ACCT 460 v10 Assignment 1A Assignment 01 PDF

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ACCT 460: Principles of AuditingAssignment 1, Version AQuestion 1: Discussion Question 4-22 on page 89 of the textbook (20 marks)Discuss whether the facts in any of the situations indicate violations of the rules of conduct for professional accountants. If so, identify the nature of the violation(s)...

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ACCT 460: Principles of Auditing Assignment 1, Version A

Question 1: Discussion Question 4-22 on page 89 of the textbook (20 marks) Discuss whether the facts in any of the situations indicate violations of the rules of conduct for professional accountants. If so, identify the nature of the violation(s). 4-2 2 5 6 The following are situations that may violate the general rules of conduct of professional accountants. Assume in each case that the PA is a partner.

A. Simone Able, a PA, owns a substantial limited partnership interest in an apartment building. Juan Rodriquez is a 100 percent owner in Rodriquez Marine Ltd. Juan also owns a substantial interest in the same limited partnership as Simone. Simone does the audit of Rodriquez Marine Ltd. This is violation of independency of professional accountants, where a PA audits and keeps self -interest with audit client. When the user uses the audited financial statement, he/she believes that statement is prepared according to CAS, Where CAS 240 emphasizes on independency of the auditor. Knowingly or unknowingly, there is merely relationship existed as common investors between Simone and Juan There are five threats to independency of the auditor. They are Self-interest, Self-review, Advocacy, Familiarity and intimidation. In the above case there four threats that are applicable. Self-Interest -Simone has financial interest with Juan for profit motive Self-review -Simone might have done the books for Juan and also do the audit compilation Advocacy – Simon may be promoting his business because common profit motive Familiarity – Simon and Juan are partner in another business. What Juan can do is form an audit committee to decide and choose an audit PA. This way he would be able to form trust and integrity in his business. However, there is no professional conduct violations, if the Simone were a limited partnership who will not have known the other investors.

ACCT 460v10

Assignment 1A

March 2018

B. Horst Baker, a PA, approaches a new audit client and tells the president that he has an idea that could result in a substantial tax refund in the prior year’s tax return by application of a technical provision in a tax law that the client had overlooked. Horst adds that the fee will be 50 percent of the tax refund after it has been resolved by Canada Revenue Agency. The client agrees to the proposal. There is multiple code of Professional accountants conduct and independence threats are violated here. The self-interest threat for independency of audit; Horst, already starting the audit review with profit motive only, therefore the review become questionable. Second, Horst have not done audit or examined or gathered sufficient material to assure that. There were things that were overlooked, in this situation, Horst associated himself with false or misleading information and also fail to reveal material omission. The question here is Horst is specific about engagement outcome even before the audit started. According to CPA rules of Professional conduct, there is a clear breach of rule 215.1

“ A member or firm engaged in the practice of public accounting or in a related business or practice shall not offer or engage to perform a professional service for a fee payable only where there is a specified determination or result of the service, or for a fee the amount of which is to be fixed, whether as a percentage or otherwise, by reference to the determination or result of the service, where the service is (a) One in which professional standard. (b) A compilation engagement. 215.3

(c) the fee arrangement is not one which influences, or in the view of a reasonable observer would influence, the result of a compilation engagement performed by the member or a partner of the member for the same client; and “ (CPA ,Hand Book ,215.1 ,215.2 ,215.3) C. Chantal Contel, a PA, advertises in the local paper that her firm does the audit of 14 of the 36 largest drugstores in the city. The advertisement also states that the average audit fee, as a percentage of total assets for the drugstores she audits, is lower than that of any other public accounting firm in the city. There two uneasy things I found here with Chantal as professional conduct of professional accountant. First Chantal discloses confidential information about client assets value. It is a breach of confidentiality. Secondly creating unnecessary competition in local market leading Questionable quality of audit. The main idea of advertising shouldn’t lead to promise favorable outcome for audit parties or create undue professional service competition. However, can seek publicity for the member’s or firm’s services they offer. CPA hand book Conduct 217.1

“ A member or firm may advertise or seek publicity for the member’s or firm’s services, achievements or products and may seek to obtain new engagements and clients by various means, but shall not do so, directly or indirectly, in any manner” (CPA ,Hand Book 217.1)

ACCT 460v10

Assignment 1A

March 2018

The verifiable information in the advertisement such as almost half of the pharmacy sector (14/36) is audited by her firm. Does this verifiably true and the fees on assets are lower offer than other PA in the market. Does this constitute to audit quality. D. Olaf Gustafson, a PA, sets up a small loan company specializing in loans to business executives and small companies. Olaf does not spend much time in the business because he works full time in his public accounting practice. No employees of Olaf’s public accounting firm are involved in the small loan company. There is no violation as far as Olaf only providing loans to small business, However, if Olaf becomes the auditor of those business who has obtained loans from Olaf. He has responsibility to disclose the audit committee, shareholders and users of financial statement that he has such business of providing loans services to small business. Olaf may be at one be more unbiased in audit processed since he has self interest in those business.

