Question: Patrizia Montani is considering the sample size

> Ana Dinh used 0.5 to 5 percent of gross profit in determining materiality of $70,000 in her audit of XYZ Inc., a company that builds replacement engines for tractors and combines. She used the $70,000 amount as her planning materiality, identifying accou

> You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating Co., for the year ending December 31, 2020. Eagle manufactures and sells heating and plumbing equipment to a number of home improveme

> Triple J Movers Ltd. is owned by Jacques Tétreault. The company used to be profitable but several new small companies have started to compete with Triple J, offering very low prices that Triple J cannot match. Jacques thinks he can make his company profi

> This is the second year that your firm is auditing JJ Company, which is developing a new drug for a rare form of cancer. The company is controlled by Jack Mukash, who purchased the shares from the previous owner this year. You have been informed that the

> LLL Avionics Ltd. has contacted your accounting firm to inquire about the cost of an external audit. The company’s president explained that he feels that “the previous auditor charged too much and only issued a qualified opinion.” Your firm was recommend

> Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to sales revenue. A problem with its control system means that the proper allocati

> Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home

> Identify the audit risks associated with the installation of the new IT system for patient revenue for Gardens Nursing Home.

> Cheap-as-Chips stocks thousands of items in inventory that range in value from $1 to $100. The inventory on hand represents a material portion of current assets. The merchandise items change according to the season and the promotional theme adopted by th

> Answer the following questions based on the information for Cloud 9 presented in Appendix A of this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required: a. Conside

> Based on the background information, what are the major inherent risks in the Securimax audit? Consider both industry and entity risks in your answer.

> Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris o

> Bright Spark Fashion has retail outlets in six large regional cities in eastern Canada. The shops are run by local managers but purchasing decisions for all stores are handled by Ray Bright, the owner of the business. Fashion is an extremely competitive

> Li Chen has calculated profitability ratios using data extracted from his client’s pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures). Table 4.11 presents the data for

> You are the audit senior of Rhino & Co. and you are planning the audit of Kaine Construction Co. for the year ended March 31, 2020. Kaine specializes in building houses and provides a five-year building warranty to its customers. Your audit manager h

> Niagara Dairy is a boutique cheese maker based in the Niagara region of Ontario. Over the years, the business has grown by supplying local retailers and, eventually, by exporting cheese products. In addition, there is a “farm-gate” shop and café located

> Tom’s Trailers Ltd. (TTL), located in London, Ontario, manufactures industrial trailers that are used to ship goods across the country. Originally, Tom Tran owned 60 percent of the common shares of TTL and the other 40 percent was owned

> Gold Explorers Inc. is a major Canadian gold mining corporation. Gold Explorers has mines and development projects in Canada (Northern Ontario and British Columbia), the United States, and South America. Shares of Gold Explorers trade on three major inte

> Carl’s Computers imports computer hardware and accessories from China, Japan, Korea, and the United States. It has branches in every provincial capital, and the main administration office and central warehouse is in Montreal. There is a branch manager in

> Planning, performance, and specific materiality Challenging LO 2 Claytonhill Beverages Ltd. is 100-percent owned by Buzz Bottling. While the company has in the past been profitable, it incurred a loss for the year ended December 31, 2020. The parent comp

> W&S Partners will need the assistance of auditors in China and the United States and may need derivatives experts to complete the Cloud 9 audit. The other auditors will be asked to provide evidence about the inventory shipped to Canada from the productio

> Ajax Finance Ltd. provides small- and medium-sized personal, car, and business loans to clients. It has been operating for more than 10 years and run throughout its life by Bill Schultz. Bill has been the public face of the finance company, appearing in

> An airline company has been adversely impacted by a global economic slowdown and its effect on business travel. In addition to lower overall demand, the airline company faces increased competition from other airlines, which are heavily discounting flight

> Francine Rideau, controller of Quatco Company, is reviewing the year-end financial statements with Tonya Kowalski, the company president. The financial statements currently report a net income of $563,480. Tonya is applying for a very substantial bank lo

> Sisters Inc. beauty salon is a 100% subsidiary of Benefit Beauty Supply Inc., a beauty supply company. As a result of this relationship, there were several transactions between the two entities during the last year. Sisters rented retail space for its sa

> a. Identify and explain any significant fraud risk factors for Featherbed. b. For each fraud risk factor you identify, explain how the risk will affect your approach to the audit of Featherbed.

