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Question 2 - (24 marks) (A) Tim is an auditor with a CPA firm

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Question 2 - (24 marks) (A) Tim is an auditor with a CPA firm. He was formerly an internal auditor and has extensive experience in that field. The CPA firm is auditing MMM Inc., a plastics manufacturer where Tim formerly work. as an internal auditor. Tim's expenence in this industry is consider. invaluable by the CPA firm. During his last year of employment at MMM, he conducted reviews and desad controls 00th acquisition and expenditure cycle. He was hired by the CPA firm right after MMM's year end. As this is Tim's that experience in external audit. he has been assigned an assistant, Hassan, who is a co-op accounting student. Tim assigned Hassan to develop a test of controls for the work-in-process inventory. Hassan designed the program, which Tim reviewed and suggestad some changes to. Tim also reviewed the evidence that Hassan obtained to ensure that tots sufficient and appropriate_ Required: (6 Marks) i) Briefly define and explain the general standard of GAAS. (3 Marks) ii) List and explain three points indicating that the situation above violates the general standard of GAAS. - (3 Marks) 
Question 2 (B) As at partner in a CPA firm, you are reviewing the evidence obtainad during the field work phase of an add. The auditor obtained sufficient appropriate evidence showing that the bad debts were understated by $200,000. The bad debt relates to a sale made 2 years ago. When the client would not adjust the amount, the auditor decided to recommend a qualifi. audit opinion. This was the only matenal misstatement found. Gross accounts receivable were $4,000,000 (audited balance) at year end. Required (8 Marks) i. Is this a GAAP departure or a scope limitation? Explain the reasons. (4 Marks) ii Explain why the auditor would recommend a qualified opinion rather than an adverse or denial of opinion in this case. (4 Marks) 

Question 2 (C) The following are fate independent situations. For each case, state whether or not the CPA or CPA student has violated the Code of Ethical Principles and Rules of Conduct and explain your reasoning (2 marks for each situation). (10 marks) 1. In the course of providing professional services to a client, Sate, a CPA, becomes aware that the client has committed a non-criminal breach of one or more governmental regulations. Sam reports the matter to the regulatory authorities. 2. Jennifer, a CPA, is a partner in a professional accounting firm. Jennifer acted as a cheque signatory for a client for whorn the firm provided review services. 
3. James, a partner in a CPA firm. owns a material amount of shares in to mutual fund. The mutual fund has a significant  esssCtatetatthe common stock of one of the CPA firm's clients for whom the firm provides only tax and consulting services. 
4. Justin, CPA student, currently employed by CPAs firm in public practice. Justin discusses the details of his audit assignment with his sive, who is a CPA student employed at another firm. 5. Mighty Construction Ltd. has applied for a loan at the local bank. The bank has requested auditcd financial statements. Ann, a CPA. agrees to perform the audit of Mighty Construction Ltd. for a fee below what she would normally charge. In excha,ge for the lower fee, Mighty Construction agrees to pay Ann an additional S15,000 if the loan application with the bank is approv..As a partner in a CPA firm, you are reviewing the evidence obtained during the field work phase of an audit. The auditor obtained sufficient appropriate evidence showing that the bad debts were understated by $200,000. The bad debt relates to a sale made 2 years ago. When the client would not adjust the amount, the auditor decided to recommend a qualified audit opinion. This was the only material misstatement found. Gross accounts receivable were $4,000,000 (audited balance) at year end. 

Question 3 - (10 Marks) You are the auditor of Jehello Incorporated, a public company with a December year end. Your firm has audited Jehello for the past three years. Jehello manufactures and develops electronic media and sells its products to retailers and wholesalers. The following issues were documented in the working paper files for the prior year audit: • The company had incurred expenditures of 8400,000 related to the development of a new music format for electromc media. The loge majority of the costs were related to developrnent of sottware, hardware, and presentation of the results to customers who participated in research studies. Management had been optimistic that the new sound system would work well, even though research study results indicated poor consumer acceptance. These research and development costs had been fully capitalized. • About 40% of the company's revenues were from one customer. That contract had been due for renewal on May 15, ten days after the audit report had been issued. Documents provided to the auditor indicated that Jehello's custtroarnctewr soeed,dmeddtliblteely toewreednew the contract, atthough quality control disputes were escalating. On May 14, Jehello was inform. that the con n Jehello has defaultSd on its bank Its and the bank is suing you (the auditor), saying that the financialLtateme„nantIpresented lasyceearstswere false d etc) and misleading due to inadequate disclosure. and that the auditor was negligent regarding the audit of e pttts Requited: 
a) Describe with Eight (8) specific defense points that the auditor would use to defend their position in the court of Law.

b) How likely is the auditor going to succeed against the lawsuit?