E. Louise Elbert, a PA, owns a material amount of stock in a mutual fund investment company, which, in turn, owns stock in Louise’s largest audit client. Reading the investment company’s most recent financial report, Louise is surprised to learn that the company’s ownership in her client has increased dramatically. There is no violation by any party; However, Louise has some privacy issues here by going over the clients’ financial statements which has private interest for her. She had opportunity to enjoy the information she has received. She has material amount of Investment enjoy the information. There are two things need to be done. In first place audit committee should have access the risk planning by selecting appropriate staffs and by asking if Loise have any personal interest on those business that have been audited. Secondly Louise has responsibility to disclose to the audit committee that she has personal investment interest in those clients.

ACCT 460v10

Assignment 1A

March 2018

Question 2: Discussion Question 5-21 on page 124 of the textbook (10 marks) 5-21 1 2 4 Frequently, questions have been raised regarding the responsibility of the independent auditor for the discovery of fraud (including defalcations and other similar irregularities) and concerning the proper course of conduct of the independent auditor when his or her examination discloses specific circumstances that arouse suspicion about the existence of fraud. a.What are (1) the function and (2) the responsibilities of the independent auditor in the examination of financial statements? Discuss fully, but do not include fraud in this discussion. An independent auditor either can be self-employed or work for PA firm. The main function of Auditor is to - examine financial statement and related transactions - analyze business operations, process and financial control system - Do test and substantive test - Gather enough evidence to make decisions or opinion - Provide independent opinion on fairness or efficiency of business For auditor to provide above functions. The auditor should be -Independent of audit environment -Use professional code of conduct -Attitude of professional skepticism b. What are the responsibilities of the independent auditor for the detection of fraud and other irregularities? Discuss fully. In the audit planning process, the auditor should assess the risk of material misstatement due to fraud and errors. The auditor should be able analyze inherent risk and audit risk. According to CAS 240 the auditor is required to perform a fraud risk assessment. By doing Below steps the information can be gathered about fraud risk assessment. -Plan with the audit team to come up with strategy to identify material misstatement due to fraud. -Understand the fraud triangle in the audit environment and business entity that been audited -Consult with audit committee to see what measures have been in place for fraud detection -Evaluate unusual relationships identified during analytical reviews -Analyze any nonfinancial information from indirect parties.

ACCT 460v10

Assignment 1A

March 2018

c. What are the responsibilities of the independent auditor for the detection of fraud and other irregularities? Discuss fully. The auditor is required to communicate with audit committee and management about any audit findings. If the errors, omissions or fraud deducted, It should be discussed with audit committee and management about further measures to be taken and management should response in written statement explaining the auditor about nature of audit findings. The auditor, if require should seek legal advice on the finding of the audit if it has significant effect on financial statement.

ACCT 460v10

Assignment 1A

March 2018

Question 3: Discussion Question 19-25 on page 597 of the textbook (20 marks)

19-25 2 3 4 6 7 8 9 For the following independent situations, assume you are the audit partner on the engagement. For each situation, using the framework for reporting decisions, identify the appropriate audit report from the list below and briefly explain a rationale for selecting the report. A. Unqualified—standard wording. B. Unqualified—explanatory paragraph. C. Qualified opinion—inappropriate accounting policy or material misstatement. D. Qualified opinion—scope limitation. E. Disclaimer. F. Adverse. A .Kieko Corporation has prepared financial statements but has decided to exclude the cash flow statement. Management explains to you that the users of its financial statements find that particular statement confusing and prefer not to have it included. Qualified -Not comply with GAAP. Reason for it is the audit report should include the cash flow statement for the period. B.HardwareFromHome.com is an internet-based start-up company created to sell home hardware supplies online. Although the company had a promising start, a downturn in ecommerce retailing has negatively affected the company. The company’s sales and cash position have deteriorated significantly, and you have reservations about the ability of the company to continue in operation for the next year. Unqualified -explanatory paragraph. The PA is satisfied by fairness. However, have suspicious about going concern due to sales decline .The PA can express their opinion in the explanatory paragraph. New and revised auditor reporting standards includes reporting of going concerns, entity-specific of other information and key audit matters for certain entities. These items near call events during audit finding. C. A different public accounting firm, which you had selected, performed approximately 20 percent of the audit for Furtney Farms Inc. You have reviewed its working papers and believe it did an excellent job on its portion of the audit. Nevertheless, you are unwilling to take complete responsibility for its work. Unqualified -standard wording with describing the total amount of work done by other reporting PA as percentage of audit with their location and legal name.

ACCT 460v10

Assignment 1A

March 2018

D. The controller of Fair City Hotels Co. Ltd. will not allow you to confirm the receivable balance from two of its major customers. The amount of the receivable is material in relation to Fair City’s financial statements. You are unable to satisfy yourself as to the receivable balance by alternative procedures. In this case qualified -disclaimer -scope limitation. Unable to confirm the balances.

E. In the last three months of the current year, Oil Refining Corp. decided to change direction and go significantly into the oil-drilling business. Management recognizes that this business is exceptionally risky and could jeopardize the success of its existing refining business but feels that there are significant potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in footnotes. Unqualified standard wording. There was no question about going concern, however there is additional business operation have been added in last three months. The detail of that operation has been included in the footnote.

ACCT 460v10

Assignment 1A

March 2018...