Assurance

Question 1

Balance Sheet Assertions

Answer 1

1. Existence - do assets/liabilities/equity exist?
2. Rights & Obligations - entity holds control/rights to asset, & liabilities are obligation of entity
3. Completeness - all assets/liabilities/equity have been recorded
4. Valuation & Allocation - all assets/liabilities/equity are recorded at the correct amount
5. Classification - all assets/liabilities/equity are recorded to correct accounts
6. Presentation - all relevant disclosures made, & in compliance with financial reporting framework

Question 2

Procedures - Cash

Answer 2

Assertions - Existence, Completeness, Valuation

Procedures
- Agree bank statement to bank reconciliation
- Agree bank reconciliation to general ledger
- Review bank reconciliation for stale-dated cheques
- Review outstanding cheques/deposits to ensure recorded in correct period

Question 3

Procedures - A/P & Other Liabilities

Answer 3

Assertions: Completeness, Valuation

Procedures
- Review subsequent bank statements for unrecorded liabilities
- Review subsequent bank statements to confirm cutoff of liabilities
- Request supporting documentation from vendors for balances outstanding
- Review final pay period if payable should be accrued
- Pull sample of AP items and agree to supplier invoices

Question 4

Procedures - Long-term Debt

Answer 4

Assertions: Completeness, Valuation

Procedures:
- Review loan documentation to ensure correctly recorded as long-term
- Recalculate loan amortization schedule to confirm balance outstanding and current portion
- Recalculate any loan covenants to confirm entity is in compliance. If not, assess any consequences

Question 5

First Year Audit Considerations

Answer 5

1. Opening balances - Prior year balances not reliable
2. Comparative figures - Prior year balances not reliable
3. Understanding of business & internal controls - auditor needs to obtain understanding of business & controls in place
4. Independence & Client Acceptance - (determine any independence issues) AND (any reason not to accept as a client)

Question 6

Procedures - A/R

Answer 6

Assertions: Existence, Completeness, Valuation

Procedures:
- Agree AR listing to general ledger
- Review AR listing for negative balances
- Review AR listing for old accounts (typically over 60 days) to ensure these amounts are still receivable
- Review subsequent bank statements for any unrecorded receivables

Question 7

Procedures - Inventory

Answer 7

Assertions: Existence, Completeness, Valuation

Procedures:
- Conduct inventory count
- Inquire with management for any obsolete/damaged inventory and if any adjustments have been made to the carrying balance
- Vouch supplier invoices to inventory balances to ensure recorded at correct cost
- Agree inventory listing to general ledger for valuation

Question 8

Going Concern - Auditor Objectives

Answer 8

Auditor objectives
1) Obtain sufficient evidence regarding management’s going concern assumption
2) Conclude, based on evidence collected, whether material uncertainty exists for events/conditions to doubt entity’s ability to continue as a going concern
3) To report in compliance with CAS

Question 9

Going Concern - Management Assumption Unreasonable

Answer 9

If management’s going concern assumption is unreasonable:
a) management to provide 12 month projected cashflows
b) auditor to assess projection for reasonableness through management discussions & review of supporting documents

Question 10

Materiality for RAMP - Users, Overall Materiality, & Perf Materiality

Answer 10

Discuss users of materiality
- Shareholder
- Lenders

Overall Materiality
+For-profit
i) 1-3% of revenues, expenses, total assets
ii) 3-5% of equity
iii) 3-7% of normalized net income
+Non-profit
i) 1-3% of revenues, expenses, total assets

Performance Materiality
- 60-75% of Overall Materiality

Question 11

Procedures - PP&E

Answer 11

Assertions: Existence, Rights & Obligations, Valuation

Procedures:
- Agree capital asset listing to general ledger
- Vouch additions/disposals to supporting documentation
- Request proof of existence for sample of PP&E
- Recalculate depreciation, & compare to client recorded amount
- Assess if any indicators of impairment
- Review R&M expense for capital items

Question 12

Audit Opinions

Answer 12

Are F/S materially misstated?
+No - Issue unqualified opinion

+Yes - Is the material misstatement pervasive?
- No - Issue qualified opinion
- Yes - Issue adverse opinion

+Unable to assess due to scope limitations - Is the scope limitation pervasive?
- No - Issue qualified opinion
- Yes - Issue disclaimer of opinion

Question 13

Using Work of Internal Audit: Why & Evaluation

Answer 13

Why: Using internal audit work can reduce the nature, & extent of procedures to be performed

Evaluation
1) Objectivity - reports to board of directors, not controller
2) Competency - competent in finance/accounting so work can be relied upon
3) Systematic Approach - formal approach prepared for the approach to conduct testing internally

Question 14

Independence Concerns

Answer 14

1) Self-interest threat - has financial interest in client
2) Self-review threat - form opinion on own work
3) Advocacy threat - promotes position of the client
4) Familiarity threat - close relationship with client, making it difficult to be unbiased
5) Intimidation threat - client intimidates practitioner

Question 15

Audit Risk Factors

Answer 15

Increases risk
- first year of audit
- complex transactions
- first year of operations
- compensation tied to company performance
- new stakeholders
- management disregard for controls
- company in poor financial health

Decreases risk
- repeat audit engagement
- simple transactions
- competent accounting staff

Question 16

Income Statement Assertions

Answer 16

1. Occurrence - revenue/expenses have occurred
2. Completeness - all revenue/expenses have been recorded
3. Accuracy - amounts & details of revenue/expenses have been recorded at correct amounts
4. Cut-off - revenue/expenses recorded in correct reporting period
5. Classification - all revenue/expenses classified to correct accounts
6. Presentation - all relevant disclosures made, & in compliance with financial reporting framework

Question 17

Special Reporting - 9100

Answer 17

• Details: Firm performs specific procedures as requested & report on results
• Procedures: To be specified by entity for what is needed
• Assurance - None, only conclude on procedures completed
• Cost - Dependent on number of procedures, since no assurance provided less risk to firm

Question 18

Special Reporting Options

Answer 18

1) CAS 805 - Audits of Single Financial Statement & Specific Elements, Accounts, or Items
2) CRSE 2400 - Review Engagements
3) 9100 - Reports on results of Specified Audit Procedures to Financial Information other than F/S

Question 19

Special Reporting - CRSE 2400

Answer 19

1) Provide reporting framework
2) Details - scope covers historical information
3) Assurance - Limited assurance, showing nothing has come to attention to influence F/S
4) Materiality - Specific materiality, typically lower than overall materiality
5) Cost - Less than CAS 805, due to less rigorous procedures
6) Procedures - limited to analytical procedures & inquiry

Question 20

Special Reporting - CAS 805

Answer 20

1. Provide reporting framework
2. Details - description of responsibilities of management & firm, & statement of firms opinion in compliance with reporting framework
3. Assurance - Reasonable assurance
4. Materiality - Specific materiality, typically lower than overall materiality
5. Cost - Most costly of special reporting options, can be mitigated if conducted by same auditor as overall F/S
6. Procedures - Procedures include inspection, observation, confirmation, recalculation, reperformance, & analytics

Question 21

Audit Approach Factors

Answer 21

Factors
- Number & value of each transaction (ex. high volume, low $)
- Controls in place
- Control testing needed
- Control issues noted in case

Question 22

Procedures - Revenue

Answer 22

Assertions - Occurrence, Cut-off, Accuracy

Procedures:
- Pull sample of sales from general ledger and agree to receipt and bank deposit
- Test cut-off for last and first item reported in each reporting period
- Pull sample of returns and confirm they have been removed from revenue