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Auditing A Practical Approach 1st Canadian Edition Robyn Moroney - Solutions

Gold Explorers Inc. (Gold Explorers) is a major Canadian gold mining corporation. Gold Explorers has mines and development projects in Canada (Northern Ontario and British Columbia), the United States, and South America. Shares of Gold Explorers trade on three major international stock
AutoCare Ltd. (ACL) is a federally incorporated public company formed in 2007 to manufacture and sell specialty auto products such as paint protection and rust proofing. By 2010, ACL's board of directors felt that the company's products had fully matured and that it needed to diversify. ACL
Carl's Computers imports computer hardware and accessories from China, Japan, Korea, and the United States. It has branches in every capital city, and the main administration office and central warehouse is in Montreal. There is a branch manager in each store plus a number (depending on the size of
LLL Avionics Ltd. has contacted your certified general accounting firm to inquire about the cost of an external audit. The company's president explained that he feels that "the previous auditor charged too much and only issued a qualified opinion." Your firm was recommended to LLL by your bank
This is the second year that your firm is auditing JJ Company, which is developing a new drug for a rare form of cancer. The company is controlled by Jack, who purchased the shares from the previous owner this year. You have been informed that the company's bank requires an audit to increase the
Ana used 0.5-5 percent of gross profit in determining materiality of $70,000 in her audit of XYZ Inc., a company that builds replacement engines for tractors and combines. She used the $70,000 amount as her performance materiality, identifying account balances and transactions to be tested. She
Claytonhill Beverages Ltd. is 100 percent owned by Buzz Bottling. While the company has in the past been profitable, it incurred a loss for the year ended December 31, 2012. The parent company, Buzz Bottling, has indicated that if Claytonhill incurs another loss, it will put the subsidiary up for
Niagara Dairy is a boutique cheese maker based in the Niagara region of Ontario. Over the years, the business has grown by supplying local retailers and, eventually, by exporting cheese product. In addition, there is a "farm-gate" Shop and cafe located next to the main processing plant in
Li Chen has calculated profitability ratios using data extracted from his client's pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures). Table 4.8 presents the data for the gross profit and profit margins.Gross profit and profit
Bright Spark Fashion has retail outlets in six large regional cities in eastern Canada. The shops are run by local managers but purchasing decisions for all stores are handled by Ray Bright, the owner of the business. Fashion is an extremely competitive business. Bright Spark Fashion sells only for
Part 1 MaterialityW&S Partners commenced the planning phase of the Cloud 9 audit with procedures to gain an understanding of the client's structure and its business environment. You have completed your research on the key market forces as they relate to Cloud 9's operations. The topics you
Explain why the quality of audit evidence is determined by the choice of the audit procedure and the assertion at risk of material misstatement.
Review the examples of working papers provided in the chapter. What advantages are there for the auditor in writing working papers in spreadsheets and word documents?
What is a legal letter? What external parties could an auditor send a confirmation to? What other parties provide representation letters to an auditor?
Explain how gathering physical evidence by inspecting a client's tangible assets assists in the audit of the completeness and existence assertions.
Discuss the impact of electronic processing of transactions on the audit.
Why does an auditor have to consider the persuasiveness of corroborating evidence? Explain.
If an auditor does not have sufficient knowledge and skill in an area, the auditor can ask for the assistance of an expert. This creates a problem-how does an auditor know if the expert's work is correct if the auditor is not also an expert? Explain.
Under what circumstances does an auditor use the work of a component auditor? Why doesn't the group engagement partner do all of the work?
What are the evidence-gathering procedures an auditor might use? At which stages of the audit are these procedures appropriate? How do the procedures relate to the types of evidence an auditor can rely upon?
What is the difference between recalculation and re-performance? Explain using examples.
Required 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 year end are recorded. (d) The
Securimax Limited (Securimax) has been an audit client of KFP Partners (KFP) 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 win large government
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: • Shady Oaks Centre, a
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: • Shady Oaks Centre, a
You are engaged to examine the financial statements of Lauzon Inc. for the year ended December 31.On October 1, Lauzon Inc. borrowed $250,000 from a local bank to finance a plant expansion. The loan agreement provided for the annual payment of principal and interest over three years. Lauzon's
Required 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 right amounts. In addition, the
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.Daytona Lemans LLP Chartered Accountants (DL),
The following are independent questions. Required (a) List four factors that make audit evidence more reliable. (b) Explain the difference between positive and negative confirmations for accounts receivable.