> You have access to the following information for Featherbed: • prior period financial statements • anticipated results for the current year • industry comparisons Required: Explain how you would use this information to understand your new client.

> Ivy Bishnoi is preparing a report for the engagement partner of an existing client, Scooter Ltd., an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects of Scooter’s business given the change in economic con

> Stokes Ltd. operates in the steel fabrication industry. Its business is organized into domestic and international sales and it has many clients in each area. It obtains most of its raw materials from two suppliers, both located in the same province as St

> Dunks Holdings Ltd. (Dunks) is an importer of hardware goods and distributes them to hardware retailers around the country. The growth in the do-it-yourself (DIY) market, which has accompanied the boom in house prices in most capital cities over the past

> Expansion Aviation has installed a new payroll module for its existing accounting system that integrates with the general ledger application. The new payroll application is more complex than the old system, but its reporting function provides more detail

> W&S Partners commenced the risk assessment phase of the Cloud 9 audit with procedures to gain an understanding of the client’s structure and its business environment. You have completed your research on the key market forces as they

> Armstrong, Aldrin & Collins Professional Corporation (AAC) operates a public accounting practice that is located in Woodstock, Ontario. AAC’s common shares are owned equally by its three shareholders, who are Chartered Professional

> McKesson & Robbins was a company at the centre of a famous fraud in the United States in the 1930s. Required: a. Research the facts of the McKesson & Robbins fraud and write a short description of the case. b Make a list of the defects in the company’s

> Farm Fresh Foods Inc. (FFF) is a new food distribution company that has been profitable since the second month of operations. It has arranged with Smith LLP, an accounting firm, to conduct an external audit of its first year of operations. FFF has a larg

> Discuss the factors to consider when determining preliminary materiality for Securimax. Questions 4.21 and 4.22 are based on the following case. Fellowes and Associates is a successful mid-tier accounting firm with a large range of clients across Canada.

> Required: Match the numbered situations below with one of the following types of audit sampling or sampling risk: a. Statistical sampling b. N on-statistical sampling c. Sampling risk d. Non-sampling risk 1. Rather than looking only for authorized si

> State the assertion that is violated in the following sentences: a. The client fails to accrue management bonuses in the current year. b. The client does not adjust its inventory to the lower of cost or market. c. The client books revenue in the current

> For each of the following items, identify the related assertion: a. Inventory is recorded at the lower of cost and net realizable value. b. All delivery vans recorded in the accounting records are owned by the entity c. All payroll-related accruals at ye

> For each of the following documents, state whether it would be located in the auditors’ permanent file or the current file. a. Articles of incorporation b. Bank confirmation for the current year c. Management representation letter for the current year d.

> What substantive tests apply to the existence and valuation assertions for investment balances?

> Explain why an unexpected change in the gross profit ratio leads the auditor to suspect a wide range of possible misstatements in recorded transactions and balances.

> It is increasingly common for companies to program their computer information system to print and distribute cheques without further authorization. As an auditor, describe controls you would expect to find in place over such a system.

