Au1 free essay sample

The following are independent statements concerning certain auditing issues. Required Indicate whether you agree or disagree with each statement, and explain your reasoning. a. An adverse report would be issued when an auditor was unable to observe a company’s inventory count at the beginning of the year because the auditor was appointed during the year. (1 mark) b. When encountering a violation of generally accepted accounting principles in an audit of financial statements, the auditor will decide between an unqualified report, a qualified report, or an disclaimer of opinion report. The main consideration will be the materiality of the matter in question. (1 mark) c. A public accountant is not required to be independent of an entity to perform a compilation engagement for that entity. In such a situation, however, disclosure of a lack of independence is not required. (1 mark) d. If there is significant doubt and material uncertainty that an auditee will continue operating in the future and these doubts have been properly disclosed in the notes to the financial statements, the auditor is required to include an emphasis of matter paragraph in the audit report. We will write a custom essay sample on Au1 or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page (1 mark) e. When replaced as auditor, the outgoing auditor has a professional responsibility to reply promptly to an enquiry letter from the incoming auditor, but is not required to allow the incoming auditor access to the most recent year’s audit working papers. When an auditor uses a substantive audit approach (setting control risk at maximum) to an audit of financial statements, the auditor is still required to gain an understanding of the internal controls. (1 mark) g. The auditor is not required to use the same approach (combined or substantive) for all transaction cycles as well as for the various transaction or balance-related audit objectives. (1 mark) Question 2 (7 marks) The audit risk model has become the commonly used basis for audit planning. The following are independent situations which could have an effect on various components of the audit risk model. Required For each situation, identify the element(s) of the audit risk model (that is, audit risk, inherent risk, control risk, and detection risk) that is (are) most likely to be directly affected and the nature of the change in risk levels (increase or decrease) relative to a typical audit. Explain your reasoning. a. The company is experiencing significant cash-flow difficulties and is currently seeking to obtain external financing. Inherent risk will increase since risk of misstatement is greater, and as result audit risk increases; no impact on control risk and detection risk b. The client is a small family-owned company with few employees. The owners have not yet hired an accounting clerk and the bookkeeping function is performed on an ad-hoc basis whenever one of the members has time to complete the tasks. The accounting records are often left incomplete for several months at a time. (1 mark) Control risk will increase c. A client’s vice president, finance, was recently charged with tax fraud by the Canada Revenue Agency. Inherent risk will increase as well as control risk as VP may have overriden controls due to position d. The client operates 40 retail outlets. Every year the auditor attends the inventory count for a sample of 20 stores. In the current year the auditor increased the number of locations attended to 25 stores. (1 mark) Detection risk decrease, control risk increase and audit risk – increase (? ) e. An auditor observes a significantly lower than expected number of compliance deviations while testing a client’s internal controls. (1 mark) Inherent and control risks increase f. Subsequent to the audit, the client implemented all internal control recommendations made by the auditor. (1 mark) Control risk decrease or unchanged, not sure g. The company established an internal audit department in the current year being audited. (1 mark) Control risk will decrease Question 3 (12 marks) Required For each of the following independent situations, state whether the CGA has violated generally accepted auditing standards and/or the CGA-Canada Code of Ethical Principles and Rules of Conduct or Independence Standard, and explain your reasoning. a. During his audit of Waste Ltd., which operates a major waste disposal facility in Alberta, John, CGA, encounters several unusual cash disbursements, leading him to suspect that his client may be illegally bribing government inspectors who inspect the disposal facility for compliance with environmental laws and regulations. Even though the evidence is only circumstantial, John issues a qualified opinion on the company’s financial statements. Based on his assessment, he also decides that it would be inappropriate to inform the Alberta Department of Waste Management of the potential impropriety. As such, he does not notify the authorities of the potential violation. (2 marks) b. Mable Goodwill, CGA, is a sole practitioner. Her office currently performs most of the daily bookkeeping functions for Gladfill Inc. , a privately held company. Mable also supervises the accounts receivable clerk employed by Gladfill and assumes all managerial responsibilities when the principal owner is on vacation. This year, Gladfill Inc. has applied for a bank loan, and a condition of the loan requires that Gladfill provide audited financial statements. Gladfill’s management has engaged Mable to continue performing the bookkeeping services as well as perform an audit. (2 marks) Violation of theR202, Independence of CEPROC self-review treat c. Roger, CGA, serves as a member of the board of directors of a travel agency and also prepares the agency’s financial statements (a compilation engagement) and tax returns, and prepares the personal tax returns of the principal owners of the business. Roger discloses his board affiliation in the Notice to Reader paragraph accompanying the financials. The travel agency’s other board members, including the agency’s owner, have agreed that the modification is inappropriate, since no assurance was provided and independence is not a condition that is required for this type of engagement. The board members told Roger that should he continue to disclose the affiliation, they would engage another CGA for the completion of the compilation in subsequent years. Roger agreed that independence was not a requirement for a compilation and removed the disclosure. (2 marks) d. Sam, CGA, is a