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Auditing A Practical Approach 3rd Canadian edition Robyn Moroney, Fiona Campbell, Jane Hamilton, Valerie Warren - Solutions

Key documents are used to record and maintain adequate inventory and property, plant, and equipment accounts.RequiredFor each of the following documents, describe its purpose and how it contributes to internal control over the related function:a. Inventory transfer requisitionb. Inventory count
For each of the following statements, identify the audit assertion that it relates to:a. Inventories are recorded at the lower of cost and net realizable value.b. There is no inventory on consignment.c. All asset additions during the year have been recorded.d. All inventory purchases are recorded
When conducting tests of details of transactions for property, plant, and equipment, there are three types of transactions that need to be substantiated. These transactions are additions, disposals, and repairs and maintenance. Briefly describe what is involved with substantiating each of these
What steps can the auditor take to ensure that the disposal of fully depreciated assets is properly recorded? What are the implications if such assets are retained in the accounts?
What are the problems confronting the auditor in verifying both the rate and method of depreciation?
Discuss procedures that would be useful in ensuring that all disposals of property, plant, and equipment have been recorded.
Why does the auditor usually adopt a substantive audit strategy for property, plant, and equipment assertions?
You are the audit senior in charge of the audit of Blackburn Ltd., and you are auditing the company?s trade creditors at December 31, 2020. A junior member of the audit team has been checking suppliers? statements against the balances in the accounts payable sub-ledger. He is unable to reconcile a
Greystone Co. is a retailer of women’s clothing and accessories. It operates in many countries around the world and has expanded steadily from its base in Canada. Its main market is 15- to 35-year-olds and its prices are mid to low range. The company’s year end is September 30, 2020.In the
Blake Co. assembles specialist motor vehicles such as freight trucks, buses, and delivery trucks. The company owns four assembly plants where parts are delivered and assembled into the motor vehicles.The motor vehicles are assembled using a mix of robot and manual production lines. The
MO has a high volume of casual staff who work during peak season to support the increase in workload in the following main areas:1. distribution: warehouse staff to pack, store, and receive goods2. drivers: to deliver goods to retail stores3. sales and marketing: MO representatives to operate at
You are reviewing the audit work for Online Ltd., a large Canadian company. Online uses a service bureau to process all wages. Time sheets are authorized by the appropriate supervisor, batched, and sent to the service bureau for processing. Detailed payroll reports, as well as the time sheets, are
You are the audit senior for the audit of Grosse Ltd. and have been given the audit file to review. The reporting date is December 31, 2020, and the materiality for the client has been set at $200,000. You obtained the information listed below from your review of the audit file.1. The balance noted
Figure 10.6 is a copy of the auditor’s working paper for auditing accounts payable for the client New Millennium Ecoproducts.Requireda. Explain the nature of the test being documented in the working paper.b. Compare the information for the current year with the details for the prior year. Do you
Venture Volunteers for Troubled Teens is a not-for-profit entity that provides counselling services to troubled teens and adolescents. While the majority of its funding comes from the government, the group also participates in a variety of fundraising activities. To manage the fundraising
You are the auditor of Sofasellers Ltd., which buys furniture from manufacturers for sale to the public. You have been asked to audit certain aspects of the computerized purchasing and accounts payable system.The company has a head office, a warehouse, and many stores throughout the country.
Trillite 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 increased as well. An investigation revealed that the controller had added a fictitious employee
Diamond Construction is an owner-managed entity with contracting revenues of $20 million in 2020. As construction is a labour-intensive industry, one of Diamond’s largest expense accounts is labour and wages. You are a first-year auditor at Klein and Partners. You have been given the following
Management of Tarnawski Ltd. has requested a review of internal controls over cash payments for parts and supplies purchased at its various manufacturing plants. Cash payments are centrally processed at head office based on vouchers prepared and approved at the manufacturing plants. Each
Your firm is the external auditor of Bestwood Engineering Ltd., which manufactures components for motor vehicles and sells them to motor vehicle manufacturers and wholesalers. It has sales of $25 million and a profit before tax of $1 million. The company has a new financial controller who has asked
Key documents are used throughout the purchases, payables, and payroll process, and each supports an internal control function.RequiredFor each of the following documents, describe its purpose and how it contributes to internal control over the purchases, payables, and payroll cycle.a. purchase
For each of the following statements, identify the audit assertion that it relates to:a. All purchases transactions that occurred during the period have been recorded.b. Accrued payroll liabilities are liabilities of the entity at the end of the period.c. Purchase invoices are properly recorded.d.
Discuss the cut-off implications of the inventory count being before or after the year end and closing inventory being determined by adjusting the count by reference to purchases and sales records in the intervening period.
Overhead is to be absorbed into the cost of inventory on the basis of the normal level of activity. What evidence is available to the auditor in verifying management’s determination of that level of activity?
Many companies use standard costing as the basis for inventory costing. What audit procedures may be appropriate for establishing the fairness of the standard costs, for testing the maintenance of the standard cost records, and for determining the disposition of variances?
What steps should the auditor perform when observing the inventory count? Why should the auditor take test counts?
