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ACC - Hide-It (HI), a family-owned business based in Tombstone

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Question;Hide-It (HI), a family-owned business based in Tombstone, Arizona, builds custom homeswith special features, such as hidden rooms and hidden wall safes. Hide-It has been an auditclient for three years.You are about to sign off on a ?clean? opinion on HI?s current annual fi nancial statementswhen Art Hyde, the VP-Finance, calls to tell you that the Arizona Department of Revenuehas seized control of a Hide-It bank account that includes about $450,000 of company funds,the account is not currently recorded in the accounting system and you had been unaware ofit. In response to your questions about the origin of the funds, Art assures you that the funds,though not recorded as revenue, had been obtained legitimately. He explains that all of themoney came from separately billed but unrecorded change orders to items in contracts completedbefore you became HI?s auditor, and before he or any members of current managementbecame involved with the company. You subsequently determine that there is insuffi cient evidenceto allow you to reconstruct the nature of these cash transactions, although the followinganalysis is available from the Arizona Department of Revenue:Deposits 1/17/X2?12/3/X4 $455,000Interest earned 1/2/X2?12/31/X8 95,000Withdrawals 2/12/X3?4/7/X7 (100,000)Balance 12/31/X8 $450,000Art also informs you that HI has agreed to pay a combined tax and penalty of 12 percent onthe total funds deposited within 120 days as required by a recently enacted rule that providesamnesty for tax evaders. Furthermore, he states that negotiations with the Internal RevenueService are in process.a. The professional standards defi ne errors as unintentional misstatements or omissions ofamounts or disclosures in the fi nancial statements. Is the situation described an error?b. The professional standards state that fraud relates to intentional misstatements or omissionsof amounts or disclosures in the fi nancial statements. Misstatements due to fraudmay occur due to either (a) fraudulent fi nancial reporting or (b) misappropriation of assets.Does the situation appear to be fraud? If so, is it fraudulent fi nancial reporting, misappropriationof assets, or both?c. The professional standards outline certain auditor responsibilities relating to identifying client noncompliance with laws and distinguish between laws with a ?direct eff ect? onthe fi nancial statements and other laws. Does the situation herein relate to noncompliancewith laws as discussed within the auditing standards? If so, is the noncompliance related toa law with a direct eff ect on the fi nancial statements or another law.d. Should the CPA fi rm resign in this situation? If the decision is not clear-cut, what additionalinformation would you desire before deciding?

 

Paper#41404 | Written in 18-Jul-2015

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