Exercise 10–1 [General]

Two years ago you were hired as an accountant in the tax department
of a small regional accounting firm. This year you have been asked
to help mentor an intern from the local university. This intern, Jeff
Golightly, has been following your progress as you’ve researched a client’s
tax problem. Your conclusions, which are complex and technical,
have been approved by your supervisors.
Jeff sent you an email to suggest that you and he meet with the
client over lunch and present the results of your research orally. That
way, he argues, you can avoid the work and aggravation of putting your
findings into a written client letter.
Write a memo to Jeff in which you explain why his idea is not a
good one. Invent any information you feel is necessary to make your
memo complete.

To: Jeff Golightly

From: xxx
Date: 9/18/2021
Subject: Need a Formal Letter for Our Client

I have finished the analysis of our client’s problem. I see that you have suggested we go over the

plan with the client over lunch. The client’s problem is too complex and a casual lunch meeting

of talking it over is not enough. I advise that you and I to compose a full written report with all

the details and explanations with charts and graphs to help the client have a better understanding

of our strategy, conclusion, and solution to the client’s problem. Also, meeting the client and

presenting the idea would take longer than just a lunch hour. We can make a lengthy

appointment with the client in our firm, while explaining our solutions, and give out a copy of

our written report. That way, once the client has a rough understanding of our plan, he/she can

refer the report for details.

Exercise 10–2 [General]

You are a manager in a local CPA firm, Barry, Peters, & Travis. While
attending the symphony in your city you noticed in the program that
a couple of other CPA firms in the area were listed among the donors;
one had given $100,000 and another had given $40,000. As a fan of the
symphony, you would like to see your firm also make a donation. However,
beyond wanting to support the symphony, you want to encourage
such a donation because you think it would enhance the image of your
firm and be a good marketing move. You note that several of your
firm’s clients have also made donations.
Write a memo to the partner-in-charge of your firm, John Hoffman,
persuading him to support such a donation.
To: John Hoffman
From: xxx
Date: 9/18/2021
Subject: Symphony Donation

There is an ongoing symphony hosted in our city from Aug 4 to 9. I attended the symphony

yesterday and saw names of couple of our competing CPA firms from our area were among the

donors, including donation amount of $100,000 and $40,000. I would like to suggest that we

make such donation too to have our name to be shown. There were about 6,000 attended the

symphony yesterday, and I believe this move, other than a PR stunt, will show the audiences that

we really care about our local community, and we have contributed back of our earnings back to

society. Also, it would avoid that our competitors have an advantage in the local marketing. We

can donate just a little bit more than $100,000 to show that we are bigger than the other two CPA

firms, which is really nothing considering it only consists less than 1% of our last fiscal year’s

earnings.

Exercise 10–4 [Managerial]

You are a staff accountant for Mitchell Manufacturing, Inc., a large
electronics manufacturing company. Mitchell has four sales divisions,
three manufacturing plants, and a home office in Dearborn, Michigan,
which houses all the administrative offices. Management is considering
using the cloud in accounting and auditing for the first time. Jeff Smart,
Chief Operating Officer of Mitchell, has asked you to answer the following
questions in a memo:
• What is the cloud?
• How might Mitchell Manufacturing use the cloud in accounting
and auditing?
• What advantages might there be to Mitchell Manufacturing’s use
of the cloud?
Write a memo to Mr. Smart responding to these questions. Invent any
information you feel is necessary to make your memo complete.

To: Jeff Smart, COO

From: Xxx
Date: 9/18/2021
Subject: Cloud Migration
As you know, we have been considering migrate our accounting and auditing system over cloud

for over a year now. Our manufacturing, inventory, and distribution systems have adopted cloud

for two years, and their results are outstanding. I am here to answer a few questions of yours

about the cloud.

• What is the cloud?

Cloud services are fully managed by cloud computing vendors and service providers. They’re

made available to customers from the providers' servers, so there's no need for a company to host

the applications on its own on-premises servers.

• How might Mitchell Manufacturing use the cloud in accounting

and auditing?

I no long need for our local server anymore and we can access and update the accounting and

auditing system anywhere any time. The migration to the cloud takes less than 24 hours.

• What advantages might there be to Mitchell Manufacturing’s use

of the cloud?

We easily increase the scalability as our company grows.

