Explain how analytical procedures could be used for control testing and substantive testing. Give examples of each.
> A new client, an oil and gas explorer in Western Canada, is currently negotiating a loan worth $3 million to avoid defaulting on its long-term debt that is due in three months. Its latest quarterly earnings report indicated the entity has a working capit
> Discuss the cut-off implications of the inventory count being before or after the year end and closing inventory being determined by adjusting the count by reference to purchases and sales records in the intervening period.
> Many companies use standard costing as the basis for inventory costing. What audit procedures may be appropriate for establishing the fairness of the standard costs, for testing the maintenance of the standard cost records, and for determining the dispos
> What steps should the auditor perform when observing the inventory count? Why should the auditor take test counts?
> When conducting tests of details of transactions for property, plant, and equipment, there are three types of transactions that need to be substantiated. These transactions are additions, disposals, and repairs and maintenance. Briefly describe what is in
> Describe the alternative methods entities use to determine their inventory at the end of the reporting period and the possible effect of each method on audit strategy.
> Cut-off procedures can be applied to receiving reports issued before the year end or to liabilities recorded after the year end. Consider the separate merits of each approach in assuring the completeness of recorded liabilities.
> Describe the performance of the purchases cut-off test.
> Explain why the assessment of control risk for the occurrence of payment transactions affects the assessed level of control risk for the completeness of the accounts payable balance.
> Describe computer-assisted audit procedures that can be used in testing controls over purchasing.
> Describe programmed application controls you would expect to fi nd in a computerized payroll system. Explain the audit procedures for testing those controls.
> The Wellington Plaza Hotel is located close to the main railway station in a large regional city. Its main client base is business people visiting the city for work-related purposes. The second largest group of clients consists of groups of (mainly) wome
> Explain the importance of segregating the personnel function from the payroll preparation.
> Explain why achieving an accurate cut-off of purchases and sales transactions is of critical importance in assuring the fairness of the financial statements. Illustrate your explanation with examples of the effect of cut-off errors.
> State the main audit objectives for: (a) purchases and payroll transactions and (b) accounts payable balances.
> Explain what is meant by “cut-off” and why it is important to auditors in establishing the fairness of the financial statements.
> Explain the kinds of fraud that could be expected in sales, cash receipts, and sales adjustment transactions in the absence of adequate internal control procedures. Consider the importance of the segregation of duties in preventing such frauds.
> Identify situations leading to an inherent risk that an entity may wish to (a) overstate sales revenue and (b) understate sales revenue.
> Discuss situations in which sales adjustments may be necessary. Identify necessary controls to ensure that the accounting system recognizes only genuine adjustments.
> If the auditor does not receive a response after sending a letter to confirm a customer’s account balance, what alternative audit procedures may be performed?
> Outline the procedures involved in performing accounts receivable confirmations.
> Why is the auditor likely to adopt a combined audit approach to accounts receivable wherever practicable? Why are substantive procedures more likely to be based on the accounts receivable balance than on sales, cash receipts, and sales adjustment transac
> Fellowes and Associates Chartered Professional Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2020, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 p
> Why is the control risk assessment of the completeness of cash receipts and sales adjustment transactions associated with the control risk over the existence of the accounts receivable balance?
> CAS 530 Audit Sampling distinguishes between sampling and other selective testing procedures. Explain the application of the requirements of this standard to the selection of accounts receivable confirmations.
> Describe the inherent risks specific to sales and receivables the auditor needs to consider.
> Explain the two main types of CAATs. What are the advantages of using software to interrogate and examine client data files? Does using CAATs remove the need to test client control systems? Why or why not?
> Why is it important to consider the quality of the data used in analytical procedures? How important to this question are client controls over financial data?
> What conditions must be satisfied before we can regard evidence from analytical procedures as persuasive rather than corroborative or minimal? Why are these conditions important?
> What are analytical procedures? Describe how they can be used as substantive tests in an audit.
