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Thompson Rivers University *

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4230

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Accounting

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Apr 3, 2024

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Assignment 01 39 /50 Name : Nadeera Sanjeevani Kumari Galagedarage Student No. – T00700394 Course Code - ACCT_4231_J01_202235Date : 13-01-2024 Question 01 10 The scenario is subject to violations of ethical considerations, professional conduct, objectivity and integrity of the auditors, thus undermining the credibility of the audits performed. Here are five violations: Violation of Independence and Objectivity: When independence and objectivity is impaired, the credibility of financial statements, the auditor and the auditor’s report become questionable. Paul is Tom’s friend and Soccer buddy who meets each other on a weekly basis. Their relationship could influence Paul's judgment and lead to biased reporting. Furthermore, $10,000 is given as audit fee by with only a quick meeting at pub without even inquiring the details and extent of the audit first, this might mean that Paul’s independence and objectivity may be compromised. Violation of Professional Competence and Due Care: It is the auditor’s personal responsibility to possess professional competencies and capabilities to conduct the audit. But in this case junior staff with only six months experience in review engagements only is sent to this assignment. They might not be experienced enough or have the relevant expertise to critically evaluate the audit evidence and be bold enough to challenge the auditee’s assertions. This may be a breach of duty to exercise professional competence and due care. Violation of Professional Skepticism: Paul lacks professional skepticism when he mentions that the majority of the audits ended with unqualified opinion when Tom stressed needing an unqualified opinion for his audit. Paul and the junior staff may fail to identify material misstatements due to this lack of professional skepticism. Furthermore, Paul’s staff spent the morning providing sales quotes to potential customers, which is clearly a breach of professional skepticism, this creates a conflict of interest and compromises the independence of audits. Violation of Integrity and Objectivity:

Junior staff telling their family to hold off computer purchases as Big Gig Ltd will have a sale soon questions his integrity and objectivity as he is breaching confidentiality by sharing non- public information to a third party which might also damage the company’s reputation. Junior staff should not use the information for personal gain and not compromise objectivity. about integrity and objectivity. This information may be considered non-public and should not be used for personal gain or shared inappropriately. Violation of Ethical Behavior and conflicts of interest The junior auditors accepting financial gifts ($250 gift card) to be used at Big Gig’s stores violates the ethical behavior of the auditors and compromises the independence of the audit. Furthermore, it creates a conflict of interest. The objectivity of the audit becomes questionable. Question 02 10 Generally, Rules of Professional Conduct cover the below principles. • Professional Behavior • Integrity and due care • Professional competence • Confidentiality • Objectivity Situation 01 - Brian, CPA : Yes, there is a violation. It is the professional responsibility of Brian to identify and assess risks of material misstatement based on understanding entity’s environment and its internal controls. His decision not to establish an understanding of internal controls and evaluate them for effectiveness violates the principles professional skepticism and due care. Situation 02 - John, CPA : Yes, there is a violation. Auditors need to gather sufficient and appropriate audit evidence to form an opinion in the event they are not able to do so it should be disclosed and audit opinion modified to reflect that. John issued an adverse opinion on the financial statements when he did not have sufficient evidence of collectability of a material portion of the company’s accounts receivable balances. This is clear violation of his professional responsibility towards the company being audited. Situation 03 Irene, CPA : Yes, there is a violation. Irene already performs tax services to the company, and accepting an assignment to prepare audited financial statements violates the independence of the audit specially since the tax calculations she already prepared will also be audited by her team again for accuracy. Due to

