Au1 Assignment 1

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Assignment 1 Session 3
Question 1 (7 marks)
The following are independent statements concerning certain auditing issues. Required
Indicate whether you agree or disagree with each statement, and explain your reasoning. a.An adverse report would be issued when an auditor was unable to observe a company’s inventory count at the beginning of the year because the auditor was appointed during the year. (1 mark)

b.When encountering a violation of generally accepted accounting principles in an audit of financial statements, the auditor will decide between an unqualified report, a qualified report, or an disclaimer of opinion report. The main consideration will be the materiality of the matter in question. (1 mark) c.A public accountant is not required to be independent of an entity to perform a compilation engagement for that entity. In such a situation, however, disclosure of a lack of independence is not required. (1 mark) d.If there is significant doubt and material uncertainty that an auditee will continue operating in the future and these doubts have been properly disclosed in the notes to the financial statements, the auditor is required to include an emphasis of matter paragraph in the audit report. (1 mark) e.When replaced as auditor, the outgoing auditor has a professional responsibility to reply promptly to an enquiry letter from the incoming auditor, but is not required to allow the incoming auditor access to the most recent year’s audit working papers. (1 mark) f.When an auditor uses a substantive audit approach (setting control risk at maximum) to an audit of financial statements, the auditor is still required to gain an understanding of the internal controls. (1 mark) g.The auditor is not required to use the same approach (combined or substantive) for all transaction cycles as well as for the various transaction or balance-related audit objectives. (1 mark) Question 2 (7 marks)

The audit risk model has become the commonly used basis for audit planning. The following are independent situations which could have an effect on various components of the audit risk model. Required

For each situation, identify the element(s) of the audit risk model (that is, audit risk, inherent risk, control risk, and detection risk) that is (are) most likely to be directly affected and the nature of the change in risk levels (increase or decrease) relative to a typical audit. Explain your reasoning. a.The company is experiencing significant cash-flow difficulties and is currently seeking to obtain external financing. (1 mark) Inherent risk will increase since risk of misstatement is greater, and as result audit risk increases; no impact on control risk and detection risk b.The client is a small family-owned company with few employees. The owners have not yet hired an accounting clerk and the bookkeeping function is performed on an ad-hoc basis whenever one of the members has time to complete the tasks. The accounting records are often left incomplete for several months at a time. (1 mark) Control risk will increase

c.A client’s vice president, finance, was recently charged with tax fraud by the Canada Revenue Agency. (1 mark) Inherent risk will increase as well as control risk as VP may have overriden controls due to position d.The client operates 40 retail outlets. Every year the auditor attends the inventory count for a sample of 20 stores. In the current year the auditor increased the number of locations attended to 25 stores. (1 mark) Detection risk decrease, control risk increase and audit risk – increase (?) e.An auditor observes a significantly lower than expected number of compliance deviations while testing a client’s internal controls. (1 mark) Inherent and control risks increase

f.Subsequent to the audit, the client implemented all internal control recommendations made by the auditor. (1 mark) Control risk decrease or unchanged, not sure
g.The company established an internal audit department in the...
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