Posted: July 30th, 2021

Accounting Final Exam Questions 2015

Question 1 (9 marks)(Multiple choice) (1½ marks each)Note: For multiple-choice questions, select the best answer. Answer each item by giving the number of your choice. Incorrect answers will be marked as zero. Multiple-choice questions must be completed in your Assignment Submission section. This portion of the assignment will be automatically graded. Do not include your answers in your Word document as they will not be graded.Which of the following is least likely to be of concern to a CGA who is auditing the financial statements of a small business?The possibility of management override of internal controlsThe limited knowledge of the client’s accounting staffThe possibility of related-party transactionsThe appropriate use of systems-oriented CAATsA CGA is approached by the management of a company whose financial statements are audited by another CGA firm, and is asked to provide a second opinion about the accounting for a hypothetical transaction. Which of the following actions should the CGA take?Decline to provide the second opinion.Ask for an engagement letter setting out the details of the hypothetical transaction.Ask the company for permission to discuss the matter with the company’s auditors.Accept the engagement and offer the second opinion immediately.What type of audit opinion should an auditor issue if, after a first audit of a new client, the auditor is unable to obtain sufficient appropriate evidence concerning the carrying value of the opening inventories that were material in amount but not highly so? The auditor has no other concerns about the financial statements.An unmodified opinion on the financial statements, including a note that no opinion is expressed with respect to the comparative figures for the previous year as they were not auditedAn audit report that is qualified with respect to the comparative figuresA disclaimer of opinion on the current year’s income statement, statement of retained earnings, and statement of cash flows, and an unmodified opinion with respect to the balance sheetA qualification of opinion on the current year’s income statements, statement of retained earnings, and statement of cash flows, and an unmodified opinion with respect to the balance sheet.Which of the following statements best describes the auditor’s responsibilities with respect to the management discussion and analysis contained in a client’s annual report?The auditor’s responsibilities approximate those appropriate to an audit engagement.The auditor’s responsibilities approximate those appropriate to a review engagement.The auditor’s responsibilities approximate those appropriate to a compilation.The auditor has no responsibility with respect to the MD&A.Which type of opinion should be expressed if the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued?The auditor must disclaim an opinion in the auditor’s report on the current period financial statements.The auditor must express an adverse opinion in the auditor’s report on the current period financial statements.The auditor may provide an unmodified opinion in the auditor’s report on the current period financial statements, provided the corresponding figures are properly restated or appropriate disclosures have been made.The auditor may express a qualified or adverse opinion in the auditor’s report on the current period financial statements, provided the corresponding figures are properly restated or appropriate disclosures have been made.The nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances depend on a number of factors. Which of the following isnotone of those factors?The accounting policies of the entityThe nature of the account balances, classes of transactions and disclosures, and the risk of material misstatement in the prior period’s financial statementsThe significance of the opening balances relative to the current period’s financial statementsWhether the prior period’s financial statements were audited and, if so, whether the predecessor auditor’s opinion was qualifiedQuestion 2 (18 marks)The following audit procedures are included in the audit program because of the heightened risk of material misstatement due to fraud:Use generalized audit software to examine cash disbursements transaction files for records without cheque numbers. Do a sequence test on cheques and record any missing cheque numbers.Engage an actuarial expert to assess pension liabilities. The specialist is to examine management’s assumptions about average length of employment and re-evaluate the average life expectancy of retirees used in pension accounting decisions.Search the accounts receivable master file for account balances with missing or unusual customer numbers (for example, “99999”). List customers with post office box shipping addresses. Compare customer addresses with employee addresses.Send confirmations to customers for large sales transactions made in the fourth quarter of the fiscal year to obtain customer responses about terms related to the transfer of title and the ability to return merchandise.Use audit software to search purchase transactions for any with non-standard vendor numbers or match to vendor names of known related parties.Search sales transaction files and list any invoices without bill of lading numbers.RequiredComplete requirements a, b, and c for each of the audit procedures:Describe one type of specific fraud risk or error that is likely associated with the need for this procedure.(6 marks)Identify the general ledger accounts likely affected by the potential fraud misstatement.(6 marks)Identify the audit objective(s) that this procedure addresses.