1. ANC Inc. is currently under review by the Canada Revenue Agency (CRA). The CRA is investigating payments made by ANC to its employees for travelling expenses. These payments were made gross without any deduction for CPP and EI or income taxes. If the CRA decides that this is an inappropriate treatment, the company may be liable for an additional payment to the CRA of $60,000. ANC has net income of $500,000. J&H's tax department is not optimistic about the outcome and agrees with the CRA estimate of $60,000. ANC has refused to accept this estimate and has not accounted for this amount in its financial statements. Materiality is $35,000 for ANC's year-end audit.

2. Big Haul Trucking (BHT) has been accused of breaking the law regarding hours that drivers are driving and speeds at which they drive. If proven, BHT could lose its transport licence. At a minimum, it will receive a written warning from the regulator and a fine of $50,000. J&H has been prevented by the client from asking any questions in relation to this, as BHT is concerned that any disclosures may imply guilt before the hearing takes place. Materiality is $45,000 for BHT's year-end audit.

3. Rose Inc. has prohibited the auditor from observing its inventory count. The inventory balance accounts for 40% of all assets ($200,000), and J&H has been unable to apply alternative audit procedures to the inventory balance. J&H has been able to obtain sufficient and appropriate evidence for all other items in the financial statements. Materiality is $110,000 for Rose's year-end audit. 

Required: 

For each scenario, identify the type of potential problem (GAAP departure or scope limitation), determine if the problem is material and/or pervasive, and describe the impact on the audit report. 

Answer rating: 100% (QA)

1 Type of Problem GAAP departure Material andor Pervasive Material Impact on Audit Report JH must is... View the full answer