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 involved with substantiating each of these types of transactions.
> 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
> Patrizia Montani is considering the sample size needed for a selection of sales invoices relating to the test of internal controls of the Caistor Company. She is determining the acceptable risk and deviation rates, and is considering two possible scenari
> 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?
> 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 how analytical procedures could be used for control testing and substantive testing. Give examples of each.
> 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