It has better security measures. It is safer as our database and records are being backup in

multiple cloud servers, as well as we always keep a local record.

System is real time synced to our external accounting and auditing firms, so that any update will

be instant on both sides.

It has better flexibility. It can be accessed by our accountant any where that has an internet

connection, for an example, at home.

It is a newer system with faster response and friendlier user interface.

Therefore, I suggest that we compare the services and prices from a few vendors and begin our

cloud upgrade starting next month.

Exercise 10–5 [Financial]

You are newly hired as an accountant for Hill Business Technologies,
Inc., a small service business that has no formal capital budgeting
system.
The president of your company, Janice Hill, has requested that
you write a memo to her explaining what the internal rate of return
method of investment evaluation is, how it differs from the net present
value and payback period methods, and why Hill Business Technologies
should use the internal rate of return method for capital budgeting purposes
instead of either of the other methods. Write the memo. Invent
any information you feel is necessary to make your memo complete.

To: Janice Hill, President

From: Xxx
Date: 9/18/2021
Subject: Internal Rate of Return is the Way to Go

The internal rate of return (IRR) is a cash flow discounting technique that gives the rate of return

obtained by the project. The internal rate of return is the discount rate when the sum of the initial

cash expenditure and the discounted cash inflow is zero.

The net present value method, called NPV, is a capital budgeting decision-making tool that uses

discounted cash flow analysis to evaluate the net present value of a project, which is equivalent

to pursuing the financial benefits of a specific project.

The return method is usually used to evaluate capital investment projects. Using this method, we

first determine the time required for our company to recover a single capital project investment-

the payback period-and then select the project with the shortest payback period. To determine the

payback period, you can divide the total cost of the project by the annual cash flow you expect

from the project.

IRR is the discount rate when the net present value (NPV) is zero. The internal rate of return

method uses the net present value method in reverse. Considering the undiscounted cash flow of
the project, this method can calculate the discount rate, which results in a net present value of

zero. The zero point represents the break-even point of the project's profitability.

Exercise 10–6 [Auditing]

In recent years, assessment of organizational culture has become an
important issue in internal auditing. As an accountant employed in
your company’s financial division, you have been asked by the comptroller,
Janice Graham, to write a briefing memo for her that she can
use in several meetings she has set up with company managers to discuss
this issue. Write the briefing memo for Ms. Graham. Invent any
information you feel is necessary to make your memo complete.

To: Janice Graham, Accountant

From: Xxx
Date: 9/18/2021
Subject: Assessment of Organizational Culture

Organizational culture drives the development of business and the way in which strategies are

executed. All organizations have a culture, whether it is intentionally created or not. There may

be organizational subcultures within individual departments, especially if there are multiple

locations or campuses. Solving cultural issues is important because it provides opportunities to

reduce risks and seize opportunities to take action to achieve success. Audit culture helps internal

auditors understand the risks associated with organizational culture, how effective management

of these risks supports a successful control environment, and how to conduct cultural

assessments. The work of internal auditors includes, but is not limited to, a full understanding of

the business significance of cultural and behavioral risks in the organization's control

environment; identifying the key components of cultural and behavioral risks; understanding the

concerns and expectations of major stakeholders related to cultural and behavioral risks;

Acknowledge the role of internal audit in assessing and reporting on organizational culture;

based on example tools/guidelines, understand possible methods for assessing and reporting on

organizational culture and behavioral risk management.

Exercise 10–7 [Managerial]
You are a managerial accountant at Gourmet Restaurant Supplies,
which supplies fresh produce, meat, seafood, and food staples to the
area’s finest restaurants. You have been asked by the controller to write
a memo to the company’s regional managers that will explain costvolume-
profit (CVP) analysis. In particular, the controller hopes that
managers will understand how CVP analysis can help them perform
their responsibilities.
Write the memo to Gourmet’s three regional managers: Lupe
Garcia,
Sybil Alexander, and Paul Chan. You can make up hypothetical
examples if needed to illustrate your memo.

To: Lupe Garcia, Sybil Alexander, and Paul Chan

From: Xxx
Date: 9/18/2021
Subject: Cost-volume-profit (CVP)

Cost-volume-profit analysis, usually also called break-even analysis, aims to determine the

break-even point of different sales volumes and cost structures, which is useful for managers to

make short-term business decisions. The CVP analysis makes several assumptions, including

that the sales price, fixed and variable costs per unit are constant. Running a CVP analysis

involves using several equations of price, cost, and other variables, and then plotting them on an

economic chart. Breakeven sales are calculated by dividing fixed costs by contribution margin,

and contribution margin is calculated by subtracting variable costs from sales revenue.

