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Question 1 (15 marks)
(Multiple choice) (1½ marks each)
Note: For multiple-choice questions, select the best
answer. Answer each item by giving the number of your choice. Incorrect answers
will be marked as zero. Multiple-choice questions must be completed in your
Assignment Submission section. This portion of the assignment will be
automatically graded. Donot
include your answers in your Word document as they will not be graded.
a. Which of the following has historically
represented the key driver in the demand for audits?
1. Regulators’ requirements
2. Lenders’ preferences
3. Clients’ demand
4. Investors’ information risk
b. An auditor found $5,000 in errors from
a representative sample of $50,000 in accounts receivable balances. The
population of the total accounts receivable is $200,000. The client corrected
$3,000 of the errors. What would be the projected misstatement ?
1. $2,000
2. $5,000
3. $17,000
4. $20,000
c. Which of the following elements of the
audit risk model is most likely to incorporate the lowest numerical value?
1. Audit risk
2. Inherent risk
3. Control risk
4. Detection risk
d. Which of the following isnot a likely consequence of audit team members under-recording
hours worked on audit engagements?
1. The audit firm will likely quote a
lower fee for the following year’s audit.
2. The audit team for the following year’s
audit will have trouble meeting the time budget.
3. Audit members will increase their
respect for the integrity of their employer.
4. Audit team members will benefit in
their performance evaluation for that audit engagement.
e. In general, there are two dimensions to
audit evidence: sufficiency (quantity) and competency (quality and
reliability). When considering the best approach to gather evidence, which of
the following factors would most likelynot directly affect financial data reliability?
1. Client economic risk
2. Management integrity
3. Persuasiveness of alternative forms of
evidence
4. Client’s control structure
f. Katy, a CGA, is in the process of
reassessing control risk. Which of the following is most likely to cause Katy
to lower the level of control risk?
1. Inherent risk is higher than expected.
2. Tests of control show high sample error
rates.
3. A substantive approach is used.
4. Tests of control show low sample error
rates.
g. Meetings are an important component of
the audit process. Meetings may be held prior to the commencement of field
work, during the audit, and at the conclusion of the audit with management or
the audit committee. Which of the following items would most likely be on the
agenda of a meeting that is held during the audit?
1. Schedules to be prepared by the client
2. Arrangements for using
computer-assisted audit techniques (CAATs) on the audit
3. Other services that might be provided
by your firm (such as tax services)
4. Arrangements for plant tours
h. Which of the following best describes
financial statement risk?
1. The risk that the auditor will form the
wrong opinion on the financial statements
2. The risk that the auditor will not
detect a material misstatement
3. The business risk faced by the auditor
4. The risk of material misstatement
i. Bruno, a CGA, is auditing the financial
statements of a small business client. Which type of risk is Bruno most likely
to encounter when applying the audit risk model?
1. High engagement risk
2. High control risk
3. High detection risk
4. High risk of material misstatement
j. To assist the auditor in evaluating the
effect of misstatements accumulated during the audit, auditing standards
require the auditor to distinguish between factual misstatements, judgmental
misstatements, and projected misstatements. Which of the following statements
would most likely be associated with projected misstatements?
1. The auditor requests management to
record an adjustment for such misstatements.
2. Such misstatements represent the
auditor’s best estimate of misstatements in an audit sample.
3. Such misstatements are differences
arising from the selection or application of accounting policies by management
that the auditor considers inappropriate.
4. Such misstatements represent the
auditor’s best estimate of misstatement in a population.
Question 2 (22 marks)
Auditor independence has been a key issue for many
years. Requiring the highest levels of independence is seen as a way of
ensuring that auditors are not motivated to let clients get away with
questionable financial reporting. It is argued that auditor independence supports
higher quality audits and deters clients from aggressive earnings management
and fraudulent financial reporting. Some research indicates, however, that the
stringent independence standards currently in place for auditors actually
result in less effective audits as measured by higher audit risk, since
auditors do not know their clients as well as they did when they were also
acting as consultants.
Required
Evaluate both points of view, commenting on and
critiquing each side from the perspectives of the auditor, the client, and the
public. Decide which viewpoint has the most merit, and defend your position. In
addition to the readings related to independence in your module notes, readThe
Cost of Auditor Independence, from the CFO.com website.