Describe the alternative methods entities use to determine their inventory at the end of the reporting period and the possible effect of each method on audit strategy.
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 current year at the expense of income in future
Cut-off procedures can be applied to receiving reports issued before the year end or to liabilities recorded after the year end. Consider the separate merits of each approach in assuring the completeness of recorded liabilities.
Explain why an unexpected change in the gross profit ratio leads the auditor to suspect a wide range of possible misstatements in recorded transactions and balances.
It is increasingly common for companies to program their computer information system to print and distribute cheques without further authorization. As an auditor, describe controls you would expect to find in place over such a system.
Describe the performance of the purchases cut-off test.
Explain why the assessment of control risk for the occurrence of payment transactions affects the assessed level of control risk for the completeness of the accounts payable balance.
Your client is BigC Ltd., a large private firm with offices in all major cities of Canada. BigC specializes in selling concentrated fruit juices to Canadian and overseas buyers. This is the first year your firm will perform the audit. You are currently completing the planning work for the audit of
Ally Bobyk is conducting the audit of a wholesale electrical goods distributor, Electra Ltd. Electra supplies appliances to hundreds of individual customers in the Toronto area. It maintains detailed accounts receivable records on a computer system. The customer account master file is updated at
You have been assigned to perform tests of controls on the sales system at EDB Ltd. as part of the December 31, 2020, audit. EDB is a wholesaler of bathroom supplies such as vanity units, toilets, taps, and sinks. During testing, you noted the following errors:1. Invoice no. 54922 issued on January
Bestwood Ltd. is planning to replace its computerized sales accounting system. The managing director has asked for your advice on certain matters relating to the new system.The existing system uses the computer to produce sales invoices from handwritten shipping documents, posts them to the
Venture Volunteers for Troubled Teens (VVTT) is a not-for-profit entity that provides counselling services to troubled teens and adolescents. While the majority of its funding comes from the government, the group also participates in a variety of fundraising activities. To manage the fundraising
Soak City Waterpark is a family-owned business just outside of Winnipeg. The waterpark is only open for business from May to September. During the winter months, the waterpark undergoes repairs and maintenance upgrades.The capital assets for Soak City are significant and the waterpark recently
As the internal auditor of the Sellanything Group of companies, you have been asked to investigate the cash sales system of Stationery Ltd., one of the subsidiaries. Stationery sells office supplies in the Halifax area. Its prices are highly competitive and it offers a same-day delivery service for
Key documents are used throughout the sales process and each supports an internal control function.RequiredFor each of the following documents, describe its purpose and how it contributes to internal control over the sales cycle:a. Customer orderb. Sales orderc. Accounts receivable master fi led.
For each of the following statements, identify the audit assertion that it relates to:a. Sales are made to customers that do not have approved credit.b. Goods not ordered by the customer are shipped.c. Unit prices on customer invoices are incorrect.d. Invoices are not posted to customer accounts.e.
CAS 530 Audit Sampling distinguishes between sampling and other selective testing procedures. Explain the application of the requirements of this standard to the selection of accounts receivable confirmations.
Explain what is meant by “cut-off ” and why it is important to auditors in establishing the fairness of the financial statements.
Explain the kinds of fraud that could be expected in sales, cash receipts, and sales adjustment transactions in the absence of adequate internal control procedures. Consider the importance of the segregation of duties in preventing such frauds.
Identify situations leading to an inherent risk that an entity may wish to(a) Overstate sales revenue(b) Understate sales revenue.
Discuss situations in which sales adjustments may be necessary. Identify necessary controls to ensure that the accounting system recognizes only genuine adjustments.
If the auditor does not receive a response after sending a letter to confirm a customer’s account balance, what alternative audit procedures may be performed?
Outline the procedures involved in performing accounts receivable confirmations.
Why is the auditor likely to adopt a combined audit approach to accounts receivable wherever practicable? Why are substantive procedures more likely to be based on the accounts receivable balance than on sales, cash receipts, and sales adjustment transactions?
Why is the control risk assessment of the completeness of cash receipts and sales adjustment transactions associated with the control risk over the existence of the accounts receivable balance?
Describe the inherent risks specific to sales and receivables the auditor needs to consider.
Describe computer-assisted audit procedures that can be used in testing controls over purchasing.
Describe programmed application controls you would expect to find in a computerized payroll system. Explain the audit procedures for testing those controls.
Explain the importance of segregating the personnel function from the payroll preparation.
State the main audit objectives for:(a) Purchases and payroll transactions(b) Accounts payable balances.
