acct4231-assignment-2-mandatory

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Studocu is not sponsored or endorsed by any college or university ACCT4231 Assignment 2 Mandatory Assurance (Thompson Rivers University) Studocu is not sponsored or endorsed by any college or university ACCT4231 Assignment 2 Mandatory Assurance (Thompson Rivers University) Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

Question 1 (12 marks) One step in the planning phase of an audit is to obtain information about the client's legal obligations. Required A. Identify four types of legal documents and records that auditors examine to obtain this information. 1. Industry Trade Publications 2. Corporate charter & bylaws 3. CPA Canada Handbook & CPAB Industry Audit Guidelines 4. Board of Directors meeting minutes B. For each of those identifed in part A, discuss the audit- relevant information contained in each of these types of documents that an auditor should be aware of early in the audit. 1. Industry trade publications give insight to how the industry is doing and what business risks the client may be averse to. It can help the auditor determine areas and classes of transactions it should focus on or where the company may have felt inherent pressure to misstate their fnancials. It helps the auditors assess risk and design analytical procedures that are tailored to the client. 2. The corporate charter & bylaws will set out the legal compliance the client should be adhering to. Any questions as to non-compliance can raise concerns about reliability of statements at the fnancial statement level and the assertion level. 3. The CPA Handbook and CPAB Audit guidelines are important to determine the fnancial framework the company should be reporting by such as International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). These fnancial frameworks help the auditor to understand any unique accounting requirements pertaining to the industry. 4. The meeting minutes are a great record of the company’s actions throughout the year regarding their legal framework and fnancial framework. These documents will assist the auditor to understand any major changes to the industry, staf, operations, and fnancials that it should be aware of while examining the statements. Question 2 (10 marks) Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

The audit risk model has become the commonly used basis for audit planning. The following are independent situations that could have an efect on various components of the audit risk model. Required For each situation, identify the primary element of the audit risk model (that is, audit risk, inherent risk, control risk, or detection risk) that is most likely to be directly afected and the nature of the change in risk levels (increase or decrease) relative to a typical audit. Explain your reasoning. A. A company provides all customers with the option to return unused goods within two weeks of the purchase. The most signifcant risk afected would be control risk. The client’s internal controls could allow a material misstatement to not be detected in a timely manner such as not realizing that the goods may be used and therefore unsellable in future transactions. There is also a medium to low inherent risk that the inventory may not be properly accounted for as it is purchased and returned. B. In the current year, the company began performing credit checks for all new customers. The customers’ credit ratings were used to determine credit limits for the customers. The inherent risk will increase from non-routine processes and judgement required to correctly determine customers credit limits. Since this is the frst year the company implemented credit checks and then used those credit checks to determine customers credit limits auditors should increase the inherent risk that possible material misstatements could have been made since this is a new process for them and may not be there level of expertise. C. A client’s sales team is primarily compensated on a commission basis. Commissions are determined on a percentage-of-sales basis. I feel like the inherent risk would be increased to medium to high in analyzing the revenue cycle and that it would afect the detection risk to be medium to low. By increasing the number of samples taken in the revenue cycles to ensure the payroll cycle is accurately refected then the auditor will decrease its detection risk of material misstatements regarding the sakes teams commissions. Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

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D. All cheques greater than a pre-determined limit require the signature of the controller and the chief fnancial ofcer. Control risk would be considered low due to the high assessment of controls in place for large amounts. The inherent risk should increase on larger amounts to test these controls but if proven efective this will also decrease the detection risk to a moderate to low level. E. In order to raise capital, in the current year the owner- manager of a business sold 20% of the common shares to a private-equity investor. The owner will remain actively involved in the business. The private-equity investor will not actively partake in the daily management of the business. Since the owner-manager is trying to raise capital this could raise some concerns about fnancial stability and therefore reduce the level of acceptable audit risk an auditors is willing to ascertain. There is also the question of distribution of ownership and external users reliance on the fnancial statements. The new private-equity investor has considerable infuence from purchasing 20% of the frms common shares and therefore the acceptable audit risk should be decreased and detection risk will also be low to include a substantive level of testing. F. An auditor tests a control and observes several compliance deviations. The acceptable audit risk would be low considering that after testing a control of the companies they found multiple compliance deviations. This puts in question managements integrity to follow the frms procedures. G. In the past two prior-year audits, the auditor has identifed several material overstatements in inventory. Inherent risk will be high in determining the valuation of inventory because many types of misstatements are systemic in nature, and organizations are often slow in making changes to eliminate them (Arens et al., 2019). Question 3 (3 marks) GreenGrow Limited is a local landscaping company that does household and commercial landscaping. Primarily, it helps businesses select plants and manage the plants. It also has regular maintenance contracts such as watering, weeding, and mowing. In the winter, it has some contracts for managing the indoor plants of shopping malls, and does snow clearing to help boost that low income season. Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

