Auditing Questions

AMIS 4500—QUIZ #1 Name ____________________________________________

A. Discuss the attached auditors’ reports, note any unusual items of interest to users.

	Industry	Sales	Net Income	Assets	Liabilities	MarketCap
Reliability	Electronics	$29m	($.8m)	$12m	$11m	$10m
Royale Energy	Natural Gas	$2m	($1m)	$8m	$15m	$3m
VirnetX Holding	IT Services	$303m	$280m	$234m	$10m	$298m

A.1. Reliability {full auditor’s report}

A.2 Royale Energy { partial auditors’ report}

A.3 VirnetX Holding {partial auditors’ report}

To the Stockholders and Board of Directors, Reliability Inc. (Rockville, Maryland)

Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Reliability Inc. as of December 31, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Security and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2, the Company has experienced recurring losses, negative cash flows from operations, cash constraints, has extended payment terms from its customers, and has been unable to negotiate payments due on its related party receivables which are currently in default. The company is currently unable to access the capital markets and believes the impact of the COVID 19 pandemic will continue to have a material impact on its business, operations and cash flows. These factors raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Matter of Emphasis As discussed in Notes 12, the Company has significant related party transactions and arrangements with the majority owners of the Company and other companies owned by the majority owners. In addition to holding several receivable agreements, including notes receivable with these related parties, the Company is currently involved in a lawsuit against one of the majority owners and other companies owned by the majority owner.

We have served as the Company’s auditor since 2009.

Ramirez Jimenez International CPAs (Irvine, California) March 31, 2021, except for the reverse merger discussed in Note 2, dated April 24, 2021

ROYALE ENERGY

OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS

We have audited the accompanying consolidated balance sheets of Royale Energy, Inc. as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended, and the related notes to the consolidated financial statements. In our opinion, based on our audit and the report of the other auditor, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We did not audit the financial statements of RMX Resources, LLC, an equity method investment, which statements reflect total assets and revenue constituting 30 percent and 10 percent, respectively, in 2018, of the related consolidated totals. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for RMX Resources, LLC, is based solely on the report of the other auditors.

VIRNETX HOLDING

CRITICAL AUDIT MATTER

As discussed in Note 12 to the financial statements, during the year ended December 31, 2020 the Company collected a lump sum payment in the amount of $454 million from Apple Inc. on a judgement as a result of a favorable verdict relating to a patent infringement lawsuit. As disclosed by management, the process for determining the value of revenue, $302 million, from the basis of the award was identified in the Final Judgement which included, fixed royalty rate per device, damages for willful infringement, interest, and reimbursement for court costs and attorney’s fees. Our determination that revenue recognition pertaining to the Final Judgement is a critical audit matter results from the significant judgment exercised by management in determining the classification. Processes involving higher amounts of management judgment include the interpretation of the provisions of the Final Judgement to determine the amount of revenue to recognize and whether or not the Company is acting as a principal in the fulfillment of the identified performance obligations.

T F The credit rating agency, Moody’s, just downgraded Einstein Healthcare’s credit rating of their $415m in bonds to ”junk” status (BB+) citing declining margins that are likely to remain weak. Their auditors’, PwC, should consider giving Einstein a going concern audit report.

T F An auditor will use different audit procedures like confirmation (auditor obtains third-party verification) and observation (auditor counts himself/herself). Clients will consider confirmation to verify Inventory and observation to verify Accounts Receivable.

T F The auditors’ report signals that the audit was to only obtain reasonable assurance that the financial statements are free of all misstatements, whether due to error or fraud.

T F The auditor’s report will have two dates if there is either a bankruptcy, stock split, natural disaster or other major event that occurred after the end of field work.

T F On 12/22/2020, Zilzie Wines sued their auditors PwC for accounting malpractice. PwC must resign immediately from the ZilZie audit for the fiscal year ending 12/31/2020.

T F Sherwin Williams auditor, Ernst & Young, should require the client to present a footnote in

the financial statements mentioning that their stock price decreased 58% in 2021. A true fact.

