Unformatted text preview: r of interests (buy/sell agreement); or
o the effect of misstatements of net income or loss when contrasted with expectations.
• The definitive character of the misstatement. For example, the precision of an error that is
objectively determinable as contrasted with a misstatement that unavoidably involves a
degree of subjectivity through estimation, allocation, or uncertainty.
• The motivation of management with respect to the misstatement such as an intentional
misstatement to "manage" earnings or "smooth" earnings trends, an indication of a possible
• pattern of bias by management when developing and accumulating accounting estimates, or
a misstatement precipitated by management's continued unwillingness to correct weaknesses
in the financial reporting process.
The existence of offsetting effects of individually significant but different misstatements.
The cost of making the correction. The benefits expected to arise from providing information
in financial statements should exceed the cost of doing so.
The risk that possible additional undetected misstatements would affect the auditor's
evaluation. 53 QUESTION 10 (11 marks)
CICA 5135 The Auditor's Responsibility to Consider Fraud and Error
Part A (3 marks)
The misappropriation of assets is identified as an error in CICA 1506.26. As the employee has been
at HAL for a number of years it may be necessary to retroactively adjust for material amounts from
prior periods. Prior year financial statements would be restated. Any tax effects would also be
adjusted. Opening retained earnings, inventory and any other accounts would be adjusted.
Required disclosure would include:
• a description of the error;
• the effect of the error on current and prior financial statements;
• the fact that the financial statements are restated; and
• measurement uncertainty if the amount is not measurable. (CICA 1508).
If there is recovery through an insurance policy there will be a contingent gain. John may be
concerned about exposure due to a material loss not being identified in prior periods.
Part B (8 marks)
John will need to reassess the risk of material misstatement.
The following are specific examples of actions to be taken.
• Visit all locations or perform surprise tests. For example, observe inventory at locations
where auditor attendance has not been previously announced or count cash at a particular
date on a surprise basis.
• Request that inventories be recounted.
• Alter the audit approach in the current year. For example, contact major customers and
suppliers orally in addition to sending written confirmations, send confirmation requests to a
specific party within an organization, or seek more and different information.
• Perform a detailed review of HAL's adjusting entries and investigate any that appear unusual
as to nature or amount.
• Perform substantive analytical procedures at a detailed level. For example, compare sales
and cost of sales by location and line of business to expectations developed by the auditor.
• Conduct interviews of personnel at the location affected by the risk of material
misstatements resulting from this theft. Obtain their insights about the risk and whether, or
how, internal controls address the risk.
• Perform audit procedures to analyze selected opening balance sheet accounts of last year's
audited financial statements to assess how any issues involving accounting estimates and
judgments for inventory were resolved with the benefit of hindsight.
• Perform procedures on inventory reconciliation prepared by HAL.
• Perform computer-assisted audit techniques such as data mining to test for anomalies in a
population of inventory.
• Review HAL's inventory records to identify locations, areas or items for specific attention
during or after the physical inventory count.
54 QUESTION 11 (6 marks)
Special Reports (CICA 9100, 5800, 5805, 5815, 8500, 8600)
To recommend the appropriate special report it is necessary to know and understand what SPL's
client wants. The term “adequate” insurance must be defined. The contract with SPL must be
reviewed to see if it is clarified on amount and term. It is unlikely CA could give an opinion on such
a vague term.
Possible alternatives for a special report include:
• section 9100 Report on the Results of Specified Auditing Procedures to Financial
Information. For this type of report it will be necessary to get agreement on the type of
procedures such as reviewing all revenue by customer. This type of report provides no
• section 5805 Audit Report on Financial Information Other than Financial Statements. This
report would provide assurance on the amount of premiums and coverage, not on adequacy,
such as a Schedule of Revenue by customer showing percentages. There may be a
confidentiality issue if SPL does not want to disclose this information;
• section 5815 Audit Report on Compliance with Agreement. Insurance has a specific
• review engagements (8500/8600) provide lower assurance which may not meet the request.
(No recommendation requested/premature to assess.) 55 QUESTION 12 (6 marks)
Analysis (CICA 5301)...
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- Law, ........., Income tax in the United States