Auditing Theory And Practice 1st Edition Karen Van Peursem - Solutions

explain various audit opinions and the reasons for them.
prepare an audit report and understand the reasons for its elements
explain audit communication history and context
MANAGEMENT LETTER: You have completed the audit for Tirau Sheet Metal Works Ltd. During your investigation, you found that an HR employee, Samuel, falsified several employee records and, as no prenumbered approval documents were required, they resulted in $53 500 being paid into a bank account of
SUBSEQUENT EVENTS: Assume that your client, EverReady, has a 31 March 2023 balance date. They had a customer who owed $95 500 for a 15 December 2022 purchase. As the debt was current, no provision for doubtful debts was allocated to this account. In May 2023, the auditor needed to perform
SUBSEQUENT EVENTS: Consider each of the following events independently of the others for Latham Ltd, with a balance date (date of financial statement) of 31 March 2023. Assume, unless noted otherwise, that all costs are material:a Latham had a fire in its warehouse on 23 February 2023, incurring
RELATED PARTIES: An auditor discovers the following three events during the course of the audit of BurgerMash, a New Zealand food service franchise for schools.The business is doing well, showing a 6 per cent profit margin and growing.i Paul is BurgerMash’s CEO. Paul’s sister Eileen purchased
COMMUNICATION WITH MANAGEMENT: During the completion stage of the audit of Ace Manufacturing Ltd (an unlisted public company), you have identified that the company has not provided for depreciation on its factory buildings. You inform Mr Beta (the managing director) that you would have to qualify
GOING CONCERN: Assume that you are auditing a wholesale distributor of locks, safes, alarms and other security devices. Your overall analytical procedures reveal a recent and significant drop in consumer sales for these products; nonetheless, solvency and liquidity ratios remain positive and
GOING CONCERN: The auditor has collected or created the following evidence for going concern review for a financial adviser client. The client assumed a going concern situation.i beginning-year capital budgets ii sales forecast made and submitted to the client’s bank for an impending loan iii
RELATED PARTIES: The managing director of Paua Ltd has a 20 per cent shareholding in Smithers Printing Ltd. Smithers owes Paua Ltd a considerable amount, which has been converted to a short-term note. The note is supported with adequate documentation, and a positive confirmation was received from
GOING CONCERN COMMUNICATIONS: The audit partner in charge becomes concerned about the going concern assessment of two different clients. Their situations are described below.a Valevale Ltd adopted the going concern assumption, but they also failed to reclassify half of their $2 000 000 debt as
SUBSEQUENT EVENTS: Before completing the audit, the auditor is required to conduct a review for subsequent events. The client is a beauty parlour franchise experiencing pressure to retain a certain level of sales each year. They have occasionally had to borrow from non-bank finance companies to
SENIOR REVIEW: Three levels of supervision and review are often performed on audit work:a On those engagements where the audit team comprises more than one staff member, the audit personnel in charge will do an initial review of each assistant’s work papers before they are placed in the audit
Distinguish between the purpose of an ‘audit manager’ review and an ‘audit partner’review.
List processes for the final review of audit working papers.
What sorts of issues might appear in the management letter?
Describe the purpose of the management letter and who it benefits, and explain why it is prepared in the completion phase of the audit.
Explain what Australian/New Zealand auditing standards require of the auditor with respect to related party transactions.
Name seven audit procedures for identifying related party transactions.
By disclosing ‘related party’ transactions, is evidence thus provided of non-arms’-length transactions? If so, why? If not, why not?
Why are related parties and related party transactions important to the auditor?
In addition to statutes affecting governing bodies and auditors, identify statute and disclosure requirements required for companies listed on the ASX or NZX.
What is the relationship between ‘accounting’ standards for disclosure and ‘auditing’standards related to disclosure? That is, how are the accountant and auditor roles distinguished in terms of disclosure?
How is the New Zealand Feltex case an example of what can occur when presentation problems exist? How are auditing standards attempting to address such concerns?
Distinguish between ‘adjustable’ and ‘non-adjustable’ events.
Describe ways of testing for subsequent events.
Distinguish between the ‘date of the financial statement’ (balance date), ‘report date’and ‘issue date’. What do each of them mean? Why is each of them important to the auditor?
