You are a recently designated accountant. As a result of having your designation, you have been hired as the controller at a national manufacturing company. Due to a recent economic slowdown, the company has been struggling to meet earnings targets. These targets are the basis for senior management bonuses. You report directly to the CFO. This is your second month with the company; however, it is your first year end (December 31). The auditor will be coming to audit the books in three weeks. You have finalized the financial statements, and you have reviewed them with the CFO and the CEO. The week before the auditor is expected to arrive, the CFO comes to your office and explains that the financial results are very disappointing. He explains that: on December 31, a sales contract was signed for $500,000 of goods with delivery to take place January 3. He asks you to record the revenue for this contract on December 31, the date the contract is signed and before the work is performed. This will result in early revenue recognition, and doing so will eliminate the overall net loss for the year. You are married with a stay-at-home spouse and two small children. To celebrate your success, you recently purchased a new home. It cost a little more than you planned to spend and the mortgage payments are pretty expensive. Required: What would you do? What are the ethical issues you would need to consider?
> 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
> Which is more important, independence in fact or independence in appearance? Explain.
> What is the purpose of an engagement letter? What should be included in an engagement letter?
> Explain how compliance with the fundamental principles in the code of professional conduct contributes to the ability of the auditor to discharge their duty to act in the public interest.
> Explain the system of reviewing the quality of audits performed by listed company auditors.
> Describe the audit expectation gap. What causes the gap?
> What are the auditor’s responsibilities?
> What is an emphasis of matter paragraph? When do you think an auditor would use it?
> What does reasonable assurance mean?
> Are internal auditors independent? Which internal auditor would be more independent: an internal auditor who reports to the chief financial officer (CFO) of the company, or an internal auditor who reports to the audit committee?
> Who would request a performance audit? Why?
> Identify and discuss any professional conduct issues in the following independent scenarios. a. Adnan Hussein is a CPA working for a national firm. He is at his desk when he overhears his colleague Joan having a phone conversation. She is telling the per
> What are the limitations of an audit?
> Compare the financial statement users and their needs for a large listed public company with those of a sports team (for example, a football team).
> The global financial crisis led to increasing legal action against auditors as company managers searched for scapegoats and potential places to recover their losses. The tough economic times also likely caused companies that would otherwise have survived
> The audit of short-term investments can be a high-risk area for auditors. A case in Australia (AWA Ltd v. Daniels t/a Deloitte Haskins & Sells & Ors (1992) 10 ACLC 933) found the auditors negligent for failing to report weaknesses in the foreign exchange
> Consider the following statement: The audit of inventory is one of the riskiest areas of the audit. Management can manipulate the value of inventory through a variety of methods, such as through varying the provision for obsolescence or the method of val
> A generally accepted definition of earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out earnings over a number of accounting periods. Generally speaking, earnings management is used to increase income in the cur
> In the early 2000s, several large corporations such as Enron, WorldCom, and Nortel collapsed because of corporate greed, bad business practices, and accounting irregularities. Others, such as Bristol-Myers Squibb, Xerox, and Harris Scarfe, were forced to
> The financial statements for public companies are available through the website SEDAR (www.sedar.com). This is the official site that provides access to information filed by public companies and investment funds with the CSA. The statutory objective in m
> Bernard Madoff was convicted in 2009 of running a Ponzi scheme, the biggest in U.S. history. A Ponzi scheme is essentially the process of taking money from new investors on a regular basis and using the cash to pay promised returns to existing investors.