> Hatami and Partners completed the field work for the December 31, 2020, audit of Harbinger Corporation on March 1, 2021. The financial statements and auditor’s report were issued and mailed to shareholders on March 15, 2021. Required: In each of the two s

> C. D. Hodgson and Associates Chartered Professional Accountants audited the financial statements of Tallender Company, a sporting goods retailer. As with all of his firm’s audits, Carl Hodgson conducted the Tallender audit in accordance with generally ac

> Shane White bone is getting to know his new client, Clarrie Potters, a large discount electrical retailer. Ben Brothers has been the engagement partner on the Clarrie Potters audit for the past five years, but the audit partner rotation rules have meant

> Identify the type of audit evidence being used in each situation described below: a. The auditor tests cash remittance advices to ensure that allowances and discounts are appropriate and that receipts are posted to the correct customer accounts in the ri

> Audit opinions Moderate LO 1, 5 Required What type of audit report would be appropriate in each of the following scenarios? Explain. a. There is uncertainty relating to a pending exceptional litigation matter that is adequately disclosed in the notes. b.

> Required: From the list below, identify what you would consider as a. an incentive for fraud, and b. an opportunity for fraud. 1. college or university tuition 2. gambling debts 3. the fact that nobody counts the inventory, so losses are not known 4. the

> There are several categories of control activities listed in this chapter. They include performance reviews, authorization controls, account reconciliations, physical controls, and segregation of duties. Required: For each of the following, identify the

> Overhead is to be absorbed into the cost of inventory on the basis of the normal level of activity. What evidence is available to the auditor in verifying management’s determination of that level of activity?

> What does “assurance” mean in the financial reporting context? What qualities must an “assurer” have in order for you to feel that their statement has high credibility?

> CAS 260 stresses the importance of communication with “those charged with governance.” Who are these people and why is it important that the auditor communicate with them (and not others)?

> Explain the difference between limitation of scope and disagreement with those charged with governance.

> What is “modified wording” in an audit report? What are the different types of modified wording and when are they used?

> Ajax Ltd. is a listed company and a new client of Delaware Partners, a medium-sized audit firm. Jeffrey Nycz is the engagement partner on the audit and has asked the members of the audit team to start the process of gaining an understanding of the client

> Why do audit reports contain paragraphs outlining (a) management’s responsibility for the financial statements and (b) the auditor’s responsibility for the financial statements? What is contained in these paragraphs?

> What options does an auditor have when material errors are found? Do these options vary for current-year misstatements and prior-year misstatements?

> Explain the difference between the two types of subsequent events. Discuss the auditor’s responsibility for detecting subsequent events (a) prior to the completion of field work, (b) prior to signing the audit report, and (c) between the date of the audit

> What procedures must the auditor perform to search for contingent liabilities?

> What is the accounting assumption of “going concern”? Why is it of interest to auditors?

> What matters does an auditor communicate at the end of an audit to those charged with governance? Why are these matters important?

> List and describe the elements in the/the process/engagement wrap-up process. Why is important?

> Explain the financial reporting principle underlying the audit verification of the existence and completeness assertions with respect to entities consolidated into group financial statements.

> When inspecting securities on hand, what things should the auditor observe?

> Explain lapping. Describe appropriate audit procedures to perform where it is suspected.

> Sax Co. sells insurance, and it has recently become a listed company. In accordance with corporate governance guidelines, the finance director of Sax is reviewing the company’s corporate governance practices. Bill Bassoon is the chair of Sax. Bill vacate

> Outline the procedures involved in verifying the bank reconciliation.

> Describe the procedures for counting cash on hand.

> Explain why it is important to trace transfers between bank accounts on either side of the end of the reporting period.

> Explain why the balance of cash on hand and at bank is always audited, and why a substantive approach is preferred.

> Describe procedures to be undertaken where group entities are audited by other auditors.

> Explain the use and audit of imprest accounts.

> What steps can the auditor take to ensure that the disposal of fully depreciated assets is properly recorded? What are the implications if such assets are retained in the accounts?

> What are the problems confronting the auditor in verifying both the rate and method of depreciation?

> Discuss procedures that would be useful in ensuring that all disposals of property, plant, and equipment have been recorded.

> Why does the auditor usually adopt a substantive audit strategy for property, plant, and equipment assertions?

> 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