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14 question 9 8 marks 14 minutes evaluation of

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Unformatted text preview: applicant’s financial institution, and then sends the amount owing to BCI on a monthly basis. SL is responsible for all credit losses. Required: Discuss the recognition, presentation and disclosure issues with respect to revenue on the financial statements of SL and reach a supported conclusion on whether SL should report revenue at the gross amount collected or the fee charged to BCI. 14 Question 9 (8 marks) (14 minutes) Evaluation of Misstatements At the planning stage the auditor must make a preliminary assessment of materiality based on the users of the financial statements. During the execution of the audit the auditor will accumulate the misstatements and must consider if they have a material effect on the financial statements. It is not simply a quantitative exercise of comparing the amounts identified to the level of materiality. Qualitative factors must also be considered. Required: Outline the relevant qualitative factors that the auditor may consider in the evaluation of whether the misstatements have a material effect on the financial statements. 15 Question 10 (11 marks) (20 minutes) Fraud and Error John Smith, CA is in the process of completing the audit of Hurt Autos Limited (HAL). HAL supplies paint to independent auto body shops and also has two of its own auto body shops. During the course of the audit a theft of paint was discovered when a customer informed the owner that he was offered paint at a discount if he did not need a receipt and was willing to pay cash. The employee who made the offer has worked at HAL for a number of years and has recently been fired. The owner has made an initial estimate that at least $100,000 of inventory is missing. This amount is material to the financial statements. Required: Part A Outline the accounting implications of this discovery. (3 marks) Part B Outline the audit implications for John Smith, and identify the specific audit procedures John should complete. (8 marks) 16 Question 11 (6 marks) (11 minutes) Special Reports Your client, Security Plus Limited (SPL), is owned and operated by Tom Styles. SPL provides electronic storage of confidential documents for its clients as part of their off-site storage security procedures. SPL 's clients include government departments, financial institutions, and other similar entities. SPL has contractually agreed to provide two major customers with a copy of the audited financial statements of SPL. It has also agree to provide a separate letter to one client stating that SPL carries adequate insurance and that no one client accounts for more than 10% of SPL's gross revenue. Tom has asked you what you can do, as the auditor of SPL, to help comply with these requirements. Required: Prepare a response to Tom Styles. 17 Question 12 (6 marks) (11 minutes) Analysis An auditor should use analysis at the audit planning stage, as a substantive procedure during the audit execution stage as well as at the final evaluation stage. When using an analytical procedure as a substantive procedure the auditor should consider whether the intended levels of assurance and precision are consistent with the auditor’s objective in performing the procedure. The levels of assurance and precision are affected by the reliability of the data used in performing the analytical procedure. Required: Discuss what factors would influence the auditor's assessment of the reliability of the data used in the performance of an analytical procedure. 18 Question 13 (6 marks) (11 minutes) Audit of Accounting Estimates Aid Service Limited (ASL) has accounts receivable of $600,000. The client has recorded an allowance for doubtful accounts of $110,000. The auditor completed some preliminary analysis of the specific accounts and recent trends in bad debts losses at ASL and concluded that the allowance should be between $130,000 and $160,000. Materiality has been set at $25,000. Required: Discuss the factors the auditor should consider in the resolution of the above situation including an assessment of what amount, if any, should be recorded on the schedule of unadjusted differences. 19 Question 14 (6 marks) (11 minutes) Audit Reports Your client, Ontrac Products Limited (OPL), advised you that the company may become liable as a result of claims arising from certain alleged defects in a line of products sold. The sales all took place during the fiscal year ended July 31, 2002. It is now September 6, 2002 and you have finished all of the fieldwork for the audit of this year-end, except for procedures related to this matter. The management of OPL has informed you that no significant claims have been asserted as of yet and on the advice of OPL's counsel, has refused to identify the product or provide you with any further information regarding any possible claims. OPL will not disclose this matter in its financial statements as management believes that the disclosure of any information is not in the company's best interests. Required: Discuss the audit report implications of the abo...
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