CVP analysis can be used to determine whether it is economically reasonable to produce our

restaurant supplies. The target profit rate is added to the breakeven sales volume, that is, the

number of units that need to be sold to cover the cost of manufacturing the product to achieve the

target sales volume required to generate the required profit. Our supervisor can use CVP to

compare the product’s sales forecast with the target sales volume to see if it’s worth making the

product.
Exercise 10–8 [Tax]
You are a CGMA working for a large multinational manufacturing
firm that has operations in 37 countries, mostly in Europe, North and
South America, and Southeast Asia. Some of your company’s competitors
in the United States have recently been subjected to transfer
pricing audits by the IRS. Your controller, James Wheat, has asked
you to prepare a briefing memo concerning transfer pricing audits.
The memo should cover the issues of why the IRS is motivated to
conduct them, and what your company can do to either avoid such
audits or mitigate the burden should one be conducted. Write the
memo inventing any information you feel is necessary to make your
briefing memo complete.

To: James Wheat, Controller

From: Xxx
Date: 9/18/2021
Subject: Avoid IRS’s transfer pricing audits

A transfer pricing audit is an investigation conducted by tax authorities to determine whether a

company complies with applicable transfer pricing regulations. During the analysis process, the

tax authority evaluates company information such as accounts, ledgers, statutory records,

documents, transfer pricing documents and agreements.

The US Internal Revenue Service initiates a transfer pricing audit to determine whether the

company complies with applicable transfer pricing regulations. During the analysis process, the

tax authority evaluates company information such as accounts, ledgers, statutory records,

documents, transfer pricing documents and agreements. There are different types and levels of

auditing. In some cases, audits focus on specific controlled transactions and are done by a tax

inspector. In other cases, transfer pricing may be part of a larger review and involve the entire

investigation team.

TPA cannot be avoided, but it can be mitigated. When asked to conduct a transfer pricing audit,

we can do several things. Before handing over any information, ask the tax authority about the

nature and scope of the audit. Inform management and key stakeholders of the audit situation. Be

methodical when preparing records. Let us have solid documents and be fully prepared. The
confirmed documents allow us to cancel funding for the transfer pricing policy. Always comply

with the IRS, otherwise we may face review during IRS visits or audits. Put us in a non-

aggressive position. One explanation for the high rate of disputes is that tax authorities believe

that multinational companies use transfer pricing as a tool to reduce their overall tax liability. An

aggressive transfer pricing stance will not help avoid scrutiny. It's best to keep a middle ground.

Unless we have a good reason, do not use the lower quartile or the upper quartile to support the

median.

Exercise 10–9 [Financial]

Daniel Gordon, the president of the Skinner Company, is considering a
bond issue to raise $1,000,000 for the company. Mr. Gordon notes that
long-term treasury bonds yield 3%, which he thinks is a good loan rate.
Before proceeding with the bond issue, however, Mr. Gordon wants to
know more about it. Specifically, he wonders what the annual interest
payments would be on the bonds.
You are a financial analyst at Skinner Company. Write a memo to
Mr. Gordon explaining what the interest payments on a $1,000,000,
20-year bond issue would be if the bonds were issued at a 3% yield.
Also explain in your memo why the Skinner Company would probably
not be able to issue the bonds at 3%.

To: Daniel Gordon, Prsident

From: Xxx
Date: 9/18/2021
Subject: We Cannot Afford the Bond

$1,000,000 3% 20 years

Annual interest payment is $1,000,000 * 3% = $30,000

20 years is $600,000

Based on our existing bonds, loans, and our fast-paced expansion rate, we may be able to afford

this loan. It would be a better option to issue some stocks.