partner in an assurance practice and is currently investigating the possibility of accepting a new client engagement. He has written to the predecessor auditor (also a CGA) and enquired as to whether there are any circumstances that should be taken into account that might influence his decision to accept this client. Despite two follow-up attempts, the predecessor auditor did not respond to Sam’s request. Sam accepted the engagement. (2 marks) e. Sandy, CGA, has been the partner in charge of the Licrest audit for four years. Licrest is a public company whose shares are actively traded on the Toronto Stock Exchange. Licrest’s senior management made an offer of employment to Sandy for the position of Chief Financial Officer. They believed that Sandy’s intimate knowledge of Licrest’s operations made her a perfect candidate for the position. Sandy accepted the position and began her employment with Licrest one month after the most recent audit was completed. (2 marks) f. Walter, CGA, has just completed the audit of ABX Company, a small privately held company whose financial statements are used primarily by its bank as a basis for renewing the company’s line of credit. During the audit for the current year, Walter noted several weaknesses in internal controls, which influenced his substantive test design, and which he described in his management letter to the owner. The owner thereupon asked Walter to redesign the control system in an effort to eliminate these weaknesses and to suggest other ways in which the efficiency of the operation could be improved. Walter accepted this additional engagement. (2 marks) Question 4 (12 marks) The purpose of substantive testing is to verify the assertions made by management in the financial statements. Consider the following unrelated audit tests, which a CGA performed for the audit of the financial statements of a client with a fiscal year end of December 31, 2011. Required For each of the six audit procedures listed below, identify the primary management assertion being tested and the account balance being verified, name the specific audit procedure being used, and state the quality of the audit evidence obtained (high, moderate, or low), explaining why the evidence is the quality level you specify. Organize your answer with these headings: Management assertion and account balanceAudit procedureQuality of audit evidence a. Sent negative confirmation requests to a sample of customers with unpaid balances at December 31, 2011. (2 marks) b. During the company’s normal physical inventory taking on December 31, 2011, selected items from the client’s inventory listing and performed test counts. (2 marks) c. Vouched property, plant, and equipment additions to supporting documents, including the supplier invoice, shipping, and payment documents.(2 marks) d. Calculated an estimated total managerial payroll expense by multiplying the average salary by the number of managers. Compared the estimated payroll expense with actual and discussed the cause for the 20% variance with client management. (2 marks) e. Recalculated depreciation expense related to property, plant, and equipment. (2 marks) Reasonableness, Depreciation account/ Recalculation/ f. Verified that the bank balanc e as indicated on the December 31, 2011 bank reconciliation agreed to the bank confirmation. (2 marks) Question 5 (12 marks) Madeleine, CGA, is a senior auditor in charge of the field work for the audit of a client’s financial statements (with a year end of December 31, 2011). During the conduct of the audit, Madeleine discovers that as a result of the audit client’s competitor introducing a superior product to the market, the auditee has experienced a significant decline in sales volume. Consequently, the company is suffering from severe cash shortages and there is significant concern that the company may not be able to meet is current obligations. The client is currently trying to secure a loan from the bank. Madeleine informs management that they must include a note disclosure informing the users of the financial statements of the potential going-concern issue. Client management indicates that that the company is very close to releasing a new product that will compete directly with that of its competition. They are currently in negotiations with the bank for a loan, and the extra funds will provide the company with the extra capital it needs to get the new product to market. Management indicates that the bank will not loan the money if the disclosures are included in the financial statements, and without the loan, the company will be forced to declare bankruptcy. After much discussion, the client convinces Madeleine that a going-concern note disclosure is not required since the company is in the final stages of developing a competitive product, and once the company receives the funds from the bank loan, it will be able to introduce the new product in the market, sales will increase, and it will be able to continue operations and meet its current obligations. Stakeholders, meanwhile, need to know the exact state of a company’s financial affairs. With enough warning of possible business failure, potential investors can think twice about where to put their money, and existing shareholders can cut their losses. Lenders also need this information to assess the likelihood of default on a loan 1. The problem is whether it is ethical for senior auditor, Madeline, CGA, to accept management rationale not to include a note disclosure informing the users of the financial statements of the potential going-concern issue. The company being audited is currently seeking 2. The first alternative is to, 2nd alternative 3. The decision between the two alternatives should be based on the Principles of Ethics and Rules of Conduct. 4. In analysis of rules that are relevant to this case, I considered importance of ethical behavior in audit engagements; professional judgment in accounting situations as well as ethical implications faced Madeline. 5. The ethically correct solution to this situation Required What are the moral/ethical issues, if any? What should Madeleine have done? Use the relevant steps from the nine-step case analysis approach you studied in Topic 2. 5. (You can also find the case analysis approach in How to analyze a case under the Resources tab. ) Marks will be allocated as follows: Identify problems and issues1 mark Generate alternatives3 marks Select the decision criteria1 mark Analyze and evaluate the alternatives6 marks Recommend an action for Madeleine (explain your reasoning)1 mark 50