> One way of getting accounting expertise onto audit committees is to recruit ex-audit firm partners and/or employees onto the board of directors. However, appointing former audit firm partners to boards and audit committees raises independence concerns, a
> Required: Access the CPA Canada Handbook and locate the following: a. What number is the CAS for audit documentation? b. How many sections are there to each CAS? c. What is the name of CSAE 3000? d. What numbers relate to review engagements? e. Where spe
> Chong and Pflugrath conducted a study of different audit report formats and their effects on the audit expectation gap. They investigated whether report length (long or short), the location of the audit opinion (at the start or the end), and plain langua
> For each of the following statements identify the audit assertion to which it relates: a. All cash transfers are recorded in the correct period. b. All investment gains are recorded in the correct amount. c. All cash inflows are recorded. d. The line of c
> Your firm of accountants is the auditor of Oxford Ltd., a reporting entity. Oxford’s consolidated financial statements incorporate the financial statements of its four subsidiaries. Three subsidiaries are incorporated in Canada and audited by your firm. The
> You are performing the audit of Toledo Ltd. for the financial year ended December 31, 2020. Under the terms of a major loan contract, Toledo is required to maintain certain financial ratios. If the ratios are breached, then the loan is immediately due for
> Ingrid Shalansky, an audit senior, was given the task of auditing Crabapple Ltd., an investment company. Her firm had not performed the audit before; however, from a discussion with the previous year’s auditors, she found out that the following transactio
> Your firm is the auditor of Zhao’s Charity for Pensioners. The charity was formed many years ago from a large gift by the Zhao family, the income from which is used to pay pensions to needy people. The original gift has been invested in
> Your firm is the auditor of Trojan Trading Ltd. The audited financial statements for the year ended December 31, 2020, show the company’s revenue was $5 million and the profit before tax was $320,000. The part of the working papers that records audit work o
> Mathias Co. sells cars, car parts, and gasoline from 25 different locations in one country. Each branch has up to 20 staff working there, although most of the accounting systems are designed and implemented from the company’s head office. All accounting syst
> You have been asked by the financial controller, Walid Hossain, of Potter Ltd. to carry out an investigation of a suspected fraud by the company’s cashier. The cashier, Alfred Blyton, has left the firm without notice. Potter is a small company, and there w
> IndaCar Inc. (IC) operates a high-end car rental agency that specializes in the rental of unique vehicles and is located next to Lester B. Pearson International Airport in Toronto. IC is a private Canadian company that is wholly owned by Jake Bouvier. Da
> Your firm is the auditor of Thai Textiles Ltd. and you are auditing the financial statements for the year ended June 30, 2020. The company has sales of $2.5 million and a before-tax profit of $150,000. The company has supplied you with the following bank re
> Shiny Happy Windows Co. (SHW) is a window cleaning company. Customers’ windows are cleaned monthly and the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door. SHW has a large number of receivable balances
> You have spent two years working as an auditor. In that time, you have come across a number of errors in performing bank reconciliations. Outlined below are some of them: 1. An un reconciled item of $340 was on the client’s final bank reconciliation and w
> You are an audit senior performing the audit of Stella’s Stars Ltd., a talent agency. In performing the audit, Stella informs you of the following: 1. She does not want you to send the bank a confirmation because she objects to the cost and feels that the
> In 2002 the audit firm Arthur Andersen collapsed following charges brought against it in the United States relating to the failure of its client, Enron. Some other clients announced that they would be dismissing Arthur Andersen as their auditor before it
> Bravo Bags is a luggage retailer that operates out of a shopping mall. As required by the landlord, Bravo Bags has hired Brad Pope, CPA, to provide a report to the landlord as to whether Bravo Bags has met the requirements of its lease agreement in terms
> You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialize in providing loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years. The directors
> Required: a. Identify and explain the potential type of threat to Fellowes and Associates’ independence in situations (1) and (2) above. b. What action should Fellowes and Associates take to eliminate the potential threats to independence in situations (
> Explain why Tania Fellowes should have reservations about accepting the HCHG engagement to provide an opinion with respect to the laser machines. Make appropriate reference to fundamental ethical principles in your answer.
> Charles is at a neighborhood party with several of his roommates. Over a few beers, Charles gets into a conversation with a neighbor, William, about mutual acquaintances. Charles is a senior auditor with a large accounting firm (although he tells William
> Auto Care Ltd. (ACL) is a federally incorporated public company formed in 2014 to manufacture and sell specialty auto products such as paint protection and rust proofing. By 2018, ACL’s board of directors felt that the companyâ
> Salt & Pepper & Co is a firm of Chartered Professional Accountants that has seen its revenue decline steadily over the past few years. The firm is looking to increase its revenue and client base and so has developed a new advertising strategy. It is guar
> Roy Dussault is a CPA who started a sports equipment importing business. The business became very successful and he sold it to his neighbour. As part of the sale agreement, Roy agreed to perform an audit of the financial statements for the first year at