Exercise 10–11 [Auditing]

Assume you are a staff accountant working for Kim & Kirkpatrick,
Inc. (K&K), a small publicly traded company that will soon have its
financial statements audited by a local CPA firm, Young, Mitchell,
and Gregory. Eleanor Lee, a rising manager at K&K, expects to work
closely with the auditors. Ms. Lee has a general business background
and several years experience working for K&K, but her knowledge
of auditing is limited. She sees you in the hall one day and during the
conversation, she tells you she is confused about a term she’s heard of
that will somehow affect the upcoming audit. The term she refers to is
materiality. You talk with her briefly about materiality, but as she walks
away she still seems to be a little confused. Later she asks you to write
her a memo explaining the concept of materiality and possible ways it
might affect the audit of K&K.
Write the memo, inventing any details you need to make your discussion
clear and readable.

To: Eleanor Lee, Manager

From: Xxx
Date: 9/18/2021
Subject: Materiality

According to the generally accepted accounting principles in the United States, the definition of

materiality is the omission or misstatement of an item in the financial report is significant. If

based on the surrounding circumstances, the importance of the item makes it possible for a

reasonable person to rely on the report. Or correct the item and change or affect it. Significant

events or information are any events or facts that will affect the judgment of informed investors.

Major events should be publicly disclosed together with the corresponding financial statements.

In addition, if there is a change in accounting methods or assumptions and the change has a

significant impact, the change must be disclosed along with the financial impact of the change.

Under the International Financial Reporting Standard, the definition states that if omissions,

misstatements, or obscure information can reasonably be expected to affect major users’

decisions based on these financial statements, the information is important.

Exercise 10–12 [Auditing/Current Professional Issues]

You are an audit partner in a medium-size CPA firm, Kilmer, Kissenger,
and Kennedy. Several of your larger audit clients have read in the
news about the possibility that audit firm rotation might at some time
be required and have asked whether they should be prepared to comply
with such a requirement in the near future. You have been asked by
your partners to prepare a memo for distribution to your firm’s clients
that discusses the pros and cons of such a requirement and your evaluation
of the likelihood of its occurrence in the near future.
Write the memo, inventing any details you need to make your discussion
clear and readable.
To: Kilmer, Kissenger, and Kennedy, Partners
From: Xxx
Date: 9/18/2021
Subject: Materiality

As you know, we are facing an upcoming auditor rotation. The independence of auditors is the

main goal of the rotation of accounting firms. However, this may only lead to resolution of

independence through appearance. If auditors are forced to change every five years, yes, they

will seem to be more independent, but this does not actually bring independence. The audit

committee is responsible for apparent independence, but the auditor is actually the culprit for

independence. Because auditors may not be 100% independent in appearance, it does not mean

that auditors cannot express their opinions based on the evidence obtained from the audit

completely and impartially, which will make them actually independent.

The Accounting Oversight Committee of Listed Companies is firmly opposed to the proposal of

mandatory audit firm rotation in the United States, especially after the House of Representatives

approved a bill that effectively prohibits mandatory firm rotation in 2013. However, the

Sarbanes-Oxley Act of 2002 still requires major partners to provide no more than five years of

service during audits overseeing the same company’s customers. In the European Union,

mandatory re-tenders are required every 10 years, in which companies must invite bids from

other auditing companies after using a company for ten years.

However, despite the frequent occurrence of international accounting scandals in recent years,

the audit market, which is still dominated by the Big Four accounting firms, has been calling for

reform. Both the EU and the UK are planning further reforms, mainly involving the separation of

audit and consulting services. Although the calls for mandatory audit firm rotation seem to have

subsided in recent years, two academic studies even questioned the need for partner rotation.
Auditors have many strict standards that they must comply with. These standards are designed to

be independent of the companies they audit. The most important one is the mandatory rotation of

the chief auditor every five years. This is a more cost-effective way to increase the independence

between auditors and clients. When the chief auditor changes, they must "start from the

beginning" with the customer, which means that the long-term relationship will not be intact. In

addition, compared with a brand-new company, the audit company will have to spend less time

on auditing, thereby saving a lot of time and most importantly, saving money. If companies are

required to rotate their auditing companies every five years, they will face a higher risk of bad

audits. On the issue of audit quality, the researchers found that, on average, the quality of the

five-year mandatory rotation period has nothing to do with the length of the partner’s and client’s

terms. In addition to restatement announcements, restatement announcements are more frequent

in the first phase. Two years after the rotation. The increase in previous misstatement

announcements indicates the benefits of a new look, but other important indicators of audit

quality are not. For example, it was found that the probability of financial misstatement did not

decrease in the past two years, and the level of accruals did not decrease. It is believed to be

particularly vulnerable to management manipulation.