Allocation of marks:
·
2
marks are awarded for each valid and well-developed point, to a maximum of 4
marks per point of view/perspective combination and a maximum of 16 marks
overall.
·
2
marks are awarded for a valid conclusion in support of either position.
·
4
marks are awarded for providing a convincing rationale that is consistent with
the analysis.
Question 3 (14 marks)
In Topic 1.3, you read “Transparency of Firms that
Audit Public Companies,” a consultation paper from the Technical Committee of
The International Organization of Securities Commissions. At the end of the
document, the committee raises questions for discussion. Prepare answers to the
following questions excerpted from the consultation paper:
The Task Force seeks public input on
the following additional matters to facilitate its consideration of the issues
surrounding transparency of firms that audit public companies:
|
17 |
Would transparency of audit firms improve audit |
|
18 & 19 |
Would investors have increased |
Allocation of marks: 2 marks are awarded for each valid
and well-developed point, to a maximum of 8 marks for question 17 and 6 marks
for questions 18 and 19.
Question 4 (16 marks)
You are a senior auditor at Smythe, Chaudhry &
Radman, CGAs. In preparation for upcoming audits, you are reviewing the files
of a number of potential new clients and continuing clients, and evaluating
potential threats to independence. You recall that the framework used in the
CGAIndependence
Standard requires you to identify threats to
independence, evaluate whether these threats are clearly insignificant, and in
cases where the threats are significant, identify and apply safeguards to
eliminate or reduce the threats to an acceptable level.
Required
For each of the following situations (a to e),
complete the following steps in your review:
i.
Identify
the type(s) of threats to independence.
ii.
Evaluate
each threat by classifying it as “clearly insignificant” or “ clearly
significant.”
iii.
For
each threat that is clearly significant, identify one or more safeguards that
would help eliminate or reduce the threat to an acceptable level.
a. Six months ago, one of the firm’s
partners served as an expert witness at a hearing where Kaledon Inc. (a public
company) was being sued for non-performance of contract. The partner testified
at the request of Kaledon with respect to the fair value of an asset provided
by Kaledon to the plaintiff. The asset was valued at $5 million. Several
similar assets are still on hand and recorded in Kaledon’s books. The company
was impressed with the partner’s work, and has approached him for a quote on
audit services for this year.
b. The firm recently hired Ninan as a new
audit manager. Ninan’s wife owns 5% of the common shares of Tempo Corporation,
an existing audit client.
c. The minutes from your audit team
debriefing meeting for last year’s audit of Saltzbury Shutters indicated that
several audit staff members had difficulty talking to the company’s controller.
One audit team member noted, “I had difficulty following a complicated
walk-through, and when I asked the controller for clarification, she made me
feel stupid and threatened to tell my supervisor.”
d. Raj, an audit manager, recently bought
a new condo downtown and joined the strata council. At the first council
meeting Raj attended, he discovered that the treasurer of the strata council,
who is a neighbour in Raj’s new building, is also the CFO of Baltar Corp.
Baltar is an audit client of Raj’s firm, and Raj manages the audit engagement.
e. The firm provides bookkeeping services
to non-assurance clients. At the beginning of the current year, EdgeMax Inc., a
private company for whom the firm performs review engagements, lost its
accounting clerk suddenly. The firm sent Suzanne, a junior staff member on the
review engagement team, to do the bookkeeping and payroll for three weeks while
EdgeMax found a new staff member.
Note: the solution can be presented in a chart format.
Question 5 (33 marks)
You, a CGA, are a senior partner in the CGA firm of
Perry, Usher, and Drake (PUD) in Vancouver, B.C. Your firm performs audits,
reviews, compilations, accounting, and tax services for small to medium-sized
business clients. Your firm has built a good reputation among the local retail
and restaurant businesses in the vicinity.
Recently, you were dining at a restaurant called
Gastronomical Delights when you were approached by Jamie, the executive chef
and owner. Jamie started the conversation by telling you that a neighbouring
store had recommended your firm as you provide high-quality work at a
reasonable fee.
