Advanced Auditing Exam

Question 2 Hans & Co., CGAs, is auditing CCC Inc.s 2010 financial statements. Hans previously audited the companys 2008 and 2009 financial statements. The 2008 audit resulted in a qualified opinion because the auditors were unable to verify the opening inventory for that year, but the 2009 audit resulted in an unqualified opinion. Julia worked on the previous two audits and is familiar with most of the staff at CCC, including the office manager, Marcus. Julia was scheduled to meet with Marcus on Monday morning to meet any new staff and have a tour of the office. The office manager was unable to meet with Julia on Monday and instead left her the following memo: Julia, I had to take this week off for personal reasons. Therefore I prepared this memo for you. As you are probably aware, CCC Inc. has suffered some loss of sales due to the general economic slowdown experienced by many companies. The office procedures and internal controls are the same as last year. You will have many new office staff to meet this year as employee turnover has been high. CCC had to reduce wages for the workers by 20% to stay profitable, so several employees complain that they are underpaid, and about 30% of the staff actually left for new jobs. As the office manager, my wages were only reduced by 10%, because managers are expected to work harder than the regular workers. The staff generally do not believe that we work harder, but, for example, the controller has refused to take any vacation for the past year and does not want to take her vacation for the next two years. One of the controllers many responsibilities is to approve all payments and purchases from CCCs subsidiary company, CCC-2 Ltd. (as you know from last years audit, CCC owns 60% of the voting shares of CCC-2 and senior executives of both companies own the remaining shares 40%). Being able to purchase goods and materials from CCC-2 at below-market prices is a second reason that CCC has remained profitable, even in the poor