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15 Jun 2018

4. An audit program is designed to generate appropriate evidence on which the auditor can base an opinion.
How does the auditor know when sufficient evidence has been accumulated?
5. What is the quality of the evidence that is gathered by analytical procedures? More specifically, how
competent is evidence provided by analytical procedures compared with other types of evidence?
6. In performing analytical procedures, how extensive should an auditor’s knowledge of a client’s industry
be and how does the auditor go about getting this type of information?
7. Assume that price competition with other CPA firms was an important factor in securing this audit
engagement. What are the potential problems for a CPA firm that can arise from acquiring clients
through price competition?

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Keith Leannon
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16 Jun 2018

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Q4

Part A

(a) How does the materiality of a condition that might lead to a departure affect the auditor’s choice of audit opinions? Discuss in detail naming the various types of audit opinions that may be issued given the different amounts of misstatements detected. (10 marks)

(b) For each of the following independent situations, indicate the type of audit report you would issue and provide your reasons. You may assume that each item is material. (10 marks)

(i) On 2 January 2017, the Hot Wheels Auto Parts Limited received a notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of this notice, Hot Wheels Auto Parts revalued its 31 December 2016 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; the effect of the revaluation was material to current assets but not to total assets. The increase in valuation is adequately disclosed in the notes to the financial statements.

(ii) Your client holds a significant investment in Iraq. Due to recent political instability sparked off by a series of terrorist acts by the militants, Iraq’s communication with the outside world has been completely cut-off. You are thus unable to obtain sufficient and appropriate evidence regarding your client’s investment in Iraq.

Part B

During an examination of financial statements, an auditor needs to verify management’s assertions that are part of the financial statements. In doing so, the auditor must choose the quality and quantity of evidence, and the timing of the tests to be performed.

(a) Describe five factors that influence the quality or appropriateness of audit evidence. (5 marks)

(b) Why is it necessary to obtain corroborating evidence for inquiry and for observation? (5 marks)

(c) Describe the highest quality form(s) of evidence an auditor would normally obtain to verify each of the following assertions. Be sure to state the type of audit evidence/audit procedure technique being used, e.g. inquiry. (10 marks)

(i) ownership of share certificates held in a safe deposit box

(ii) valuation of gross trade accounts receivable

(iii) completeness of additions of fixed assets

(iv) validity of trade accounts payable

(v) valuation of finished goods inventory

Part C

An auditor is required to obtain sufficient understanding of each element of a company’s internal control system in order to properly plan the audit of the company’s financial statements and to assess control risk for the assertions included in the account balances.

How does the quantity of evidence differ between procedures to obtain an understanding of internal control and tests of internal controls? (4 marks)

(b) Distinguish between a compliance/reliance strategy and a substantive strategy. (6 marks)

(c) For each of the following, give an example of a physical control the client can use to protect the asset or record: (5 marks)

(i) cash received by retail clerks

(ii) accounts receivable records

(iii) raw material inventory

(iv) manufacturing equipment

(v) marketable securities

(d) Explain what is meant by independent checks on performance! (5 marks)

performance review and give two specific examples.

Qustion :

. For the past five years, Clark CPAs has audited the financialstatements of a manufacturing company. During this period, theaudit scope was limited by the client as to the observation of theannual physical inventory. Because Clark CPAs considers theinventories to be material and was not able to satisfy the auditrequirements by using other auditing procedures, the firm wasunable to express an unmodified opinion on the financial statementsin each of the five years.
The CPA was allowed to observe physical inventories for the currentyear ended December 31, 2015, because the client’s bank would nolonger accept the audit reports. However, to minimize audit fees,the client requested that the CPA not extend audit procedures tothe inventory as of the beginning of the year, January 1, 2015.Which type of audit report would you suggest be issued this yearand why?


Note:

I have the answer, could you please paraphrase it ?

The answer is:

The scope of the audit has been restricted by inability toassess the inventory. Based on the information,this appears to behighly material or material, depending upon the auditor'spreliminary judgment about materiality. Because the auditor wasunable to obtain sufficient appropriate evidence on the beginninginventories, it would be necessary to issue either a qualified ordisclaimer of opinion on the income statement and statement of cashflows as well as the beginning of the balance sheet. The choice ofa qualified or disclaimer opinion would depend upon materiality. Ifhighly material, then a disclaimer is the best choice. If material,then a qualified scope and opinion might be more appropriate. Anunqualified opinion could be issued for the current period balancesheet.

1. A CPA firm has carried out an audit of the GillespieCorporation. The CPA has uncovered a material misstatement in theinventory balance. However, the CPA does not feel that this problemis so serious as to eliminate the credibility of the financialstatements taken as a whole. What wording will be used to begin theopinion paragraph of the audit report?

A. In our opinion, except for adjustments, if any, that mighthave been found…

B. The scope of our work was not sufficient…

C. In our opinion, except for the effects of…

D. Because of the effects of…

2. When an auditor issues a standard unmodified audit report,the implication is that the auditor:

A. Believes the financial statements are presented fairly inconformity with U.S. GAAP.

B. Does not know if the financial statements are presentedfairly in conformity with U.S. GAAP.

C. Believes the financial statements are presented fairly inconformity with U.S. GAAP except for a specific aspect of them.

D. Does not believe the financial statements are presentedfairly in conformity with U.S. GAAP.

3. A CPA's standard report on audited financial statements wouldbe inappropriate if it referred to

A. Management's responsibilities for the financialstatements.

B. An assessment of the entity's accounting principles.

C. The significant estimates made by management.

D. The CPA's assessment of sampling risk factors.

4. The introductory paragraph of the standard audit reportstates that the financial statements and the opinion expressedabout those statements are:

A. The responsibility of management.

B. The responsibility of the auditor.

C. The joint responsibility of the auditor and management.

4. None of the above.

5. Which of the following procedures would an auditor mostlikely perform to obtain evidence about the occurrence ofsubsequent events?

A. Comparing the financial statements being reported on withthose of the prior period.

B. Confirming a sample of material accounts receivableestablished after year end.

C. Inquiring as to whether any unusual adjustments were madeafter year end.

D. Investigating personnel changes in the accounting departmentoccurring after year end.

6. The date of the management representation letter shouldbe

A. The same date as the latest interim financialinformation.

B. The same date as the latest bank reconciliation.

C. No earlier than the auditor's report.

D. No earlier than the balance sheet.

7. The audit step most likely to reveal the existence ofcontingent liabilities is

A. A review of vouchers paid during the month following theyear-end

B. Mortgage-note confirmation

C. Accounts payable confirmations

D. An inquiry directed to legal counsel

8. The Form 10-K filed by management of a public companyincludes a section on management’s discussion and analysis(MD&A) in addition to the annual financial statements. Which ofthe following best describes the auditor’s responsibility for theMD&A information?

A. The auditor must perform sufficient appropriate auditprocedures to opine on the MD&A information.

B. The auditor has no responsibilities related to the MD&Adisclosures.

C. The auditor must read the MD&A information to determineif there is any material inconsistency with the audited financialstatements.

D. The auditor must provide a disclaimer of opinion related tothe MD&A information.

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