1.Stan is an auditor for Cartman& Kenny, CPA. He has recently beenassigned to a new private client called Southpark Services, a provider of Web management services. Southpark has clients throughout the United States. The company manages the clients' Web sites, keeping them up to date, resolving problems, and doing any other programming or troubleshooting that their clients need. The two Southpark owners are hands-on managers. They, along with three other employees,provide the Web site management services for their clients. Although they don't have access to their clients'books or bank accounts, they have the ability to alter the Web site, and any data that flows through the Web site before it goes to the company or the customer. Southpark has one office manager with an undergraduate accounting degree and one full-time bookkeeper. In discussions with management, Stan learns that Southpark Services "doesn't bother"to maintain any processes specifically directed toward good internal controls. When Stan asked why,management replied,"internal control is too expensive for us, and since we are not a public company and Section 404 does not apply to us, we don't see any value internal control can offer our management."

Required:

(a) Develop a list of concerns that Southpark's clients might have based on management's attitude. Classify those concerns into two lists-concerns that affect the business and concerns that might affect their productive output, and thus the client's business operations. Some of the concerns you identify might end up on both lists.

(b)Suggest processes and controls that Southpark can implement to limit the risk of the items you listed in (a).

(c) How would Stan examine or test each of the processes and controls you list in (b)?

2.Greg Norman is the auditor in charge of the Rogers Pharmaceutical Company audit. In assessing the internal controls for the company, Greg finds that the company bills customers and receives payments at three offices in three separate states using three different and incompatible software systems for tracking payments. Rogers's terms of sale varies with the customer and varies from 30 days to 90 days. Open invoices are aged based on when they were booked to the receivables, but cash, chargebacks, or rebates are aged based on when they were applied to the account. Thus, a credit could be posted to the customer's account when it was received, but the related invoice(s) remains open as a receivable and continues to age. Chargebacks are significant and linked to batch of product rather than invoice. Most similarcompanies have credit limits or credit checks but Rogers's does not because all wholesalers are board certified M.D.'s, like the company's founder.

• Rogers's total accounts receivable was $25,276,025.
• Rogers's total accounts receivable past due over 61 days was $17,434,500.
• Rogers's past top-five wholesalers had accounts receivable of $13,457,516.
• Rogers's top-five wholesale customers had $5,428,850 past due over 61 days.
• Rogers's allowance for doubtful accounts of $266,000 did not include any estimates for the top-five wholesale customers because it was management's belief at the time that the top-five wholesalers did not present a collection risk.

Required:

Based on these control issues and findings, explain some of the most likely sources of misstatement that exist.

3.Find the following values, using the equations and then a financial calculator. Compounding/discounting occurs annually.

a. An initial $500 compounded for 1 year at 6 percent.

b. An initial $500 compounded for 2 years at 6 percent.

c. The present value of $500 due in 1 year at a discount rate of 6 percent.

d. The present value of $500 due in 2 years at a discount rate of 6 percent.

4.Find the future value of the following annuities. The first payment in these annuities is made at the end of Year 1; that is, they are ordinary annuities. Assume that compounding occurs once a year.

a. $400 per year for 10 years at 10 percent.

b. $200 per year for 5 years at 5 percent.

c. $400 per year for 5 years at 0 percent.

d. Now rework parts a, b, and c assuming they are annuities due.

5.Find the present values of these ordinary annuities. Discounting occurs once a year.

a. $400 per year for 10 years at 10%

b. $200 per year for 5 years at 5%

c. $400 per year for 5 years at 0%

d. Rework Parts a, b, and c assuming they are annuities due.

6.What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be?

7.a.         Find the present values of the following cash flow streams at 8% compounded annually

0           1          2        3          4          5

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Stream A        $0        $100   $400   $400   $400   $300

Stream B        $0        $300   $400   $400   $400   $100

B. What are the PVs of the streams at 0% compounded annually?

8.Find the amount to which $500 will grow under each of these conditions:

a.12% compounded annually for 5 years

b.12% compounded semiannually for 5 yrs

c.12 % compounded quarterly for 5 years

d. 12 %compounded monthly for 5 yrs

e. 12% compounded daily for 5 yrs

f. Why does the observed pattern of FVs occur?

9.Find the present value of $500 due in the future under each of the following conditions:

a. 12 percent nominal rate, semiannual compounding, discounted back 5 years.

b. 12 percent nominal rate, quarterly compounding, discounted back 5 years.

c. 12 percent nominal rate, monthly compounding, discounted back 1 year.

10.Find the future values of the following ordinary annuities.

            a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded  semiannually

            b. FV of $200 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly

            c. The annuities described in parts a and b have the same total amount of money paid into them during the 5-year period, and both earn interest at the same nominal rate,  yet the annuity in part b earns $101.75 more than the one in part a over the 5 years. Why does this occur?

11.Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily.

a. Based on the EAR (or EFF%), which bank should you use?

b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.