Question 4 - (12 Marks) You are having lunch with a former employee of your firm, a friend of yours. Gino had been laid off last year when he had failed to pass his professional examinations for the third year in a row. Gino told you that he managed to obtain a qualified accounting designation and public accounting license this year, and has started his public practice. He has been circulating flyers and electronic email announcements with fixed rates: $400 for it compilation engagement. 51.000 for a review. and $5,000 for an audit where revenues are less than S1 million, 515,000 for an audit for a client with revenues up to 55 million. He already has clients to keep him busy for the next three months. He even has some feelers for clients that he personally handled while he was working for your firm - there were a lot of contacts developed during the five years that he was working there! To help attract some of the larger clients, he is considering not charging any fee for the first ten hours spent on tax-related services. The clients have been coming so fast and funous that he has not bothered sending notices to the previous auditors. GMo sees no sense in looking at the files of the previous year, as this way he can get a fresh look at the client. Given that most small to medium sized business have so few controls, he has been able to provide these low cost audits because he focuses solely on tests of details and analytical review. Gino ended the conversation by asking you if you would like to Join him at his new firm, because at this rate he'll need a second person real soon! Requited: Identify Six (6) specific violations of professional rules of conduct by the auditor and explain why they are violatioriT. Use the follow, format to answer your question. 
- Specific Violation of Rules of Professional Explanation Why they are a violation Conduct (1 Mark) I (1 mark) 

Question 5 - (24 Marks) HK LLP It Canadian-bas. accounting firm that and accountig, audit, tax and advisory sennces to bears of clients revenue was S52 million). across the country. It has 70 partners across its business strearns and has enjoy. an increase in revenues over the last few years Oast year's total Gordon, a partner at HK, has been reviewing the audit firm's current and prospective client portfolio. He wants to identity whether there are any independence threats in relation to the current and prospective clients that HK needs to respond to. He has asked you to review a portion of the current and prospective clients (see below). Required: For each of the six clients below address the following: a) State and Describe the independence threats to HK, discuss only one threat for each case. Stating multiple threats for each case will result in zero marks. (2 Marks) b) Describe two safeguards or mitigation steps HK should take in relation to the threats identified for each case (2 Marks). Use the following format to answer your question. 
State and Describe the Independence Describe two safeguard or mitigation Threat (2 Mark) 1 steps (2 mark) 
k 
1. You are a prospective auditor of Accidents-do-happen Inc. Accidents is a high-profile company in the Canadian insurance industry. HK has been approached to take on the audit of this client in the current year along with areas of tax work. There are also poss.e opportunities for secondments for HK staff to Accidents' internal audit department. The overall fee discussed for the tax and audit work is around 52.3 rntlian. 2. You are the current auditor of Apples-2-Go Ltd. Apples is looking to expand its customer base by offering online sales of its and fresh fruit and vegetables. Apples has approached HK to advise the company in relation to the purchase and implementation of an appropriate webs ite  sales system to allow customers to make web-based purchases of Apples' goods over the Internet. HK currently undertakes Apples' statutory annual audit. 

3. You are the current auditor of Basic banking Inc. For the last seven years, Finn has been the engagement partner and Starkly the independent partner for the Basic audit. The systems audit partner for last year's audit has just resigned from HI,C. and Shona (HK partner) suggested that she could take on the role again after a year's absence from the (ob. She has excellent knowledge of the client because she was the systems audit partner on the engagement for the seven years prior to last year's audit. Last year, the work done for Basic by HK totalled $5.1 million. Basic has a full listing on the Toronto Stock Exchange. 
4. You are the current auditor of Couture Curtains Ltd. Charlie, the owner and managing director of Couture, was so impressed by the speed with which Shona's audit team completed Couture's year-end audit last year that he has said that he will pay an additional $10,000 to HK ShOna's team can do it as quickly this year as they did last year. 
5. You are a prospective auditor of Doncaster Doughnuts Ltd. Doncaster has At been bought by Seriously Sweet Tooth Inc.. a company listed on the Toronto Stock Exchange. As such, Doncaster has approach. HK for assistance to ensure that they are IFRS compliant. Peter, the managing director A Doncaster. has told Stanley (HK partner) that if he is impressed with HK's work then he may also otter Doncaster's annual audit to HK. 6. You are the current auditor of Eco-Penzil Ltd. Eco-Penzil is currently suffenng some financial difficulties due to the failure in the marketplace of its latest range of eco-friendly pens. As such. it is three months behind in its payments to all suppliers (goods and services). Gretna. the audit partner on the engagement, is concerned about the going-concern status of the cornea