(6 marks)Source: Arens et al.,Auditing: The Art and Science of Assurance Engagements,Canadian Eleventh Edition (Toronto: Pearson Canada Inc., 2011), Discussion Question 11-24, pages 376-377, © 2011. Reproduced by permission of Pearson Education Canada.Question 3 (14 marks)Smith is a junior on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 20X0. On May 6, 20X0, Kent, the senior auditor assigned to the engagement, had the following conversation with Smith concerning the planning phase of the audit:Kent: Do you have all the audit programs updated yet for the SCS engagement?Smith: Mostly. I still have work to do on the fraud risk assessment.Kent: Why? Our “errors and irregularities” program from last year is still OK. It has passed peer review several times. Besides, we don’t have specific duties regarding fraud. If we find it, we’ll deal with it then.Smith: I don’t think so. That new CEO, Mint, has almost no salary; he gets mostly bonuses and stock options. Doesn’t that concern you?Kent: No. Mint’s employment contract was approved by the board of directors just three months ago. It was passed unanimously.Smith: I guess so, but Mint told those stock analysts that SCS’s earnings would increase 30% next year. Can Mint deliver numbers like that?Kent: Who knows? We’re auditing the 20X0 financial statements, not 20X1. Mint will probably amend that forecast every month between now and next May.Smith: Sure, but all this may change our other audit programs.Kent: No, it won’t. The programs are fine as is. If you find fraud in any of your tests, just let me know. Maybe we’ll have to extend the tests. Or maybe we’ll just report it to the audit committee.Smith: What would they do? Green is the audit committee’s chair, and remember, Green hired Mint. They’ve been best friends for years. Besides, Mint is calling all the shots now. Brown, the old CEO, is still on the board but is never around. Brown has even been skipping the board meetings. Nobody in management or on the board would stand up to Mint.Kent: That’s nothing new. Brown was like that years ago. Brown caused frequent disputes with Jones, who was the predecessor auditor. Three years ago, Jones told Brown how ineffective the internal audit department was. Next thing you know, Jones is out and our firm is in. Why bother? I’m just happy that those understaffed internal auditors don’t get in our way. Just remember, the bottom line is whether the financial statements are fairly presented. And they always have been. We don’t provide any assurances about fraud. That’s management’s job.Smith: But what about the lack of segregation of duties in the cash disbursements department? That clerk could write a cheque for anything.Kent: Sure. That’s a material weakness every year and there probably will be again this year. But we’re talking cost-effectiveness here, not fraud. We just have to do lots of testing on cash disbursements and report it again.Smith: What about the big layoffs coming up next month? It’s more than a rumour. Even the employees know it’s going to happen, and they’re really uptight about it.Kent: I know, it’s the worst kept secret at SCS, but we don’t have to consider that now. Even if it happens, it will only improve next year’s financial results. Brown should have let these people go years ago. Let’s face it, how else can Mint even come close to the 30% earnings increase next year?RequiredDescribe three fraud risk factors that are indicated in the preceding dialogue.(3 marks)Explain how SCS’s audit procedures should be modified to take account of each risk factor identified in part a.(2 ½ marks)Describe Kent’s misconceptions regarding the consideration of fraud in the audit of SCS’s financial statements (contained in the preceding dialogue), and explain why each is a misconception.(3 marks)Describe an auditor’s audit documentation requirements regarding the assessment of the risk of material misstatement due to fraud.(3 marks)Assume that, during the audit, Smith asks Mint about a series of material transactions affecting revenues for which the staff could not produce clear documentation. Mint replies as follows:Why are you coming to me with this? Surely you can do your job in auditing routine items without having to bring it to me — go talk to my staff. And remember, we’ve got a fast-paced business to run here and we don’t need inexperienced auditors getting in the way of our success. We hired your firm because the partner assured me you guys were efficient in your work. I don’t want to have to go back to him with a bunch of petty problems raised by his staff.How should Smith respond?(2 ½ marks)Source: Arens et al.,Auditing: The Art and Science of Assurance Engagements,Canadian Eleventh Edition (Toronto: Pearson Canada Inc., 2011), Case Question 11-31, page 379, © 2011. Adapted by permission of Pearson Education Canada.Question 4 (14 marks)The following are seven independent statements concerning certain auditing or assurance issues.The best evidence of management integrity (particularly for a small business audit client) is the audit firm’s previous experience with the client’s management team. If there have been no indications of a lack of integrity in past audits and no changes in the client’s senior management team, the audit team can base its audit on the assumption that management will continue to be trustworthy.(2 marks)Because small businesses typically use off-the-shelf software for processing transactions and may not have a dedicated information technology staff, it is most efficient when auditing a small business to ignore any general controls and just concentrate on the application controls in assessing control risk for specific assertions.