> HHH Corporation manufactures automobile engines. In 2018, the treasurer at HHH decided to invest the company’s surplus funds in the commodities market. She intended for it to be a short-term investment, as the company had $1 million in extra funds that w
> Ahmad & Partners is a public accounting firm in eastern Canada. Last year, it audited Chan Corporation, a publicly traded company that manufactures automobile component parts. Although the company has been profitable for many years, Ahmad & Partners was
> Legal implications of client acceptance Moderate LO 4, 5 Godwin, Key & Associates is a small but rapidly growing audit fi rm. Its success is largely due to the growth of several clients that have been with the firm for more than five years. One of these
> Theobald Ltd. has an internal audit department that primarily focuses on audits of the efficiency and effectiveness of its production departments. The other main role of the internal audit department is auditing compliance with various government regulat
> You have recently graduated from university and have started work with an audit firm. You meet an old school friend, Kim, for dinner—you haven’t seen each other for several years. Kim is surprised that you are now working as an auditor, because your chil
> A sample audit report is provided in figure 1.3 in this chapter. A sample review engagement report is provided in figure 1.4. Required: a. What is the auditor’s responsibility as determined in the audit report? b. Find the lines in the
> Certek Technologies Inc. is a biotechnology company whose stock traded on a major Canadian stock exchange. Over the 22 months following its initial public offering in May 2009, Certek’s stock rose an astounding 1,350 percent. In mid-March 2000, Certek’s
> Securimax Limited has been an audit client of KFP Partners for the past 15 years Securimax is based in Waterloo, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to w
> Cool Look Limited (CLL) is a high-end clothing design and manufacturing company that has been in business in Canada since 1964. CLL started as an owner-managed enterprise created and run by Hector Gauthier. Its ownership has stayed within the family, and
> The accounting firm of Aschari and Di Tomaso was engaged to perform an audit of the financial statements of Pammenter Inc. During the audit, Pammenter’s senior managers refused to give the auditors the information they needed to confirm any of the accoun
> Linda is the managing partner of Osuji and Associates, a small audit firm. Linda’s role includes managing the business affairs of the firm, and she is very worried about the amount of fees outstanding from audit clients. One client, Dreamers Ltd., has no
> DDD Motor Sales Inc. is privately owned. It wants to expand its business and has approached its bank for a loan. DDD wants the funds to purchase additional inventory and will be able to provide excellent security to the bank. The bank has agreed that, si
> Fellowes and Associates Chartered Professional Accountants is a successful national accounting firm with a large range of clients across Canada. In 2020, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 perce
> Required: Discuss the expectation gap that could exist for the audit of Securimax. Consider the existence of any special interests of the users of Securimax’s financial statements.
> What is a review engagement? Why would a review be appropriate for a set of financial statements for Securimax?
> Most audit firms maintain a website that explains the services offered by the firm and provides resources to their clients and other interested parties. The services offered by most firms include both audit and non-audit services. Required: a. Find the
> In connection with your examination of the financial statements of Martinson Inc. for the year ended December 31, your post–balance sheet date audit procedures disclosed the following items: 1. January 5: The funds for a $50,000 loan to the corporation ma
> Martin Rorke is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end of the year (June 30). Martin is also reviewing evidence that shows that another cu
> Brad Gokool is reviewing the results of the subsequent events audit procedures. Brad is writing a report for his audit partner based on these results and will be attending a meeting tomorrow with the partner and representatives of the company to discuss
> You are the audit senior of Ball Construction Corporation (BC), a small public company that enters into construction contracts with individuals and developers and builds to their specifications. BC is a Canadian company, but recently opened a branch in th
> Sharon Gallagher, Josh Thomas, and Jo Wadley are members of the audit firm W&S Partners. Sharon is the audit manager and Josh is the audit senior assisting the partner, Jo, evaluate the decision to accept the Cloud 9 Ltd. audit engagement for the year en
> Mitch Ziegel and Rosie Punter are discussing the audit plan for a large manufacturing company. The company has two main manufacturing plants plus several warehouse and distribution centres (one in each province). The company has a large investment in tra
> Springsteen Ltd. is a new audit client for the 2020 financial year. Springsteen’s financial statements for the 2019 year, the last with the previous auditor, were prepared on the assumption of a going concern. An unmodified audit opinion with a going concer
> Manitoba Metal Fabricators (MMF) is a company that makes steel components for the construction industry. It specializes in extreme precision manufacturing where tolerances are measured in distances of less than one millimetre. Its products are used in re
> Phil Nanere is the partner in charge of the audit for a new client, Western Wonderland (WW). The client engaged Phil’s audit firm in November 2019, in preparation for the 2020 audit. From January 30, 2020, onwards, WW has consistently paid its suppliers l
> You, a recently designated CPA, have agreed to serve on a committee that is organizing a sports adventure race as a fundraiser for Far West Camp, a camp for teenagers from all economic backgrounds. Far West Camp has obtained support from two sponsors tha
> Beautiful Shoes Inc. is a high-end ladies’ shoe store. It has recently expanded its operations and signed a long-term lease in a popular shopping centre. The owner, Beverly Hung, is concerned because the lease agreement requires that she submit to the la