What is ‘subsequent events testing’? What is its purpose?
What sorts of actions should the auditor take if a going concern problem is identified?
List symptoms of going concern problems.
When does the auditor become involved in a going concern analysis for their client?When do they come to a conclusion about it?
Who is responsible for originally making the going concern assumption? What role does the auditor have, according to auditing standards?
List 10 issues that should be included within a Letter of Representation.
What is the purpose of the letter of representation? Who prepares it? Who agrees to it and why? Why is it prepared only during the completion phase of the audit?
FINANCE, FIXED ASSETS AND INTANGIBLES: PRESENTATION Required: Look up the annual report of a large Australian or New Zealand company, such as JB Hi-Fi or Fisher & Paykel Healthcare. Identify whether there are sufficient disclosures for each of the following (refer to accounting standards). Think
FIXED ASSETS AND SpAR: Analytical procedures are useful for highlighting material misstatements.Required:a What might the following analytical procedures highlight in an audit of a servicerelated organisation with a large fixed-asset portfolio?i ratio of equipment repairs and maintenance to total
FIXED ASSET VALUATION: Your audit client is a large retail chain that owns a number of its stores but leases a number of others. All fixed assets are listed on a register, and there are a number of controls over the purchase and disposal of these assets. The organisation has a regular cycle of
INTANGIBLES: N. Real, your client, carries on a boat-design business. He has the following assets on his books:Cash $300 Goodwill (net) $50 000 Leasehold improvements $30 000 Research and development $110 000 Required: Design the substantive tests you would perform in an audit program for these
CASH – RECONCILIATIONS: Your client performs reconciliations of their cash receipts and cash payments journals against the monthly bank statements. However, the reconciliation at balance date is shown in Table 15.2.Table 15.2 Reconciliation at balance date Balance per bank statement $2 350 Cash
FIXED ASSET – DEPRECIATION: Your client prepares a depreciation expense, accumulated depreciation schedule at the balance date. All fixed assets are straightline and no revaluations are done.Required: Describe and justify internal controls that you would look for and substantive procedures that
CASH – BANK CERTIFICATE: Your client’s bank returned the bank certificate sent to you. In the information they provided, you discover that your client has a cheque account you were unaware of and a loan outstanding with a higher balance than the books indicate. What are the implications, and
INVENTORY AND WAREHOUSING: Below are two independent inventory situations.a EzyFoods supplies its shops from a number of different warehouses. They import preserved (canned, bottled and frozen) food goods from many overseas countries.Their customers are restaurants and large caterers. Often, goods
INVENTORY AND WAREHOUSING: Below are a number of independent inventory situations.a The audit client sells high-fashion garments. The organisation’s accountant tells you that everything has been valued at net realisable value.b HV Jewellers Ltd manufactures necklaces, earrings and rings for
WAREHOUSING – ASSERTIONS: Analyse the financial statements of a retailer. From your analysis, state the specific warehousing cycle assertions requiring special audit effort to ensure material misstatements do not exist.
WAREHOUSING – ANALYTICAL PROCEDURES: Analytical procedures are useful to signal misstatements in the warehousing cycle.Required:a What do the following analytical procedures highlight in an audit of an organisation that carries large stocks of inventory?i inventory turnover compared to gross
WAREHOUSING – CUT-OFF: Sketch a timeline for an organisation’s year-end of 31 March 2022. Against this timeline, plot the four different scenarios noted below for goods shipped to the client prior to year-end. Describe how the auditor would determine the ownership of the goods from each
WAREHOUSING – STOCK COUNT: The directors of AB Ltd inform you that the board does not wish to count the raw material inventory at the balance date because a count to verify the perpetual stock records was made two months prior to the balance date.Required:a State the factors you would consider in
Define a financial instrument and why it can create valuation problems.
Define a bank certificate and its purpose.
Describe and justify audit procedures that should be used for:a investments b goodwill c research and development d equity accounts.
Describe and justify the audit procedures used for a cash system.
Identify the greatest risks in each of the following, and explain why:a cash system b other finance accounts c fixed assets (particularly with respect to fraud and distortion).
