Question 1:
For the following independent situations, assume you are the audit partner on the engagement.
1. During your examination of Debold Batteries Ltd., you conclude there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your examination sufficiently to verify whether the balance is actually misstated.
2. You are auditing Woodcolt Linen Services, Inc. for the first time. Woodcolt has been in business for several years but has never had an audit before. After the audit is completed, you conclude that the current year balance sheet is stated correctly in accordance with ASPE. The client did not authorize you to do test work for any of the previous years.
3. You were engaged to examine Cutter Steel Corp.'s financial statements after the close of the corporation's fiscal year. Because you were not engaged until after the balance sheet date, you were not able to physically observe inventory, which is very material. On the completion of your audit, you are satisfied that Cutter's financial statements are presented fairly, including inventory about which you were able to satisfy yourself by the use of alternative audit procedures.
4. Four weeks after the year-end date, a major customer of Prince Construction Ltd. declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to write off the account or otherwise disclose the information. The receivable represents approximately 10 percent of accounts receivable and 20 percent of net earnings before taxes.
5. You complete the audit of Johnson Department Store Ltd., and, in your opinion, the financial statements are fairly presented. On the last day of the examination, you discover that one of your supervisors assigned to the audit had a material investment in Johnson.
6. Auto Delivery Company Ltd. has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, it decided to lease the trucks. This change in policy is fully disclosed in footnotes.
REQUIRED
For each situation, state the type of auditor's report that should be issued. If your decision depends on additional information, state the alternative reports you are considering and the additional information you need to make the decision.
Question 2:
List two examples of audit evidence that the auditor can use in support of each of the following:
- a. Recorded amount of entries in the purchase journal.
- b. Physical existence of inventory.
- c. Accuracy of accounts receivable.
- d. Ownership of capital assets.
- e. Liability for accounts payable.
- f. Obsolescence of inventory.
- g. Existence of petty cash.
Question 3:
Each of the following situations involves possible violations of the rules of conduct that apply to professional accountants. For each situation, state whether it is a violation. Where there is a violation, explain the nature of the violation and the rationale for the existing rule.
- a. Martha Painter, a PA, was appointed as the trustee of the So family trust. The So family trust owned the shares of the So Manufacturing Company, which is audited by another partner in Martha's office. Martha owns 15 percent of the shares of the So Manufacturing Company and is also a director of the company, in the position of Treasurer.
- b. Marie Godette, LLB, has a law practice. Marie has recommended one of her clients to Sean O'Doyle, a PA. Sean has agreed to pay Marie 10 percent of the fee Sean receives from Marie's client.
- c. Theresa Barnes, a PA, has an audit client, Choi, Inc., which uses another public accounting firm for management services work. Unsolicited, Theresa sends her firm's literature covering its management services capabilities to Choi on a monthly basis.
- d. Alan Goldenberg leased several vehicles from his friend Norm. Norm said that he would give Alan a $200 commission for each referral. Alan referred to Norm several clients who were interested in leasing vehicles. After a few months, Alan was pleased to receive a cheque for $3,000 in the mail. Several of his clients had decided to change automobile leasing companies.
- e. Edward Golikowski completed for his client financial projections that covered a period of three years. Edward was in a hurry and inadvertently stated that they covered five years; so he redid the client's calculations, rather than checking assumptions and doing field work, even though he attached an assurance report.
- f. Marcel Poust, a PA, has sold his public accounting practice, which includes bookkeeping, tax services, and auditing to Sheila Lyons, a PA. Marcel obtained permission from all audit clients for audit-related working papers before making them available to Sheila. He did not get permission before releasing tax- and management services-related working papers.