(2 marks)In Canada, an auditor who audits and reports on a publicly held company’s financial statements has no responsibility with respect to the management discussion and analysis (MD&A) section of the annual report to shareholders, since MD&A is largely future oriented and has little to do with the financial statements.(2 marks)If an auditor of a not-for-profit organization determines that it will not be possible to issue an unmodified audit report with respect to completeness of donations, the auditor will, as a consequence, do less audit work in testing completeness of donations than he or she would have done if an unmodified audit report were issued.(2 marks)In the audit of the financial statements of a business enterprise, the auditor will set one level of materiality, whereas in the audit of a not-for-profit organization, it is possible that there could be more than one materiality level within the same audit of financial statements.(2 marks)It is difficult to establish the exact nature of an oral opinion and any related caveats when an accountant gives an oral opinion and is then asked to express a second opinion on an accounting or auditing matter. Consequently, current assurance and related services standards require that any oral second opinion be provided only as a preliminary presentation, to be followed up by a written report.(2 marks)Because public company audits are generally more complex and require many more hours of field work, typically the audit reports for such audits are dated at a later date than would likely be the case for the audit report of a small, closely held business with the same year end.(2 marks)RequiredFor each statement, indicate whether you agree or disagree. Fully explain your reasoning.Question 5 (12 marks)In connection with your examination of the financial statements of SRL Ltd. for the year ended February 28, 20X0, you become aware of a number of events prior to the completion of the audit work on April 22, 20X0:On March 3, 20X0, the local government approved a plan for the construction of a by-pass ring road that would require expropriation of a portion of land owned by the company. Construction is expected to commence in late 20X0 or early 20X1. No estimate of the expropriation award is available.(3 marks)On March 9, 20X0, it was discovered that the usable content of a shipment of raw materials (which was en route to SRL on February 28 with terms FOB shipping point) was 72%. The shipment had been recorded at year-end as having a usable content of 50% by a $20,600 debit to raw material inventory and a similar credit to accounts payable. The terms of the supplier state that the final amount owing is based on the usable content of the shipment.(3 marks)On March 12, 20X0, the treasurer of SRL resigned immediately, citing a desire to move in a direction other than where SRL was heading. An agreement was reached whereby SRL Ltd would purchase the treasurer’s 10% stock ownership at book value as of February 28, 20X0. Payment is to be made in two equal cash payments: the first on May 1, 20X0, and the second on November 1, 20X0.(3 marks)On March 23, 20X0, production was curtailed due to low sales, and about 25% of the staff was laid off. To protest these layoffs, all the remaining workers went on strike April 2, 20X0. So far, the strike remains unsettled.(3 marks)RequiredFor each incident, give the audit procedures, if any, that would have brought the item to your attention, and indicate what kind of subsequent event is at issue. Discuss whether the item would need to be disclosed or not and, if so, what disclosures you would recommend for the item, specifying the details. Give your reasons for recommending or not recommending disclosure.Source: Arens et al.,Auditing: The Art and Science of Assurance Engagements,Canadian Eleventh Edition (Toronto: Pearson Canada Inc., 2011), Problem 21-20, page 710, © 2011. Adapted by permission of Pearson Education Canada.Question 6 (6 marks)Following are two independent situations involving problems in the development or operation of information technology (IT) systems.RequiredFor each situation, identify the control policies and procedures that should normally be in place to prevent the problems described from occurring.A disgruntled former employee destroyed the master file of the company’s accounts receivable, by remotely accessing the company’s microcomputer-based accounting system. As a result, the accounts receivable had to be reconstructed by hand by referencing hard copies of various documents.(3 marks)A medium-sized industrial laundry service company was a profitable, family-run business but was slow to adopt new methods. However, the newly appointed president, a recent MBA, was eager to energize the company and modernize its operations. The president decided to centralize and computerize the company’s perpetual inventory and billing records at the company’s home office. In addition to the corporate home office, the company consisted of several laundry plants and hundreds of individual branches. Manual inventory records were historically maintained at the plants, while the branches were responsible for managing the route drivers who delivered the laundered towels and uniforms, picked up soiled goods, and manually billed and collected payments from customers. After spending several years and several million dollars developing a new computerized system, the company found the system to be expensive, slow, and error-prone, and it was rejected by the employees and eventually dropped.