T F From an accounting perspective, shareholders (investors) and creditors (banks) are more important users of financial information than customers and competitors for a firm like Starbucks .

T F If the client insists on preparing their financial statements using the cash basis of accounting, then the auditor should issue a qualified auditors’ report, or adverse if super material.

T F Robinhood ’s stock fell 0.3% the day after the trading app dropped more than 8% in its public Nasdaq debut, marking one of the worst IPO debuts of its size, $34b. Their auditors’, E&Y,

Should consider giving Robinhood a going concern audit report.

C. GAAS or Code of Professional Conduct {Actual Cases}	Allowed/ Acceptable	Banned/ Violation
A local auditor advertises, “Bringing maximum joy to every audit client, at the lowest state-mandated prices”
An international auditing firm advertises: “Experience Attention”.
A regional auditing firm starts a blog highlighting the firm as a “thought leader” and showcases the knowledge and insights of their partners.
The individual partners of a Big4 audit firm donate over $1m to a presidential campaign in 2020.
The SEC barred a Big4 audit partner from performing audit work for three years given the partner’s negligence. The Big4 audit firm immediately demoted the partner to manager but still allowed him to continue to service audit clients.
A Big4 audit firm was successful in attracting 17 new Fortune 500 audit clients, and the Big4 firm pays a $120k bonus to all audit partners.
A Big4 audit firm designed and implemented a new internal control system for a large accelerated firm and then acted as the internal auditor. The large accelerated firm was not an audit client.
A national auditing firm performed the 2020 audit and was compensated by the client with a $2.5m promissory note, due and payable in 12 months. The note was convertible to common stock. The audit firm is currently auditing 2021.
A Big4 senior manager, a CPA , was angry for being denied promotion to partner. The CPA destroyed the Big4 firm’s cloud computer files for the three audit clients he serviced. The CPA is not being charged by authorities.
Given unanticipated staff departures, a Big4 audit firm assigns an intern to audit a $4b allowance for doubtful account, for the ninth biggest bank in the country.
A CPA is an OSU graduate, annually purchases OSU football and basketball tickets, contributes to OSU, and has dedicated a room in his/her house as an OSU shrine with quality memorabilia. The CPA is assigned to the OSU audit.
A Regional CPA is arrested for insurance fraud, accused of falsifying multiple life insurance applications. He pleads no-contest to the charges and is fined and imprisoned for 11 months.

D. Blue Apron delivers healthy meal kits to customer’s homes. Blue Apron is audited by E&Y-NYC and received an unqualified opinion in FYE 2020. The firm issued the following press release.

New York, NY, Aug. 03, 2021 (GLOBE NEWSWIRE) – Blue Apron (NYSE:APRN), a leader in the meal delivery industry, reported results for its second quarter ended June 30, 2021. Second Quarter 2021 highlights include net revenues were $124 million, a decrease of 5.5% year-over-year. Gross profit margin of 37% of net revenues; down from 41% of net revenues year-over-year. Net loss was $18.8 million, or $0.98 loss per common share, compared to last year’s net income of $1.1 million or $0.08 earnings per share. We’ve strengthened our balance sheet and improved financial flexibility with $51million in cash, $215 million in assets, and raised $21 million in equity financing in the second quarter 2021. Operational cash outflows decreased from $3 million to ($10) million. We are also driving strong Average Revenue per Customer growth reaching $64.95 in the second quarter, up from $60.88 year-over-year. Stock price increased 4.9%, to $4.51 per share, upon the second quarter announcement, which also included plans for 16 new product launches.
	(in millions)	2Q2021 as of 6/30/21	2Q2020 as of 6/30/20
D.1. Prepare a basic income statement for
Blue Apron for the second quarter 2021,
and second quarter 2020, from the
information provided.
(Use only the spaces needed)

D.2. Assume you’re Blue Apron’s CFO, argue against a going concern audit report in FYE 12/31/21?

D.3. Assume you’re the audit partner assigned to Blue Apron. What troubling signs do you observe

that might lead you to consider a going concern audit report for 2021?