Acct 475 Midterm

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The company invested $5,000,000 in a new state of the art showroom on the outskirts of Vancouver in 2008. Due to the economic recession, the volume of sound systems sales significantly declined in 2010 and 2011. The company decided to postpone moving from their current city centre site to the new location pending a recovery in the sound system market in future years.

The company is aware that the market value of the new showroom is likely to be below cost but have indicated to you their desire to continue to carry the showroom at cost in the financial statements. In their opinion the investment in the asset will be recovered through the generation of future profits. No financial forecasts were

prepared for 2012 and later years.

Management of ML has refused to obtain an independent valuation of the property and have stated to you that obtaining such a valuation would be a waste of money as nobody can put a value on an asset when there is no current market for the asset. They have stated that should you obtain an independent valuation, the cost of

obtaining this valuation will be deducted from your audit fee.

The company has cash reserves of $2,200,000 and management is confident that the company can sustain any business losses that will be incurred in the short term pending the return of the company to profit in future years.

Required:

1. Draft a letter to the management setting out your views on the approach proposed by them to account for the above matters in the financial statements for the year ended June 30, 2011 and their potential effect on your audit opinion.

2. Based on the information provided, draft the sections of your audit plan that outline the audit risk factors and your planned response to these risk factors.

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Question 4. (20 marks)

On December 15, 2010 your firm was appointed auditor to Fruit Limited (FL). The company owns a chain of ten hotels in Ontario, Canada.

You have commenced planning the audit of the financial statements for the year ending April 30, 2011. You believe that there are two possible alternative audit strategies that you may adopt. They are:

1. A predominantly substantive approach (balance sheet approach).

2. An audit strategy that includes an expectation that internal controls are operating effectively and therefore the auditor can place reliance on the internal controls in determining the nature, timing and extent of substantive procedures.

Required:

1. Describe the procedures to be undertaken to obtain an understanding of the company during the planning stage of the audit. Your answer should set out in detail the specific information you would seek to establish about the entity in order to comply with the requirements of Canadian Auditing Standards.

2. Set out the factors that would influence your judgement in relation to the audit strategy to be followed in the audit of FL.

3. As your firm will not have audited the comparative figures (figures for year-ended April 30, 2010) what responsibilities, if any, will your firm have for the comparative figures appearing in the financial statements for the year ended April 30, 2011?

4. What enquiries would you have made to the former auditors before accepting the appointment as auditor for this company?

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Question 5. (15 Marks)

Part A - 4 marks

Explain what is meant by the terms 'substantive' tests and 'tests of control'. Illustrate your answer with one example of each kind of test from the 'Revenue, Receivables and Receipts' cycle.

Part B - 3 Marks

Give two examples of 'analytical procedures' and indicate when analytical procedures are used in the audit of company accounts.

Part C - 4 Marks

Outline four factors the auditor should consider regarding the integrity of the client when an auditor is considering accepting a new client.

Part D - 4 Marks

Describe four matters that should be included in an audit engagement letter to the client.

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Question 6. (15 Marks)

Required: Choose the best answer to each question from the alternatives provided. (1.5 marks each)

a. At the conclusion of the 2013 audit of ABC Company in which the auditor found no material

misstatements, which of the following statements is required in the scope paragraph of the standard

audit report?

1) My responsibility is to express an opinion on these financial statements based on my audit.

2) I conducted my audit in accordance with Canadian generally accepted auditing standards.

3) I have audited the balance sheet of ABC Company as at December 31, 2013, and the statements of

income, retained earnings, and cash flows for the year then ended.

4) In my opinion, these financial statements present fairly, in all material respects, the financial

position of the company as at December 31, 2013, and the results of its operations and the cash

flows for the year then ended in accordance with Canadian generally accepted accounting

principles.

b. Which of the following statements would be considered an adverse opinion?

1) In my opinion, except for the effects of the failure to record amortization of the company’s