Describe and justify essential procedures to verify amounts related to:a warehousing b finance accounts c fixed assets.
What duties should be segregated in the:a warehousing cycle with respect to custody b warehousing cycle with respect to stock count.
Explain the role of the auditor in attending stock counts. Why is their participation important?
Identify the risks in the warehousing cycle with respect to:a custody of assets b stock counts.
Describe 1–2 authorisation controls that would be expected to exist in the a warehousing subsystem b finance subsystem c fixed asset subsystem.
identify tests of controls, opening balance tests and other substantive procedures associated with the cycles of warehousing, financing and fixed assets.
apply your knowledge of documentation, audit risk and controls to subsystem analysis
describe key transaction cycles and the subsystems of which they are composed
FLOWCHART EXAMPLES FOR SALES, PURCHASES AND PAYROLL: For each of the three flowcharts in Figure 14.16, Figure 14.17 and Figure 14.18:3 a identify existing controls and their purpose, and what they may prevent b identify one or two controls that could exist but do not, and what they would serve.
SALES – ACCOUNTS RECEIVABLE: Your firm has been engaged to audit the financial statements of RST Ltd for the year ending 31 December. RST Ltd is a medium-sized manufacturing company. The company has approximately 400 open trade accounts receivable and does not prepare monthly statements.The audit
PAYROLL: Consider the following errors independently of each other:i Gary was employed by Smith Industries but left in May last year. His foreman did not notify management of his departure and instead completed time cards for him and approved them. The foreman then opened an account in Gary’s
PAYROLL: Consider the following errors independently of each other.i Tom receives pay for working in a company in the building industry. He submits his time card on a weekly basis. While Jane in the HR department continues to approve his time cards, Tom has never been officially approved for
SALES: Your client, Fitzherbert Shopping Centre, has 30 shop tenants. All leases with the shop tenants provide for a fixed rent plus a percentage of sales, net of GST, in excess of a fixed-dollar amount computed on an annual basis. Each lease also provides that the landlord may engage a chartered
CONTROL EFFECTS: In 2020, a university students’ association comes under investigation owing to missing funds in excess of $600 000. The association charged students $125 a year to belong in 2019 and $100 in 2018. Misappropriation examples included the following:i A student requested a hardship
PURCHASES: FitOutz Limited manufactures kitchen fittings for domestic use.The production process involves raw materials such as plastics, wood, metal and various fabrics. Mahe, the warehouse department’s inventory clerk, is responsible for all purchasing activity. He reviews the inventory records
ANALYTICAL PROCEDURES – PURCHASES: Analytical procedures can highlight material misstatements in the purchases cycle. What do each of the following potentially highlight in an audit of a retail organisation?a purchases for the year broken down by month and compared to similar periods in prior
ANALYTICAL PROCEDURES – SALES: Analytical procedures can highlight material misstatements in the sales cycle. What do each of the following analytical procedures potentially highlight in an audit of a retail organisation?a sales commissions divided by net sales b sales returns and allowances
CONTROLS – EFFECTS: A small medical practice consisted of the general practitioner (i.e., doctor), his wife (a nurse) and a practice administrator. The trusted practice administrator handled all of the appointments and patient payments.However, the GP discovered that she was not recording all the
What duties should be segregated in the:a sales cycle b purchases cycle c payroll cycle?
Explain the role of prenumbered documents for shipping and sales invoices in preventing errors in the value of sales.
Define 2–3 accuracy controls that would be expected to exist in each of the:a sales cycle b purchases cycle c payroll cycle.
Define 2–3 validity controls that would be expected to exist in each of the:a sales cycle b purchases cycle c payroll cycle.
Explain why the sales and purchases cycles should be separated.
Define 2–3 completeness controls that would be expected to exist in each of the:a sales cycle b purchases cycle c payroll cycle.
Define two authorisation controls that would be expected to exist in each of the:a sales cycle b purchases cycle c payroll cycle.
Describe the essential substantive procedures for the:a sales cycle b purchases cycle c payroll cycle.
Identify significant risks in each cycle and explain why they are a risk:a sales cycle b purchases cycle c payroll cycle.