> Vouching transactions and balances back to supporting documentation would ordinarily provide evidence about which assertions? Which assertions would vouching be least likely to provide evidence about?
> Differentiate between tests of details of balances and tests of details of transactions.
> What factors influence how much and when substantive tests may be performed?
> Vaughan Enterprises Ltd. has grown from its beginnings in the steel fabrication business to become a multinational manufacturer and supplier of all types of packaging, including metal, plastic, and paper based products. It has also diversified into a ran
> What is an audit program? What should be included in the audit plan?
> Provide an example of (1) an error and (2) a judgemental misstatement that could affect the balance of property, plant, and equipment.
> Define substantive testing.
> Four approaches to internal control documentation are discussed in the chapter. Assess the advantages and disadvantages of each. How would documentation assist the auditor to identify strengths and weaknesses of an entity’s system of internal controls?
> Discuss the concepts of nature, timing, and extent as they relate to control testing.
> What factors do auditors consider when deciding how much control testing to do?
> What are the four types of tests of controls? Explain them and comment on the reliability of the evidence obtained from each.
> What does ITGCs stand for? Explain their purpose.
> Explain the purpose of (a) preventive controls and (b) detective controls. Why would it be important for an entity to have both types of controls?
> Explain the difference between entity-level controls and transaction-level controls. Is an auditor interested in both?
> Michael Cheung has drafted an audit plan for a new client. The client is Countrywide Capers, a party rental business. Countrywide Capers earns 80 percent of its revenue from renting out tents, tables, dishes, cutlery, napkins, and tablecloths. Michael’s
> Explain each of the seven objectives of internal control.
> Why do auditors prepare management letters?
> What is internal control? Why is an auditor interested in a client’s internal control?
> How are test data used to gather evidence about the effectiveness of controls? Why is using test data likely to be a more effective audit test than reading client procedure manuals?
> Explain the difference between tests of controls and substantive procedures. How are the results of tests of controls related to decisions about the nature, timing, and extent of substantive procedures?
> Assume an auditor finds total errors of $25,300 in a sample of sales invoices. Why is it not appropriate to conclude that sales are misstated by $25,300? How would you determine the estimated misstatement of sales?
> Give an example of substantive testing where stratification would be appropriate.
> Explain the relationship between the sample size for control testing and each of the following factors: (1) the likely effectiveness of a control; (2) the acceptable rate of deviation; (3) the expected rate of deviation; (4) the required level of confidenc
> Why does non-sampling risk exist for all types of tests in all audits? Explain.
> Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island Its operations include boating, surfing, fishing, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and S
> You are a graduate working for W&S Partners, a Canadian accounting firm with offices located in each of Canada’s major cities. W&S Partners has just been awarded the December 31, 2020, statutory audit for Cloud 9 Ltd. (Cloud 9). The audit team assigned t
> Explain the difference between the two types of sampling risk for controls: overreliance on an ineffective system of internal controls, and under reliance on an effective system of internal controls. What are the errors’ different implications for the audit?
> Why are audit tests more likely to be conducted at or after year end for high-risk clients than for low-risk clients? Explain.
> Why do auditors use sampling? Explain the advantages and disadvantages of using sampling instead of testing every item in a population.
> What is the difference between recalculation and re-performance? Explain using examples.
> Under what circumstances does an auditor use the work of a component auditor? Why doesn’t the group engagement partner do all of the work?
> If an auditor does not have sufficient knowledge and skill in an area, the auditor can ask for the assistance of an expert. This creates a problem: how does an auditor know if the expert’s work is correct if the auditor is not also an expert? Explain.
> What is the purpose of a management representation letter?
> What external parties could an auditor send a confirmation to?
> Define what is meant by sufficient and appropriate evidence.
> Explain how gathering physical evidence by inspecting a client’s tangible assets assists in the audit of the completeness and existence assertions.
