You think we will believe such a foolish statement as that?”
scoffed Mr. X. “I tell you that you are at our mercy, Tom Swift! This
house surrounded? Bosh!”
For answer Tom went to a window and raised the shade. At the
same time he pressed the wall switch and plunged the room in
darkness.
“Look!” cried Tom, and from the darkness outside, shining
through the now dulled window glass, came a flashing light, thrice
repeated.
There was a gasp of surprise from the masked men in the dark
room.
“Look here!” went on Tom, moving to a window on the other side
of the room. From the gloom without there shone another of the
thrice flashing lights.
“It is the same on the other two sides of the house,” remarked
Tom.
The masked men sat silent, seemingly dazed.
“What is your answer now?” triumphantly asked the young
inventor as it was made plain to the plotters that they were
surrounded.
CHAPTER XXIII
TOM ACCEPTS
“Gentlemen,” and Tom Swift put a peculiar emphasis on the
word, “I repeat—what is your answer now?”
“Oh, the rascal! He’s got us beat!” lamented the fat man. “Let’s
make terms with him.”
“Make terms, nothing!” sneered Mr. X. “Those are nothing but
lightning bugs! It’s all a clever bluff!”
“Oh, is it?” asked Tom.
Again he stood in front of a window and, as he had done before,
though unseen by the plotters, Tom raised and flashed the pocket
electric torch he had brought with him. Once more, in answer to his
signal, came more flashes from without. Tom’s friends were on the
alert.
“I guess that settles it,” Mr. X was forced to admit. “Turn on the
light here, Tom Swift, and we’ll talk this matter over again.”
“No!” exclaimed the young inventor in ringing tones. “I’ll do the
talking now—you’ll do the listening. I’m in a position to dictate my
terms, and I’ll do it. I owe you something for the manner in which you
had me and my manager kidnapped and brought to this place, also
for what your tool Greenbaum did.”
“Now listen here!” broke in Mr. B, his whole, fat body quivering
with fear as Tom switched on the main light again. “That Greenbaum
fellow, he went farther than we told him to. We never told him to try
to blow you up, and we immediately discharged him when we
learned of it.”
“That is correct,” assented Mr. X. “We do not countenance deeds
of violence. Greenbaum, whom we have since discharged, went
beyond his instructions—far beyond. But he was half crazy.”
“Half crazy?” inquired Tom. “He always impressed me as being
very level-headed—too much so.”
“Still he was not right in his head,” said Mr. B. “He lost a small
fortune in a moving picture investment, and when he learned your
invention might spell the ruin of that industry, so he could never
recoup his losses, he went to desperate lengths.”
“I should say he did,” agreed Tom, with a grim smile, as he
remembered his ruined laboratory and the pains he had suffered.
“But I will exact payment for what he did.”
“You would be within your rights there,” said Mr. X.
“And for the indignities Mr. Newton and I suffered at the hands of
Snogg, Janner and Torpy,” went on the young inventor. “I suppose
you will not deny that they acted for you?” he suggested.
“No, they were our agents,” admitted Mr. B. “But we told them to
treat you with respect, merely to hold you until we could get in touch
with you. It was a mistake that Mr. Newton was kidnapped. We
wanted you held. What terms do you offer?”
“I offer no terms at all. I demand unconditional surrender!”
exclaimed Tom. “If you don’t agree to that, I propose, to use a war
term, to move immediately upon you. In other words, I’ll give the
signal for your arrest.”
“Don’t! Don’t!” begged Mr. B shakingly.
“We are here to make terms, Mr. Swift,” said a third masked man.
“What do you want us to do?” asked Mr. X, and there was no
more threat or defiance in his voice. “You can name your own terms.”
“In the first place,” stipulated Tom, “I want you all to unmask. I
don’t care to do business with men I can’t see. You might as well,” he
added, as he saw them hesitate. “If you’re arrested you will be
known.”
“Gentlemen, he is right!” said Mr. B. “Unmask!”
He set the example by doffing the black silk that covered the
upper part of his face. One after another the five followed and Tom
gasped in surprise when he saw who the men were. They were all
important figures in the theatrical and moving picture business.

8262

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

8262

Uploaded by

Copyright:

Available Formats

Auditing An International Approach 8th

Edition Smieliauskas Solutions Manual

Auditing An International Approach 8th Edition

Auditing an International Approach 6th Edition

Auditing an International Approach 5th Edition

Auditing Canadian 7th Edition Smieliauskas Solutions

Principles of Auditing An Introduction to International

Principles of Auditing An Introduction to International

Auditing Cases An Interactive Learning Approach 7th

Auditing Cases An Interactive Learning Approach 6th

ASSESSING RISKS AND INTERNAL CONTROL

SOLUTIONS FOR REVIEW CHECKPOINTS

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-1

6-10 Five principal assertions in financial statements:

3. Ownership (or Rights and Obligations) assertion:

4. Valuation (or Allocation, Measurement) assertion:

5- Presentation and Disclosure assertion:

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-2

Audit Risk = Inherent Risk x Control Risk x Detection Risk.

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-3

6-20 For example, from a recent Audit Risk Alert:

• Asset valuations--recoverability and bases of accounting.

6-24 Four “processes” and accounts in them:

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-4

X Cost of goods sold

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-5

MC 6-1 [LO1] Business risk is related to business strategy because:

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-6

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-7

SOLUTIONS FOR EXERCISES AND PROBLEMS

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-8

EP6-4 Business Processes, different industries

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-9

c) Retail grocery store

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-10

SOLUTIONS FOR DISCUSSION CASES

DC6-1 Audit risk model

Last Year: AR = IR (0.50) + CR (0.20) x DR (0.20) = 0.02

Features of the hypothetical comparison:

DC6-2 Planning, inherent and control risk, manufacturing business

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-11

DC6-4 Obtaining a ‘sufficient’ understanding of internal control

DC6-5 Comprehensive audit planning decisions

Obtaining and reviewing financial information about prospective client

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-12

Credit revenues =34643256.99

Materiality level determination:

Pre-tax income $1.6 m @ 5% = $80,000

Justification for judgment considers the following:

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-13

Assertions and related IR assessments:

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-14

DC 6-6 FINANCIAL PERFORMANCE ANALYSIS LO1, LO2

iii- Contingency – Organic Lunch Box

Smieliauskas, Auditing: An International Approach, 8th Edition Page 6-15

You might also like