1. Markly Werke, Inc. is a public corporation that manufactures a line of home appliances. These comments were included in the company’s 2004 annual report to the shareholders: The integrity of the financial information reported by Markly Werke, Inc. is the responsibility of the company’s management. Fulfilling this responsibility requires the preparation of financial statements in accordance with applicable accounting standards. Markly Werke, Inc. uses an established system of accounting and internal controls in gathering and processing financial data. Management believes that internal control is sufficiently maintained by the established business policies and procedures and the ongoing review of operations by Markly Werke’s internal audit department. Don & Servan, an independent auditing firm, is engaged to issue an opinion on the financial statements of Markly Werke, Inc. The opinion is based upon the audit of the company’s financial statements in accordance with auditing standards. The audit committee of Markly Werke’s board of directors reviews the audit report submitted by Don & Servan, including the audited financial statements. The external auditing firm has full and free access to the audit committee.
Answer the following questions:
(a) Judgement and estimates are necessary in the application of accounting standards. Whose judgement and estimates are reflected in the financial statements of Markly Werke, Inc? Explain your answer.
(b) Explain who is responsible for the establishment and maintenance of Markly Werke’s accounting system and internal controls.
(c) Explain the extent of the audit of Markly Werke’s financial statements in accordance with auditing standards by the external auditors, Don & Servan.
(d) Assume Don & Servan has issued an unqualified opinion on the financial statements of Markly Werke. What inferences, if any, can be made from the opinion of Don & Servan about: the soundness of the decisions made by the management of Markly Werke; and the financial statements of Markly Werke.
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