RANDOM NUMBER SELECTION: In Excel, the function to produce random numbers within a range is =RANDBETWEEN(x,y). The client’s invoices being tested run from 1106–2305. Use your own Excel program to produce a random sample. Sixty items are required, and you should use the invoice numbers to
PPS SAMPLING: Use Table 13.8 and the information below to answer the questions.Assume that with a sample size of 28, and a random start of $20 000, you found an overstatement in sample #5 of $53 and an understatement in sample #16 of $6.a Calculate where those errors occurred, assuming an assurance
PPS SAMPLING: Use Table 13.8 and the information below to answer the questions set out. Assume that with a sample size of 30, and a random start of $20 000, you find an overstatement in sample #5 of $13 and an overstatement in sample #16 of $28.50.a Calculate where those errors occurred, assuming
PPS SAMPLE RESULTS: Use Table 13.8 and the information below to complete a working paper on your sample results. You calculated your sample size from your risk assessments and tolerable misstatement to be 50. Before conducting the test, you discover that items 4636–4685 were miscounted. There are
PPS SAMPLE SIZE: Use Table 13.8 and the information below to determine your sample size for this test:a The tolerable misstatement is $36 500.b Inherent risk is high, control risk is high, and SpAR confidence is low.c What would be the effect of doubling the tolerable misstatement? Why?d The
PPS SAMPLE PROCESS: Assume that you decide to collect a sample of 26 items.a Expand the data table to calculate and show the cumulative balance.b Assuming a random starting point of $15 000 (the first sample item), identify the batches from which your sample would be taken. (More than one sample
TESTS OF CONTROLS: Assume that for the situation shown in the next exercise, one of the client’s staff counts each category of items against the number of items recorded in stock records. Evidence of this check is via an electronic signature within the stock records of the client.Required: Design
SAMPLING EXTRAPOLATION: Assume that you took a sample of 27 for a PPS substantive test. The procedure you used was to identify the stock item on the stock list and vouch that to the existence of the item in the warehouse. In your sample alone, you found items worth $50 000 that may have been
PPS SAMPLE: You are completing a PPS sample for the stock items listed in Table 13.7.Required: Complete the table and identify the batches from which to select the sample.
TESTS OF CONTROLS SAMPLING: The audit manager is helping the audit junior decide what type of sampling selection method should be used for a test of controls in each of the following situations:a The auditor is concerned whether the credit scores of customers whose purchases exceed $2000 within a
TESTS OF CONTROLS SAMPLING: For the situations below, (1) describe the‘population’ for this test; (2) describe the ‘sample item’; (3) explain what you would do to conduct the test of control; (4) determine what (primary) management assertion is being tested.a On a monthly basis, as soon as
TESTS OF CONTROLS SAMPLING: The management of Whyfly claims that their credit officer reviews each new credit application prior to authorising the sale. The initialling of a copy of the sales invoice indicates this review. The auditor wishes to verify that this control has been operating throughout
SUBSTANTIVE TEST SAMPLING: Your client is a retailer with thousands of items in inventory and a management-calculated balance of $500 000. You are concerned that the cost of inventory items taken at stocktake should be correct, and you are particularly concerned with overstatement. This is a new
TESTS OF CONTROLS SAMPLING: Each day, all of the time card gross hours are compared against an authorised range. If the hours are within that range, the reviewer signs the card with their initials and the date. You are reviewing this control.Assume that an estimated error of 0.01 would be
SAMPLE PURPOSE: You are sampling data from the client’s sales invoices.Distinguish between a sample that would be appropriate for a test of controls and a sample used for a substantive test, and explain how they would be different.
What does it mean to say that the audit is a particularly ‘sensitive engagement’?
What is the ‘assurance factor’ and how is it used in audit sampling?
Define each of the following:a population b confidence level c tolerable misstatement d expected error e sampling risk.
Explain what it means to say that ‘within a 95 per cent probability, the auditor rejects the hypothesis that the control is operating effectively’. What should the auditor do next?
In what ways should the auditor be concerned about samples that reveal:a carelessness b misunderstanding c irregularity?

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Auditing Theory And Practice 1st Edition Karen Van Peursem - Solutions

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