However the public accountant may become aware that

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Unformatted text preview: wing amounts would be the net carrying amount for the building on the consolidated financial statements of Company A at December 31, 2002? (a) (b) (c) (d) (iii) $ $ $ $ 4,200 4,800 6,000 7,200 Compilation Engagements When performing a compilation engagement, a public accountant is not required to make enquiries or perform other procedures to verify, corroborate or review information supplied by management. However, the public accountant may become aware that the information provided is obviously incorrect and that the financial statements would be false and misleading. In that situation, which one of the following is not an appropriate action? (a) (b) (c) (d) Perform enquiries and request information from management to resolve the issue. Refuse to release the financial statements. Withdraw from the engagement. Modify the Notice to Reader to explain the issue. 5 (iv) Control Risk Assessment After obtaining an understanding of internal controls the auditor should make a preliminary control risk assessment. Which one of the following conclusions is not appropriate? (a) (b) (c) (d) Control risk should be assessed at maximum if the policies and procedures do not address the assertion being audited or are unlikely to be effective. Control risk should be assessed at below maximum if the policies and procedures do not address the assertion being audited or are unlikely to be effective. Control risk should be assessed at maximum if the auditor assesses that it would be more efficient to obtain the necessary audit evidence by performing substantive procedures. Control risk should be assessed at below maximum if the policies and procedures do address the assertion being audited and the tests of controls confirm that they are effective. 6 Question 2 (10 marks) (18 minutes) Differential Reporting Mr. Horten is the sole shareholder of Horten Products Limited (HPL) and Horten Holding Inc. (HHI). You, CA, have just finished the year-end meeting with Mr. Horten where you have finalized the December 31st, 2001 year-end for both companies. In the meeting you provided Mr. Horten with audited financial statements for HPL and financial statements with a review engagement on the non-consolidated financial statements of HHI along with the tax returns. The following discussion takes place: Mr. Horten: I am glad that we have completed this and that everything looks in order. I have heard that my fees may go down next year since the accounting rules now realize that companies like mine do not need detailed accounting. I think the term being used is differential accounting. I am in favour of any changes that will decrease my fees. I am satisfied with your work but the bank only wants an audit to meet the head office requirement and it has become very expensive. CA: There are a number of options that will be available to you for the next set of financial statements. Would you like to discuss them now? Mr. Horten: No. You can send me an e-mail that will identify the options that will be relevant for my companies and provide me with your thoughts on the factors I should consider in making any decisions. I also want to know if it will affect the reports you will attach to the financial statements. You return to the office to prepare the response to Mr. Horten's questions. To focus your response you prepare a brief summary of the financial statements for the two companies summarized in Exhibit I. Required: Prepare the e-mail to Mr. Horten. 7 Exhibit I Summary of Financial Statements Horten Products Ltd Current Assets Property, Plant and Equipment $ 150,000 Current Liabilities $ 80,900 350,000 Long-term Debt 200,000 Deferred income taxes 39,000 Common shares 100 Retained Earnings 180,000 $ 500,000 $ 500,000 Horten Holdings Inc. Current Assets Investment in HP $ 50,000 Current Liabilities 100 Preference shares* Common shares Retained Earnings $ 50,100 $ 1,100 100 100 48,800 $ 50,100 * The preference shares were issued as part of a reorganization for tax planning purposes and are redeemable at $200,000. 8 Question 3 (7 marks) (13 minutes) Severance and Termination Benefits The staff member assigned to the review engagement for your client Hilory Corporation (HC) has left you a note about a memorandum written by the company President discovered during the review. HC is a private company and the year-end is August 31, 2002. The memorandum, dated August 15, 2002, outlines a plan to reduce the number of employees by 15. The reason cited for the decision was a recent decrease in demand for its product in foreign markets. The memorandum has the following points: • • 5 specifically identified employees will be provided $1,500 each on September 5, 2002 and will be escorted out of the office. These employees will be given the amount in lieu of notice. Based on years of service and positions held, the amount is considered to comply with the provisions of all employment standards and regulations. A second group of specifically identified employees will be offered a o...
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This note was uploaded on 10/27/2013 for the course LAW 10-100 taught by Professor Parsons during the One '10 term at Bond College.

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