You are doing a review services and related tax work engagement for Murphy Const

Question

You are doing a review services and related tax work engagement for Murphy Construction Company. You have made extensive inquiries of management about their financial statements and have concluded that management has an excellent understanding of its business and is honest, but lacking in knowledge of technical accounting issues. In doing the review you determine the following:

1. Repairs and maintenance expense has increased significantly compared to the preceding year. The president states that this seems to have been a year with a lot of repairs, in part because their equipment is getting older.

2. Property tax expense is the same as last year even though Murphy purchased a new building, including the land. The president states that there are no real estate taxes on the new building and land until next year.

3. Based on your knowledge of the construction industry you know that the pipes Murphy uses in construction have had a decrease in selling price to construction companies near the end of the current year. The president states that even though they have a large pipe inventory it will all be used in the next year or two, so the current price doesn’t matter because they won’t need to buy any.

4. Accounts receivable has increased almost 25% compared to the previous year, but the allowance for uncollectible accounts has stayed the same. The president states that even though receivables have increased, they still expect uncollectible accounts to be less than the stated allowance.

5. In discussions with the president you determine that there is a material uninsured lawsuit against the company from a former customer. The president believes it is a frivolous lawsuit and will not permit a footnote about it for fear that it will result in similar lawsuits from other customers.

Required

a. Beyond inquiries and analytical procedures, what are the accountant’s responsibilities in performing review service engagements?

b. Describe what you should do in each of the preceding situations, assuming each one is material.

Explanation / Answer

Answer:a. In carrying out a review services the accountants must be independent from the clients and should have enough knowledge of the company which the business runs. They would obtain adequate knowledge of the client’s business to make quick enquiry and evaluation of the information gathered, with the limited purpose of determining the reliability of the information reported on. The review should involve enquiries, analytical procedures and discussion with liable client executives.

Answer:b.

1. The accountant must obtain the information of accounting principles and practices of the TMurphy Construction Company. The accountant should make inquires of management about financial statement.

2. The accountant has to verify accounting principles and practice of the industry. He should carry out an annual review of tax liability. Accountant must sure that tax reporting system is ample and practical.

3. The CPA firm should apply GAAS to review an organization’s internal control, process and policies. It should verify the basis of inventory valuations and general ledger control accounts with physical inventory. It should see if there are any inventory burdens.

4. The accountant should compare account receivables balance with various cash receipts, checks and credit cards records. He should analyze reports including income statements and balance sheet.

5. The accountant should ask for that client management send a letter of audit inquiry to those legal representatives with whom management consulted about litigation, claims, and assessments.

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