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Question 2 (12 marks) For each of following specific audit procedures (A to F) state the specific audit assertion associated with the audit procedure

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Question 2 (12 marks)

For each of following specific audit procedures (A to F) state the specific audit assertion associated with the audit procedure. Be sure to include the type, i.e. whether it is a transaction-related, balance-related or presentation & disclosure-related audit assertion.

For each specific audit assertion identified, state the General Audit Assertion and Explain why.  Organize your answer in two columns as follows:

A.   Obtained a client prepared bank reconciliation and agreed the outstanding deposits to the bank statement of the following month.

B.    Externally confirmed the terms and balances of bonds payable with creditors

C.    Calculated an estimated total managerial payroll expense by multiplying the average salary by the number of managers. Compared the estimated payroll expense with actual expense and inquired with payroll manager to obtain the cause for the 30% variance.

D.   Recalculated depreciation expense related to property, plant, and equipment.

E.    Inspected accounts receivable aged trial balance to identify balances greater than 90 days old and traced the amounts to subsequent payments made by customer.

F.    Discussed significant fluctuation in repairs and maintenance account with client management.

Question 3   (15 marks)

For the Following Statements, Please indicate whether you AGREE or DISAGREE AND Explain why you AGREE or DISAGREE. Each Statement is worth 3 marks each.

1. The actual analytical procedures performed in the execution stage of the audit will normally be quite different from the analytical procedures performed in the planning stage.

2. At the completion of each audit, an independent review of the audit file is conducted. In most firms, the primary purpose of such a review is to identify and summarize areas that must be reported to the client, such as recommendations to be made to the audit committee and management for enhancing their internal controls or the accounting system.

3. Knowing a client’s business well can provide or enhance evidence to support the valuation assertion for accounts receivable.

4. There are four main types of procedures used to test internal controls: inspection, re-performance, enquiry, and observation. Each is equally useful in obtaining reliable audit evidence about internal controls, irrespective of the circumstances of the case.

5. You are engaged to audit the financial statements of a public company. However, during the course of the audit, you find that adjusting entries are required to correct some of the account balances. To save time, you make these adjusting entries.

Question 4    (16 marks)

You are a manager for David and Blue, LLP, a public accounting firm which has 10 offices and 30 partners. An expert in ethics and professional conduct, you have been contacted by various individuals in the firm and have been asked to provide advice.

Situation A (4 marks)

Jamie, CPA is an audit senior. He has just has just called you for advice. He was at his desk when he overheard his colleague Teresita having a phone conversation. She told the person on the other end of the call that Drake Co. Ltd., a public company listed in the Toronto Stock Exchange, and one of the firm's largest audit client, is about to release the company's audited annual financial statements and the results are spectacular. Teresita said that she just bought some shares as she expects that the share price will go up.

Situation B (4 marks)

An advertisement has been drafted as part of the firm’s drive to attract more clients. It is suggested it should be placed in the two national newspapers as well as local newspapers.

Situation C (4 marks)

Bobby James, CPA, has just returned from a meeting with a potential new audit client, Star Alliance Advertising. Bobby has recently returned to public practice after working in advertising industry as a CFO for a large company. David and Blue recruited him as an audit partner for his contacts within the industry. Part of his compensation is tied to the number of new clients he is able to recruit. It has been eight years since Bobby has performed any audit engagements; however, he is confident that he can rely upon his industry knowledge to assess the resources needed to perform the audit engagement. During the meeting, he reads over the prior year's financial statements and tells the client he will accept the engagement. He tells the client that he will do a substantive-based audit; therefore, he can guarantee that the fee will be less than the fee charged by the previous auditor.

Situation D (4 marks)

Sarah Wong, CPA, is a senior manager at the firm HMZ LLP. One of Sarah’s largest clients is Lenovo Inc. a publicly traded retailer of high-end electronics. This year’s audit has been challenging; Sarah has been working extra hours on the audit, as Lenovo implemented a new IT system. Furthermore, the controller has been disputing a number of audit adjustments that Sarah has proposed. The auditors have been working in one of the spare offices located close to the warehouse. One evening, Sarah notices a shipment of tablets that had not been locked up. To compensate herself for the additional hours she has been working on the file, she takes one of the tablets and slips it into her laptop bag on her way out of the client site.

Required

For each of the independent situations above Evaluate and Perform the following:

• Identify and explain the ethical and professional conduct issues
• Recommend any actions necessaery in response to the issues identified

Question 5     (15 marks)

For each of the following unrelated situations a standard unqualified auditor’s report was issued. , Outline possible deviations (if any) from the report issued that may be necessary. Give reasons. (5 Marks for each situation. 1 mark for each valid point for a situation)

• Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the percentage of completion method for long-term construction contracts. Your review of this year’s new large construction contracts indicates that several significant projects have been recorded with high revenue for the first two years,      and then have negligible earnings for the next three years.

• Maple Manufacturing Limited constructs furniture out of maple wood. The furniture is prized for its durability and craftsmanship. Last year, the company received a letter from a governmental agency advising that it had been found that    the factory was located on contaminated land that leached hazardous chemicals into the air. This was a preliminary letter stating that a full investigation into the health effects was underway. Management stated that everything is OK – the investigation was terminated. However, the client’s legal letter indicates that there are several lawsuits with respect to employee claims for long term disability due to a nervous disorder that affected employees’ ability to work. The employees claim that the nervous disorder is connected with the contaminated land. Neither the investigation nor the lawsuits are disclosed in the notes to the financial statements.

• Save our Trees is a charitable organization devoted to maintaining national woodland and green space. The majority of its revenue is from fund-raising activities handled by volunteers who are unsupervised. Fund raising is handled primarily by means of electronic mail and door to door canvassing by these volunteers. Volunteers conducting canvassing provide receipts at the door using pre-numbered receipts from two-part booklets. When funds are raised by email, a separately numbered sequence is used and donors are sent receipts by email. Numeric sequences of receipts are not accounted for.

Question 6   (12 marks)

You are completing the audit of Derban Automative Inc. (DAI), a new client, and encountered the following issues. For each issue, describe the impact upon the December 31, 2013 financial statement audit, and any further actions that you should take: (4 Marks for each situation. 1 mark for each valid point for a situation)

1. Based on your communication with the previous auditor, you learned that the previous auditors had a dispute with DAI management concerning the valuation of inventory. The previous auditor provided a clean opinion since the inventory balance was not material, but resigned anyway because of the poor relations with DAI’s management.

2. Inventory consists of raw materials, semi-processed liquids, and finished goods. The fourth quarter inventory count was attended by the previous auditors, who have provided a copy of their working papers related to the inventory count to your firm.

3. The fourth quarter inventory count resulted in a significant write-down of work-in-progress and finished goods inventory. Management thinks that the write-down may have been caused by outdated standard costs.