Question 1 (9 marks)
1. One step in the planning phase of an audit is to obtain information about the
client’s legal obligations. Identify three types of legal documents and records
that auditors examine to obtain this information.
2. Discuss the audit-relevant information contained in each of these types of
documents that an auditor should be aware of early in the audit.
Question 2 (10 marks)
The audit risk model has become the commonly used basis for audit planning. The
following are independent situations that could have an effect on various components
of the audit risk model.
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. A company provides all customers with the option to return unused goods
within two weeks of the purchase.
b. In the current year, the company began performing credit checks for all new
customers. The customers’ credit ratings were used to determine credit limits
for the customers.
c. A client’s sales team is primarily compensated on a commission basis.
Commissions are determined on a percentage-of-sales basis.
TRU Open Learning
A2-2 Assignment 2
d. All cheques greater than a pre-determined limit require the signature of the
controller and the chief financial officer.
e. In order to raise capital, in the current year the owner-manager of a business
sold 20% of the common shares to a private-equity investor. The owner will
remain actively involved in the business. The private-equity investor will not
actively partake in the daily management of the business.
f. An auditor tests a control and observes several compliance deviations.
g. In the past two prior-year audits, the auditor has identified several material
overstatements in inventory.
Question 3 (3 marks)
GreenGrow Limited is a local landscaping company that does household and
commercial landscaping. Primarily, it helps businesses select plants and manage the
plants. It also has regular maintenance contracts such as watering, weeding, and
mowing. In the winter, it has some contracts for managing the indoor plants of
shopping malls, and does snow clearing to help boost that low income season.
Joey, the majority shareholder of GreenGrow is ecstatic. He has managed to come in
as the low bidder for a new type of contract. He bid on the construction of a track for
the track and field area of a local university. A piece of land on the north end of the
university is being cleared and GreenGrow will be leveling the land and placing a
bed of crushed stone for the track. Joey has just the right person to be in charge. Jack
has previous experience working as an assistant on a road crew and knows how to
use the surveying equipment needed to keep the track level. This is a big contract,
and will increase revenues by one third!
Required
Give three specific reasons that inherent risk for revenue for GreenGrow should be
assessed as “high”.
Question 4 (10 marks)
The following are audit procedures in the sales and collection cycle.
1. Inspect a sample of shipping documents to determine if each has a sales
invoice number included on it.
2. Discuss with the sales manager whether any sales allowances have been
granted after the balance sheet date that may apply to the current period
For the month of May, count the approximate number of shipping documents
filed in the shipping department, and compare the total with the number of
sales invoices in the sales journal.
4. Send letters directly to former customers whose accounts have been written
off as uncollectible to determine if any have actually been paid.
5. Compare the date on a sample of shipping documents a few days before and
after the balance sheet date with related sales journal transactions.
Required
a. For each procedure, identify the audit procedure being used (i.e. Inspection,
Observation etc.). (5 marks)
b. For each procedure, identify either the transaction-related audit objective(s)
being met or the balance-related audit objective(s) being met. (5 marks)
Question 5 (6 marks)
Lilan’s working papers for evaluating a client’s internal controls include the
following notes:
• There were over 1,000 purchase transactions under $4,500 from four vendors;
these are routine purchases.
• All purchases over $4,500 are non-routine transactions and must be preapproved
by the purchasing manager, but one purchase for $15,000 was
authorized by the plant manager without the purchasing manager’s initials.
• All cheque stubs for purchases should have purchase order numbers
recorded, but 5% of the sample did not have the purchase order number
recorded – traced the 5% to August payments.
For each of the notes above answer the following questions:
a. Does it represent a possible control problem?
b. If yes, why does it represent a possible control problem?
c. If no, why is it not a potential control problem?
Question 6 (7 marks)
John is the owner of a small manufacturing company. In prior years, your firm has
conducted a review engagement of the company. However, this year, John obtained
a loan from the federal business development bank, and is required to have an audit
of his financial statements. When you started asking about controls and procedures
at the company, John got pretty upset.
“All you need to be concerned about is the numbers! Why are you asking all of these
questions? It takes too much time away from my staff to answer these questions! Just
check the numbers and let us get on with our work!”
You calmed him down a bit, and reminded him about the general discussion that
occurred with the engagement letter. You invited him for coffee to briefly explain
the following items:
1. Why auditors are both i.) Concerned about internal controls and ii.) Required
to audit internal controls. (3 marks)
2. What you need to do to understand internal controls (2 marks)
3. What you will do once you have documented your understanding of internal
controls (2 marks)
Required
Explain what you would say to John.
Question 7 (5 marks)
1. Describe three types of sample selection methods commonly associated with
statistical audit sampling. (3 marks)
2. Explain the difference between sampling with replacement and without
replacement. Which method is more common in audit practice? (1 mark)
3. Describe the steps involved in systematic sampling. (1 mark)