Jenna is working on the audit of a client's accounts receivable. During the last few weeks she has conducted interviews with the accounts receivable manager, the CFO and staff working in the accounts receivable department. She has also overseen the external confirmations of accounts receivable,
Conversations between the board of directors of Acme Ltd. and the engagement partner of the financial audit, Angelo Del Santo, have revealed that Acme uses three legal firms. Ball and Partners performs all legal work related to property transfers, mortgages, and planning applications. Brown and
Mohammad Ahmed is responsible for preparing bank reconciliation statements at Ajax Ltd. Ajax Ltd. has many bank accounts, including separate accounts for each major branch, imprested accounts for salaries and dividends, and accounts kept in foreign currency for overseas divisions. Mohammad
SolarTubeGen is a start-up company in the renewable energy sector. The founder, Fritz Herzberg, has developed cutting-edge technology to convert the energy in the sun's rays to electricity via a, novel system of mirrors designed to focus the sun's rays onto tubes containing a patented type of gas,
Max Crowe is a junior auditor who has just started with the team conducting the audit of a new client in the construction industry. Max is "shadowing" Susan Wong, an experienced auditor. Susan is showing Max how to be a member of an audit team and is trying to teach Max about the benefits of
Jennifer Daoust is reading the documents prepared by the members of the team working on the audit of receivables for a large client. Jennifer is the senior manager assisting the engagement partner, Ruby Rogers. Jennifer and Ruby have worked together on many audits and Jennifer knows the types of
Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers' hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in
W&S Partners will need the assistance of auditors in China and the United States and derivatives experts to complete the Cloud 9 audit. The other auditors will be asked to provide evidence about the inventory shipped to Canada from the production plants in these countries. Although the inventory is
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 estimate of misstatement in sales?
Explain how analytical procedures could be used for control testing and substantive testing. Give examples of each.
How is 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?
Why are audit tests more likely to be conducted at or after year end for high-risk clients than for low-risk clients? Explain.
Explain the difference between the two types of sampling risk for controls: overreliance on an ineffective system of internal controls, and under reliance on an effective system of internal controls. What are the errors' different implications for the audit? Which is the more serious risk? Explain.
Why does non-sampling risk exist for all types of tests in all audits? Explain.
Describe the main non-statistical sampling methods. What are the advantages of non-statistical sampling?
Explain the relationship between the sample size for controls 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 confidence in the effectiveness of the client's
How does stratification of the population reduce the required sample size? Give an example of substantive testing where stratification would be appropriate.
Emma Maltz has been appointed as audit senior of the accounts receivable area in the audit of Fantastic Cruises, a company operating leisure cruises from ports in eastern Canada. Fantastic Cruises sells cruises to individuals (via its website) and to travel agents for resale to customers. All
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following
Test A 1. Select 150 cancelled cheques (8 percent of the total number of cheques) at random from the purchases journal for the year. 2. Ignore any cheques with a recorded value of less than $1,000. 3. Examine the cancelled cheques to verify if they have been approved by the accounting supervisor
Match the numbered situations below with one of the following types of audit sampling or sampling risk: (a) Statistical sampling (b) Non-statistical sampling (c) Sampling risk (d) Non-sampling risk 1. Rather than looking only for authorized signatures, an auditor checked to see if there were any
You are an audit senior, and your manager, Monique Lauzon, feels that non-statistical sampling is the best method to use on the audit of Konway Corporation. However, you believe that statistical sampling is much superior, and you have a great deal of training in the proper use of sampling
Your friend, Alexei Antropov, has recently began working for an auditing firm and he wants your advice regarding some tests of sales transactions that he is currently undertaking with respect to one of his clients. He has been careful not to disclose to you the name of his client so as not to
Rahim, a first-year auditor, is asked to select a sample of invoices to audit the utility expense account. Below is the account detail. The audit program asks to select a sample of four
Fred Saros is auditing cash payments for OGA, a large supermarket. OGA deals with several very large corporate suppliers who expect payment by electronic funds transfer within three business days of delivery. Other large suppliers will accept cheques or electronic funds transfer on terms of 14
Bob Downe is auditing Red Gum Home Furniture (RGHF), a manufacturer and retailer of boutique home furniture. RGHF was founded 25 years ago by a husband and wife team and has grown rapidly in the last five years as solid, environmentally friendly, wooden furniture has grown in popularity. However,
Alice Pang is planning the control testing of the accounts payable function in the hardware retailer Bunns and Major. Alice is attempting to determine the appropriate sample size for her tests and is writing a report to the engagement partner of the audit justifying her choices. She has had the
The results of substantive testing of sales invoices at City Electronics are shown in table.The three strata correspond to different departments and the overall tolerable error is set at $40,000.Required(a) Project the errors for each stratum and calculate the total projected error. Is the
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the fiscal year ended December 31, 2012. You are completing the audit planning for the property, plant, and equipment (PPE) account
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the fiscal year ended December 31, 2012. You are completing the audit planning for the property, plant, and equipment (PPE) account
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following
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 system of internal controls that are
Answer the following questions based on the information for Cloud 9 presented in Appendix B of this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required (a) Consider and explain the effects that the opening of
If an auditor does not intend to rely on internal controls in the audit, does the auditor need to obtain an understanding of internal control? Explain.