(3 marks)Question 7 (12 marks)A CGA firm received an invitation to bid for the audit of a local food commodity distribution program funded by the provincial Ministry of Agriculture. The program contributes to the operation of local food banks by purchasing locally grown agricultural products and arranging for their delivery to the food banks for distribution to the needy. The audit is to be conducted in accordance with the public sector auditing standards found in theCPA Canada Handbook – Assurance. The accountants have become familiar with the public sector auditing standards and recognize that the public sector standards incorporate Canadian generally accepted auditing standards.The CGA firm was successful and has been engaged to perform the audit of the program. The audit is to encompass both financial and performance audits, which constitute two types of a public sector comprehensive audit.RequiredThe accountants working on the engagement should perform sufficient appropriate audit work to satisfy the financial and compliance element of public sector auditing standards. What are the objectives of such audit work?(4 marks)The accountants working on the engagement should be aware of general and specific kinds of uneconomical or inefficient practices in such a program. Identify four examples of such practices.(4 marks)i) List two sources of information that might be used in setting criteria for the value-for-money portion of the audit.(2 marks)ii) List two suitable criteria that may relate to the value-for-money portion of this audit.(2 marks)Question8(15 marks)You are a partner in the firm of MMP LLP, CGAs, and you are the engagement quality control reviewer responsible for conducting the final, independent review of audit engagements completed by the firm as part of its quality-control program.You are currently reviewing the audit working papers and a draft of the audited financial statements of Leisure Craft Industries Ltd. for the fiscal year ended September 30, 2014, along with the suggested auditor’s report (an unmodified opinion dated November 10, 2014).The company designs and builds recreational vehicles, campers, and mobile homes and sells them through sales outlets located in major Canadian cities. The sales outlets are independently owned and operated and have distribution agreements with Leisure Craft that give them the exclusive right to sell the company’s products in a certain geographic area, while restricting the sales outlets’ ability to market the products of Leisure Craft’s competitors.The fiscal year ended September 30, 2014 was the first year that MMP audited the company’s financial statements.During their discussions concerning the client’s internal control environment, the client’s CFO pointed out to the senior auditor that the company employs two full-time internal auditors. The senior auditor then phoned the engagement partner and told him that the study and evaluation of the client’s systems and controls was going slowly, and that she would like to save audit time by relying on the systems evaluation and tests that the internal auditors had already done during the year. The engagement partner agreed and said: “Don’t waste time duplicating their work. Find out the details of what they have already done and get a copy of their working papers and put them in our files. Then just work around this to fill in the gaps so that we have studied and evaluated the internal controls over all the company’s transactions streams.” The senior auditor wrote a detailed memo describing this approach and concluded that reliance on the internal auditors had saved MMP approximately 50 hours of audit staff time.Because MMP was engaged after the beginning of the client’s fiscal year, the partner relied on an unmodified opinion of the predecessor audit firm with respect to the opening balance sheet. Unfortunately, the predecessor firm never responded to any inquiries made by MMP nor showed any willingness to cooperate with MMP .The company uses a computerized perpetual inventory system to control parts used in production, and the audit staff developed a set of test data to verify that the system operated as designed. The test data consisted of 10 purchase transactions randomly selected from the September 2014 purchases and 10 part usage transactions also randomly selected from transactions recorded by the client during September 2014. The audit staff performed various substantive tests to verify the details of these transactions and then ran the 20 transactions through an off-line version of the client’s inventory system, noting how each transaction was processed. They found no exceptions and concluded that the system operated as designed. They therefore assessed control risk over inventory transactions as low and concluded that year-end substantive testing of the client’s parts inventory could be restricted.On November 15, 2014, the company founder received a loan of $2,000,000 from the company, which is material to the company. This loan was authorized by the company’s board of directors, is due and payable in one year, and bears interest at the prevailing prime rate. The audit staff learned about the loan when they examined the minutes of the board of directors’ meetings and made a note of it in the working papers. After reviewing this working paper, the engagement partner wrote: “This is not a concern at this time but we should evaluate collectability of the loan next year.”RequiredWrite the memo that you will send to the engagement partner identifying any issues (with a copy to the firm’s managing partner). Be sure to propose recommendations to correct the issues. 3 marks are awarded for clarity, logic and persuasiveness of the discussion including opening comments that should be addressed in a proper memo format.

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