> Elise Lauzière is the partner in charge of the audit of Hartenstein Ltd., a large listed public company. Elise took over the audit from Marjorie Szliske, who has recently retired from the audit firm. Marjorie was a very experienced auditor and the author
> Explain the difference between the completeness and existence assertions
> Review the examples of working papers provided in the chapter. List six things that should be included in every working paper.
> In what ways are the occurrence and existence assertions similar?
> What are some possible explanations of a change in the gross profit margin? How could the auditor investigate which of these explanations is the most likely cause of the change in the ratio?
> Explain using examples how you could use analytical procedures in assessing the risk of misstatement of sales revenue
> What factors should be considered to determine if an item is qualitatively material?
> The materiality of an item is assessed relative to a particular base number. What are some of the choices for this base, and what factors guide the auditor in this choice?
> How does the auditor’s preliminary assessment of materiality affect audit planning? What does an auditor consider when making the preliminary assessment of materiality?
> Consider the following statement: “If inherent and control risk are high, the auditor will set detection risk as low, to bring audit risk down.” Explain how setting detection risk as low brings down audit risk.
> If an auditor adopts a substantive strategy for the audit, do they have to consider and test the client’s internal controls? If an auditor adopts a combined audit strategy, do they have to perform any substantive procedures? Explain.
> Kerry is a senior auditor and a member of the team auditing a long-standing client, the listed public company Darcy Industries Ltd. Kerry’s wife’s uncle died recently and his estate is being finalized. Kerry’s wife has just received a letter from the exe
> Explain the approach adopted by auditors when identifying accounts and related assertions at risk of material misstatement. How does this approach help reduce audit risk to an acceptably low level?
> What is the difference between liquidity and solvency? Why does this difference matter to an auditor?
> Define audit risk and its components.
> Why does an auditor need to understand a client’s IT system? Explain how IT affects the financial statements.
> What are mitigating factors in the context of the going concern assessment? Give some examples of mitigating factors for a client that has experienced a loss during the current year.
> What does it mean when we say that a business is a “going concern” or, alternatively, has “going concern issues”? Why must an auditor specifically consider evidence about the going concern assessment for each client?
> What procedures should the auditor perform with respect to fraud?
> In the context of fraud, explain what “opportunity” means
> List and briefly explain the key factors that the auditor would consider during preliminary risk identification with respect to related parties.
> When gaining an understanding of a client, an auditor will be interested in an entity’s relationships with both its suppliers and customers. What aspects of these relationships will the auditor be interested in and how would they affect the assessment of
> Stave, Brown and Paul, a three-partner accounting firm, has implemented the following independence safeguards. 1. In the audit report for Weltzin Educational Services Inc., partner Jessica Brown has the CFO of Weltzin sign the following “I approve the pr
> What are the audit activities in the risk assessment phase of a financial statement audit?
> Give an example of a client closing procedure. Using your example, explain the accounts that would be affected if the closing procedure was performed inadequately.
> Explain the relationship between the risk assessment, risk response, and reporting phases of an audit. Why is risk identification in the first phase?
> Why are there procedures governing the client acceptance or continuance decision? Explain why auditors do not accept every client.
> What are some ways an auditor can avoid litigation?
> What are the three conditions that must be proven for an auditor to be found negligent under tort law? Based on a review of the legal cases discussed in the chapter, which conditions appear to be most difficult to prove?
> Why is it so important that an audit committee not have any executive directors as members?
> Explain the relationship between the auditor and the shareholders of the audited company. How realistic is it to regard the shareholders as the clients of the auditor?
> How can accounting firms put in place safeguards to independence?
> Self-interest, self-review, and familiarity threats all arise from an inappropriate closeness between the auditor and the client. Explain how that closeness is likely to manifest in each case and why it is a problem for the value of the audit.
> Identify and discuss any professional conduct issues in the following independent scenarios. a. Jason Crane became a CPA in 2020. He is now glad to be finished his education as he does not plan to take any further accounting courses. b. Samantha Karadzic