Joey, the majority shareholder of GreenGrow, is ecstatic. He has managed to come in as the low bidder for a new type of contract. He bid on the construction of a track for the track and feld area of a local university. A piece of land on the north end of the university is being cleared and GreenGrow will be leveling the land and placing a bed of crushed stone for the track. Joey has just the right person to be in charge. Jack has previous experience working as an assistant on a road crew and knows how to use the surveying equipment needed to keep the track level. This is a big contract, and will increase revenues by one third! Required Give three specifc reasons that inherent risk for revenue for GreenGrow should be assessed as “high”. Three specifc reasons inherent risk for revenue should be assessed as “high” for GreenGrow include: - Management Motivation & Biases - Nonroutine / judgement to record transaction - Make-up of population. Joey is extremely ecstatic about a new opportunity to increase GreenGrow’s revenues. This excitement could cloud his judgement on developing accurate accounting estimates because this contract is so important to him. It is also an unusual contract for the client because they generally specialize in household and commercial landscaping regarding plants and not gravel and road construction. Although Joey may have the right employee to execute the contract it is still a nonroutine contract for this company. Revenue and expense accounts should be audited more closely to explore if the appropriate judgement has been used. Lastly the size of this contract will increase the revenues for the year by one third which is a signifcant portion or make-up of the revenues balance. All three of these factors will increase the auditor’s expectations of material misstatement and increase the inherent risk to be assessed at a higher level. Question 4 (5 marks) Describe a fve-step approach that is used for identifying signifcant or material internal control weaknesses. Label the steps 1 through 5. 1. Identify existing controls 2. Identify the absence of key controls 3. Consider the possibility of compensating or mitigating controls Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

4. Decide whether there is a signifcant defciency or material weakness 5. Determine potential material misstatements that could result. Question 5 (6 marks) Lilan’s working papers for evaluating a client’s internal controls include the following notes:  There were over 1,000 purchase transactions under $4,500 from four vendors; these are routine purchases.  All purchases over $4,500 are non-routine transactions and must be pre-approved by the purchasing manager, but one purchase for $15,000 was authorized by the plant manager without the purchasing manager’s initials.  All cheque stubs for purchases should have purchase order numbers recorded, but 5% of the sample did not have the purchase order number recorded – traced the 5% to August payments.  Required For each of the notes above answer the following questions: A. Does it represent a possible control problem? B. If yes, why does it represent a possible control problem? C. If no, why is it not a potential control problem? 1. As long as these are regular routine transactions and the amount of transactions is not suspicious between the four suppliers than there appears to be no control problem. 2. The second note represents a control defciency. Although the plant manager may be hire then the purchasing manager there is still no reason for him to not follow the control procedure as it has been designed to avoid speculation of the purchase. The control feature states that the purchasing manager must sign of on any expenses over $4,500,00 not the plant manager and therefore the plant manager did not have the correct authorization. 3. The third note represents another control defciency. An operation defciency may have taken place in august since all 5% of the transactions can be linked back to this month. This could be because someone was flling in for a vacation or a new hire was improperly trained. Question 6 (8 marks) Joan is the owner of a small manufacturing company. In prior years, your frm has conducted a review engagement of the company. Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

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However, this year, Joan obtained a loan from the federal business development bank and is required to have an audit of her fnancial statements. When you started asking about controls and procedures at the company, Joan got pretty upset. "All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staf to answer these questions! Just check the numbers and let us get on with our work!" You calmed her down a bit and reminded her about the general discussion that occurred with the engagement letter. You have invited her for cofee to briefy explain the following items:  Why auditors are concerned about internal controls.  Why auditors are required to be concerned about internal controls.  What you need to do to understand internal controls.  What you will do once you have documented your understanding of internal controls. Required Explain what you will say to Joan. Thank you for meeting with me Joan. The purpose of this meeting is to clarify any confusion, questions or fears you may have about my responsibilities as the auditor. As an auditor my overall objective is to review and evaluate evidence from your company to determine that what you have reported complies with the necessary legal framework as well as ethical assertions and report the results to the interested user which in this case is the Federal Business Development Bank. In order to do that I need to understand the internal controls your company has in place to mitigate risk and safeguard your assets. Internal controls help support your mission’s entity, provide reliability in the financial reports, ensure that your operations are running efficiently and effectively, and comply with the legal framework of your industry (Arens et al., 2019, Pg 247). I am required to be concerned about your internal controls because I need to know where they are relevant to the audit in order to identify areas or classes of transactions that could have potential for material misstatement. Relevant controls could include anything that could have an impact on the financial statements. This will include not only transaction-related controls that are related to identifying misstatements or errors in classes of transactions, account balances, or disclosures but as well as entity-level controls. “Entity-level controls are controls that are implemented for multiple transaction cycles or for the entire organization” which could include management override procedures or period-end reporting procedures (Arens et al., 2019, Pg 249). Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477

In order to understand these controls I need to assess the five components of internal control which include the control environment, risk assessment, control activities, information and communication, and monitoring activities. After documenting my understanding of the level and existence of internal controls I then can start developing on overall audit strategy that will include specific areas to focus on that will satisfy the Federal Business Development Bank. So please understand that it is not my intention to take any time away from your staff. As stated and agreed upon in the engagement letter it will be a requirement for me to ask you and potentially your staff and other management questions about the internal controls in place at your company. By doing this I will be able to develop the appropriate audit strategy, collect and sample evidence required to provide the audit assertions that will result in a qualified opinion to the external users of this report. Do you have any questions? Question 7 AR / ( IR x CR) = DR 1.) .01 / (1 x 1) = 0.01 Detecton Risk = 1% 2.) .10 / (1 x 1) = 0.10 Detecton Risk = 10% 3.) .10 / (.50 x .40) = 0.50 Detecton Risk = 50% 4.) .05 / (.20 x .30) = 0.83 Detecton Risk = 83.3% Downloaded by 99sanji (nadee99@gmail.com) lOMoARcPSD|12172477