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 restate their earnings, in some cases over a
Tinkerbell Toys Co. (Tinkerbell) is a manufacturer of children’s building block toys. It has been in business for more than 35 years and it sells to a wide variety of customers including large and small toy retailers across the country. The company’s year end is May 31, 2020.The company has a
James Bach is a CPA student working on the confirmations working paper from one of his clients, Dunstan Electric Co. He has so far summarized the results of his testing as shown in figure 9.6.RequiredHelp James complete the working paper.a. Calculate any differences between the general ledger
You have been assigned to audit the sales and accounts receivable balances of Coppero Engineering Ltd. for the year ended September 30, 2020. Coppero Engineering is a major manufacturer of steel parts and fixtures for other manufacturers in the engineering field. The interim work was undertaken in
Your firm is the external auditor of Southwood Trading Ltd. and you are auditing the fi nancial statements for the year ended June 30, 2020. Southwood Trading has sales of $25 million and the accounts receivable at June 30, 2020, were $5.2 million.The engagement partner has asked you to consider
Figure 9.5 is a copy of the auditor’s working paper for auditing accounts receivable balances for the client New Millennium Ecoproducts. It shows the details of the cut-off tests.Requireda. Find the details of the transactions selected for cut-off tests. Why would these transactions be selected
The following items are documented in the audit working papers:1. Sales transaction included in the year ended December 31, 2020, but evidence from the cut-off procedure suggests that the sale should be dated January 2, 2021 ($1,250,000).2. Warranty expenses in the trial balance for the year to
Ann Marcus, CPA, is performing an audit for one of her clients, Artistcraft Ltd., a glass factory, for its December 31, 2020, year end. The audit program requires a substantive analytical procedure to be performed on the reasonableness of Artistcraft’s interest expense on its long-term debt.Ann
James Wu has been assigned the audit planning for the property, plant, and equipment section for a large manufacturing audit client. The client built a new factory during the first six months of the year; therefore, significant additions were made to its property, plant, and equipment
Hilltop Partners is planning the audit for one of its clients. Jake Hilltop is performing the risk assessment at the assertion level for the accounts payable account to determine the nature and timing of the substantive work to be performed. Jake has assessed the inherent risk for the accounts
What does ITGCs stand for? Explain their purpose.
Explain each of the seven objectives of internal control.
What is internal control? Why is an auditor interested in a client’s internal control?
a. Identify and explain the potential type of threat to Fellowes and Associates’ independence in situations (1) and (2) below.b. What action should Fellowes and Associates take to eliminate the potential threats to independence in situations (1) and (2) above? What safeguards should be instituted
Describe the audit expectation gap. What causes the gap?
What does reasonable assurance mean?
What are the limitations of an audit?
Why do auditors use sampling? Explain the advantages and disadvantages of using sampling instead of testing every item in a population.
Define what is meant by sufficient and appropriate evidence.
Identify the audit risks associated with the installation of the new IT system for patient revenue for Gardens Nursing HomeFellowes and Associates is a successful mid-tier accounting firm with a large range of clients across Canada. During the 2020 financial year, Fellowes and Associates gained a
You are the audit senior of Rhino & Co. and you are planning the audit of Kaine Construction Co. for the year ended March 31, 2020. Kaine specializes in building houses and provides a five-year building warranty to its customers. Your audit manager has held a planning meeting with the finance
Tom’s Trailers Ltd. (TTL), located in London, Ontario, manufactures industrial trailers that are used to ship goods across the country. Originally, Tom Tran owned 60 percent of the common shares of TTL and the other 40 percent was owned equally by Tom’s four brothers. Tom’s brothers have
Gold Explorers Inc. 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 exchanges—New York,
Atlantic Academy is a private school that offers education to children from Kindergarten to Grade 7. The school operates as a not-for-profit entity and oversight of the school is performed by the board of directors. The board reviews the operational and financial results monthly to ensure the
You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating Co., for the year ending December 31, 2020. Eagle manufactures and sells heating and plumbing equipment to a number of home improvement stores across the country.Eagle has
Define audit risk and its components.
Expansion Aviation has installed a new payroll module for its existing accounting system that integrates with the general ledger application. The new payroll application is more complex than the old system, but its reporting function provides more details. For example, the new application
Sax Co. sells insurance, and it has recently become a listed company. In accordance with corporate governance guidelines, the finance director of Sax is reviewing the company’s corporate governance practices.Bill Bassoon is the chair of Sax. Bill vacated the chief executive position last year to
Fellowes and Associates Chartered Professional Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2020, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:• Shady
Sisters Inc. beauty salon is a 100% subsidiary of Benefit Beauty Supply Inc., a beauty supply company. As a result of this relationship, there were several transactions between the two entities during the last year. Sisters rented retail space for its salon from Benefit Beauty during the past year.
You have access to the following information for Featherbed:• prior period financial statements• anticipated results for the current year• industry comparisonsRequiredExplain how you would use this information to understand your new client.
Ivy Bishnoi is preparing a report for the engagement partner of an existing client, Scooter Ltd., an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects of Scooter’s business given the change in economic conditions over the past 12 months. She has
Stokes Ltd. operates in the steel fabrication industry. Its business is organized into domestic and international sales and it has many clients in each area. It obtains most of its raw materials from two suppliers, both located in the same province as Stokes’s main operations. The government is
What are the audit activities in the risk assessment phase of a financial statement audit?
Explain the relationship between the risk assessment, risk response, and reporting phases of an audit. Why is risk identification in the first phase?
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 guaranteeing that all audit engagements
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 would not be needed for three months.
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 of Orange are planning to list it on a
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.
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 received a letter from Malik and Rudolph,
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 person on the other end of the call that Gupta
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
What are some ways an auditor can avoid litigation?
How can accounting firms put in place safeguards to independence?

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