Why do auditors prepare management letters?
Explain the difference between entity-level controls and transaction-level controls. Is an auditor interested in both?
Discuss the contention that the control environment is the most important part of a system of internal controls because it provides the foundation.
What sorts of risks would an entity's risk assessment process consider? Give some examples for a retailer. Which of these risks would be relevant to financial reporting? Explain.
Explain the importance of segregation of incompatible duties. What sorts of duties would be segregated within the sales process? Why?
Why would an auditor be interested in a client's control monitoring processes?
List three steps in the sales process. For each step selected, also identify a WCGW and an example control that should be incorporated in the step to mitigate that risk.
List the steps of the cost of sales process and give an example control that should be incorporated into each step.
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?
Powersys is an electricity distribution company based in a large capital city. Its business is to manage the electricity assets, including poles, wires, and other equipment, that are used to deliver electricity to more than 500,000 retail and business customers in the city. Pole, wire, and
WWW Corp. sells its products to clients ranging from proprietorships to medium-sized entities. WWW is controlled by two family members, and most of the employees are casual staff employed during the busy seasons (November 1 through January 15, and May 1 through July 15). The company's managers feel
Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers' hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in
Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers' hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in
Securimax Limited (Securimax) has been an audit client of KFP Partners (KFP) for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: •
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2011, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:•
TTT Ltd. has had strong growth over the past three years. The company is involved in mining in northern Canada. While revenues have been increasing, the costs of mining at its remote locations have also increased. An investigation revealed that the controller had added a fictitious employee and had
Harlan Venture Inc. (HV) operates a restaurant named Harlan's, which is located in Toronto. The shareholder, Taufiq Noorani, is concerned whether the system and controls in place at the restaurant are appropriate for monitoring and controlling its operations and for ensuring that employees don't
Integrated Measurement Systems Inc. (IMS) is a Canadian public company that manufactures high-end measuring devices used primarily in the oil and natural gas industries. Ted Pollock, CEO of IMS, is a proponent of strong corporate governance. He has spent the last year strengthening IMS's internal
Carmel Harrison runs Emerald Spa, a business providing women-only hairdressing, beauty, relaxation massage, and counseling services in a small tourist town. Ninety percent of the clients using the beauty and massage services at Emerald Spa are weekend visitors to the town, but 80 percent of the
International Bank is experiencing bad publicity surrounding huge fraud losses in its foreign currency department. Accusations are being made in the press that the rogue trader blamed for the losses was operating outside the official guidelines with the tacit approval of senior management in the
Big Town Computers has premises in the main street of a large regional city. The business is owned by Max and Betty Waldup, who purchased it three years ago. Betty has an extensive background in IT and has a talent for diagnosing and solving problems with computers that are brought in for repair.
Use Couture is documenting the purchasing and cash payments processes at Hardies Wholesaling. Hardies Wholesaling imports garden and landscaping items, such as pots, furniture, fountains, mirrors, and sculpture, from suppliers in Southeast Asia. All items are non-perishable, are made from materials
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 type of control: (a) Petty cash is kept in a
Closing the books is critical for ensuring that an entity's financial statements are complete and accurate. This process involves recording adjusting journal entries since the recorded entries have an impact on the resulting financial statements, an auditor should consider the controls over the
Two of your friends from high school will soon realize their lifetime dream of opening an English-style pub. They recently spoke with their accountant who indicated that they should ensure that they implement some strong controls. They have no idea what the accountant was talking about. They know
GGG Electronics builds short-wave radios. Its manufacturing plant is also a warehouse. When parts are received, the receiver compares the type of goods and quantity to a copy of the purchase order available online. If the quantity received differs from the quantity on the purchase order, the
Answer the following questions based on the information presented for Cloud 9 in Appendix B to this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters.Sharon Gallagher and Josh Thomas have assessed the internal
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 process of documenting the auditor's conclusions. What must be documented?
Explain the difference between automated and manual controls.
Explain the three types of ITGCs. Why are they "general" controls? Why are they important controls?
What are the four types of tests of controls? Explain them and comment on the reliability of the evidence obtained from each.
Does an auditor have to test every control? Explain.
What factors do auditors consider when deciding how much control testing to do?
Explain the concept of benchmarking and its benefits to the auditor.

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