the threat of self- review, Independence might be lost. Furthermore, this is for a mandatory bank loan condition, therefore independence and unbiased audit opinion is a must. Situation 04 Karen, CPA : Yes, there is a violation. Karen’s husband holds a significant position as Vice president of marketing in the company. Even though he is not directly involved in financial matters he can have significant influence over matters at the company, furthermore he has access to sensitive insider information of the company too. There’s a clear lack of independence for Karen in this situation. Therefore, failure to disclose their relationship in the “notice to reader” is a violation of professional conduct/behavior rules. Yes – and note that Karen is not required to be independent to carry out a compilation engagement. Situation 05 Anna, CPA : Yes, there is a violation. Anna did the right thing in reporting Sarah’s misconduct of issuing unmodified opinions on fraudulent financial statements to provincial and national CPA associations. However, informing Sarah before reporting the issue may give Sarah to take protective measures to get out the wrongdoing, therefore is compromising the integrity of the reporting process. Question 03 8/ 10 Good steps 1. Sandra contacting the previous auditor to clarify whether any problems were present in prior audits shows her proactive approach to identify and carry out a comprehensive audit. 2. Reviewing prior auditors working papers show that Sandra is very thorough in her audit procedure and objective as she did not take prior auditor’s word alone on aggressive expense deferral policies but also clarified whether they were accurate or not. 3. Sandra Identifies her lack of expertise in complex exchange transactions and hired expert firm to d it for her shows her due care and prudent approach to ensure accurate and comprehensive audit. 4. Also researching on the third-party audit firm to verify their professional standing and reliability shows Sandra is taking due diligence before selecting an outsourcing company to do the work . Same g ood step Bad steps 1. Not having an Audit Engagement letter is a bad step as it has the potential to give rise to future legal implications as well. Audit Engagement letter sets out the scope of the audit, responsibilities of the parties, fees involved and so forth. Not having these prior to start, in future disputed can arise between the parties. - If the time frame is too short, Sandra should have indicated to the client that she will need additional time to complete the work.

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- Sandra should have conducted a thorough risk assessment of both management and the industry before accepting the audit. Question 04 6/ 10 Management Assertion Audit Assertion Quality of Evidence Explanati on Occurence Existence High low - negative confirmations involve third parties - but treat non- responses as agreement with the recorded balance. - negative confirmat ions provide the best form of evidence when internal controls are considere d good. Sen ding negative external confirma tion requests to large sample of customer s who have

balances due confirms the occurrenc e of the even during the period. Also since its evidence from an independ ent external party audit quality is high. Existence Completeness existence Medium Performin g stock counts on goods on hand prior to one month before year end confirms the existence of inventory . However due to

time differenc es year end inventory may mismatch with inventory one month prior Completeness Existence completeness Medium Examine receiving reports dated prior to the year- end that have not been matched to vendor invoices checks for complete ness 4. Classification Ac curacy Classification Ac curacy High Review of paid invoices and supportin g

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documen ts for amounts classified as repair and maintena nce expenses for large or unusual items ensure the recorded transactio ns are accurate. Valuation Valuation High med ium - third party document held by client increases quality. Exami ning audited financial statements of several foreign companies in which the client owns shares enables the company to value the investment. Also since information is from outside third party

quality is high. Question 05 5/ 10 Audit Procedure Type of Evidence 1. Inspect a sample of shipping documents to determine if each has a sales invoice number included on it. i Reperformance Please see p. 138 nspection 2. Discuss with the sales manager whether any sales allowances have been granted after the balance sheet date that may apply to the current period. inquiry of the client 3. Add the columns on the aged trial balance and compare the total with the general ledger. recalculation 4. Observe whether the controller makes an independent comparison of the total in the general ledger with the trial balance of accounts receivable. observation 5. For the month of May, count the approximate number of shipping documents filed in the shipping department and compare the total with the number of sales invoices in the sales journal. Analytical procedure observation 6. Compare the date on a sample of shipping documents throughout the year with related duplicate sales invoices and the accounts receivable master file.

reperformance inspectio n 7. Examine a sample of customer orders and see if each has a credit authorization. reperformance inspectio n 8. Send letters directly to former customers whose accounts have been written off as uncollectible to determine if any have actually been paid. external confirmation 9. Review a sample of sales invoices for supporting customer purchase orders and bills of lading. inspection 10. Compare the date on a sample of shipping documents a few days before and after the balance sheet date with related sales journal transactions. Reperformance Could make a case for inspection analytical procedure

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