ACCT 460: Principles of Auditing

Assignment 1, Version C

You should plan to complete and submit Assignment 1 after Lesson 3.

Complete the following questions in a single document that is compatible with Microsoft
Office. When naming your assignment file for submission, be sure to include your last name,
the course name, and the assignment number, as follows: smith acct460 assign1C.docx

Question 1: Discussion Question 4-16 on page 87 of the textbook (20 marks)

EA LLP Staff Member Threat(s) to Independence

Toni Kowalsky, partner Advocacy Threat – As a partner with Roger,
Toni and Zaspa’s CEO, Roger, run a local Toni may be biased to help Roger maintain a
summer tennis camp together. Toni and good reputation.
Roger became friends when they both
worked at Zaspa. Toni left her role as Self-review threat – as the prior VP of
finance VP at Zaspa 18 months ago. finance at Zaspa, Toni may come across
systems or processes that she helped to
implement or design.

Familiarity threat – as a prior employee of

Zaspa and a partner with Roger, Toni may
not behave with professional skepticism
because she knows the company and CEO so
well.
Patrick Sholer, senior manager Advocacy threat – as a tennis enthusiast
Patrick is a big tennis enthusiast and bought Patrick may be in a position to promote
Zaspa tennis racquets for himself and his Zaspa
family.
Chris Washolc, manager Self-review threat – as Chris previously
Chris worked in Zaspa’s internal audit worked in the internal audit department at
department on review of payroll system Zaspa, there is a chance that he may need
controls but left Zaspa two years ago. to review his previous work. However, this
threat is minimal as Chris discontinued his
work at Zaspa two years previously so things
may have changed since his work.

Familiarity threat – as a prior employee of

Zaspa Chris may not behave with
professional skepticism because he is
familiar with the company.
Sam Rivers, audit senior Self-interest threat – if Zaspa continues to
Sam owns 1,000 shares in Zaspa, inherited do well, Sam will have increased profits from
from his father’s estate. his shares in the company. As the question
does not contain any information on the

ACCT 460v10 Assignment 1C March 2018

 number of shares currently outstanding for
Zaspa, we cannot assess the materiality of
this threat.
Yolanda Ladna, audit senior Familiarity threat – as a team member of a
Yolanda plays on a semi-competitive volleyball team with Zaspa employees,
volleyball team with four Zaspa employees. Yolanda may feel as though they are
trustworthy and thus don’t need to be
treated with professional skepticism.

Intimidation threat – although there is no

evidence of this in the write up, the team
members of Yolanda’s volleyball team may
use intimidation to ensure a good review.
Anna Madras, audit junior Advocacy threat – through her relationship
Anne’s father is a finance VP at Zaspa’s with her father, she may be in a position
parent company, which is listed on the TSX. where she is promoting Zaspa.

Question 2: Discussion Question 5-23 on page 125 of the textbook (10 marks)
Reconcile the auditor's responsibility for discovering material misrepresentations by
management with these comments.

Recently, there have been a significant number of highly publicized cases of management
fraud involving the misstatement of financial statements. Although most clients possess
unquestioned integrity, a very small number, given sufficient incentive and opportunity,
may be predisposed to fraudulently misstate reported financial conditions and operating
results.

A. What distinguishes financial reporting fraud from other types of fraud?

Financial report fraud is the intentional misstatement of financial statements to give
users of the financial statements a better impression of the company profits.
Financial reporting fraud often (approximately 90% of the time) involves the CEO or
CFO.
B. What are an auditor's responsibilities, under generally accepted auditing standards,
to detect financial reporting fraud?
Auditors are responsible for uncovering financial reporting fraud, reporting it in their
audit report, and asking management what the company will do to ensure that the
fraudulent activity will not be repeated.
C. What are the characteristics of financial reporting fraud that an auditor should
consider in order to fulfill the auditor's responsibilities for detecting management
fraud under generally accepted auditing standards?
Occurrence / existence, completeness, accuracy (validation), accuracy (posting and
summarizing), classification, and cutoff / timing
D. Three factors that heighten an auditor's concern about the existence of financial
reporting fraud include (1) an intended public placement of securities in the near
future, (2) management compensation dependent on operating results, and (3) a
weak internal control environment evidenced by lack of concern for basic controls
and disregard of the auditor's recommendations. What other factors should heighten
an auditor's concern about the existence of financial reporting fraud?
An overly complex organizational structure which can include unusual lines of
authority. A company that cannot generate positive cashflow from operations yet
maintains large increases in earnings. Frequent arguments with past or present
auditors regarding accounting matters.

ACCT 460v10 Assignment 1C March 2018

Question 3: Discussion Question 19-24 on page 597 of the textbook (20 marks)

For the following independent situations, assume you are the audit partner on the engagement. For
each situation, using the framework for reporting decisions, decide what type of auditor’s report should
be issued and provide your rationale. If your decision depends on additional information, state the
alternative reports you are considering and the additional information you need to make the decision.

A. 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.
We should issue a disclaimer of opinion as there has been a limitation of scope and we are not
able to satisfy ourselves with evidence to prove if the financial statements are fairly presented
or not.
B. 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.
Unqualified opinion with a possible explanatory paragraph if we believe that the previous years
balance sheets or other financial statements are incorrect.
C. 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.
Unqualified opinion as we were able to satisfy ourselves by use of alternative audit procedures.
D. 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.
Unqualified opinion with an Other Matter paragraph to provide information related to the
accounts receivable from the major customer.
E. 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.
More information is needed, the investment of my supervisor would need to be discussed with
the rest of the audit team and likely disclosed to the audit committee.
F. 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
Unqualified opinion with an Emphasis of Matter paragraph to highlight the change in policy.
G. One of your audit clients has a material investment in a privately held biosciences company.
Your audit firm engaged a business valuation specialist to assist in evaluating the client’s
estimation of the investment’s fair value. You conclude that the valuation specialist’s work
provides sufficient appropriate audit evidence.
Unqualified opinion.

ACCT 460v10 Assignment 1C March 2018

 H. As part of your completion, you request that the CFO sign the management representation
letter. However, she refuses to sign the letter.
Unqualified opinion with an explanatory paragraph detailing the CFO’s refusal.

ACCT 460v10 Assignment 1C March 2018