Jamie’s newly adopted philosophy emphasizes weaving
excellence into everything the restaurant does, from sourcing the best seasonal
produce from local food and wine artisans to creating unique meals. The
restaurant generates retail sales from baked goods and charcuterie through the day,
which accounts for approximately 50% of total revenues. Jamie has been featured
in a well-known food magazine,Bon Appétit, and she is optimistic that this publicity and her
business philosophy will help her draw in more customers and turn a profit in the
near future.
Jamie is thinking of switching audit firms for the
audit of the current fiscal year (year-end December 31, 20X1). She tells you
that she has been dissatisfied with her current accounting firm:
We’ve had a bit of a falling-out as we
had a disagreement and the firm ended up issuing a qualified opinion on the
financial statements last year. In prior years we were fine, and they have
always issued an unqualified opinion. Apparently, last year they could not
issue a clean audit opinion — something to do with deficient internal controls
in sales revenues and cash balances and not being able to verify these
balances. I don’t understand what can be done at my end. I cannot afford to
hire more accounting staff to address the going-concern issues or put in a new
accounting system, let alone controls. I really don’t want any further contact
with my former accountant, and your firm should probably should steer clear as
well. I don’t want you to approach this audit with any preconceived notions.
The restaurant has been losing money for several
years now, partly because the industry is suffering in the face of the current
economic situation and partly because of profit margins that have narrowed in
the face of Jamie’s newly adopted philosophy of weaving excellence into
everything Gastronomical Delights does. To keep the business going, Jamie has
been drawing down the restaurant’s $600,000 line of credit and now owes the
bank $500,000. She tells you, “Unless I can get an unqualified opinion from you
this year, I’m concerned that the bank may call my loan.”
You learn that the restaurant’s business is evenly
divided between customers who use credit cards to pay for their meals and those
who pay cash. Jamie prefers cash payment since the credit cards companies charge
merchants a fee for each transaction. To reduce the paper and time consumed by
issuing paper receipts, staff members do not ring in cash retail sales of baked
goods and charcuterie during peak periods. Jamie says, “I write down the amount
of cash sales at the end of the day when I’m depositing the day’s receipts in
the restaurant’s bank account. My staff are all honest, the cash belongs to me
anyway, and I end up saving some trees.”
Jamie explains that she is willing to pay your firm
the same fixed audit fee she paid to the prior audit firm: $12,000. She tells
you that she is willing to give you and each of your partners a 20% preferred
customer discount card that she sometimes gives to some of her best customers.
This will give you a discount on all food and beverages consumed and purchased
at her restaurant.
At the close of this conversation, you tell Jamie
that you will consider her proposal, discuss it with your partners, and respond
to her within the next few days.
You and your partners have been trying to build up
the firm’s auditing practice, but you are aware that there could be serious
risks in taking on this engagement. Your firm’s client base has been shrinking
because of the economic downturn and credit crunch, which has caused some local
businesses to go out of business. You proceed to have a discussion with the
firm’s partners.
Required
a. Assume it is now June, 1, 20X1. Write a
letter to Jamie outlining your firm’s response (maximum 1,000 words).(27 marks) (Do not prepare an
engagement letter.)
b. Assume you accept Jamie as your client.
You start to plan the overall audit strategy. Because of the client’s financial
situation, you want a 97-98% level of assurance for the audit as a whole. Based
on your initial study of the client’s accounting system and controls and
analytical tests, you have assessed the chance that the client’s internal
controls will prevent or detect and correct material misstatements at only 50%.
In addition, you believe that there is a 30% chance that the client will go
bankrupt and your firm will be sued by creditors and investors within the next
two years. Explain whether it is appropriate and in accordance with Canadian
Auditing Standards for you to consider the risk that your firm will be sued if
the client goes bankrupt when designing an audit plan for Gastronomical
Delights.(4
marks)
c. Risk features heavily in an audit.
Traditionally, the goal of the auditor has been to reduce risk to an acceptable
level during the course of the audit so that a correct opinion can be provided.
However, that goal has been complicated by the changing focus of audits, most
notably after the fall of Enron and WorldCom. Explain how the audit focus has
changed.(2
marks)
100
