2.

II. Essay questions
1.   Beda, a family-owned business based in FJC, builds custom homes with special features, such
as hidden rooms and hidden wall safes. Beda has been an audit client for three years.
     You are about to sign off on a "clean" opinion on Beda's current annual financial statements
when Juda, the VP-Finance, calls to tell you that the FJC Department of Revenue has seized control
of a Beda bank account that includes about $450,000 of company funds； the account is not currently
recorded in the accounting system and you had been unaware of it. In response to your questions
about the origin of the funds, Juda assures you that the funds, though not recorded as revenue, had
been obtained legitimately. He explains that all of the money came from separately billed but
unrecorded change orders to items in contracts completed before you became Beda's auditor, and
before he or any members of current management became involved with the company. You
subsequently determine that there is insufficient evidence to allow you to reconstruct the nature of
these cash transactions, although the following analysis is available from the FJC Department of
Revenue:

    Juda also informs you that Beda has agreed to pay a combined tax and penalty of 12 percent on
the total funds deposited within 120 days as require by a recently enacted rule that provides amnesty
for tax evaders. Furthermore, he states that negotiations with the Internal Revenue Service are in
process.
Required: