Exam 6: Client Acceptance,Planning,and Materiality

During the course of an audit engagement,an auditor prepares and accumulates audit working papers.The primary purpose of the audit working papers is to

In order to assess if a company is a going concern,the auditor can calculate which of the following ratios during the audit planning and compare with previous years and successful companies in the industry?

A)One step in the planning phase of an audit is to obtain information about the client's legal obligations.Identify the types of legal documents and records that auditors examine to obtain this information.B)Discuss the audit-relevant information contained in each of these types of documents that an auditor should be aware of early in the audit.

Which of the following is an important purpose of an organizational code of ethics and the associated processes to ensure adherence?

Mugsy Brights Limited (MBL)is a private company in Winnipeg that sells mugs,jars,and bottles in a variety of colours,sizes,and materials.MBL has been owned by four equal owners since its inception.The owners have different skills-creative design,marketing,finance,and information systems.The company attributes much of its success to the use of materials that can be easily shipped without breaking,and unique designs that appeal to a variety of buyers,particularly commercial buyers who purchase for restaurants,or for businesses who choose to advertise their business by giving away or selling regular or travel mugs. The owners meet formally every month and have informal meetings two or three times per week to discuss particular clients or new approaches.About a quarter of the company's sales are completed via the company's secure website,while the remainder are by telephone or purchase order.MBL works with distributors of kitchenware,selling wholesale to hundreds of outlets in Canada.Most of these sales are done over the phone,although a salesperson does spend some time in major cities across the country visiting some of the large customers and helping with shelf layout and marketing to the ultimate consumers for larger distributors.These efforts have resulted in gradually increasing market share for the company. All sales are recorded in the accounting software package used by the company.The accounting manager reports directly to one of the owners,and there are two other employees in the accounting department.Password controls are used to limit functions that are accessible by employees.For example,only the controller can implement wage rate increases or product price increases (which are reviewed and approved by the owner responsible for marketing).Two owners are required to sign cheques,and do so with source documents attached.Similarly,two owners are required to approve new employees. All manufacturing is outsourced to local producers who work with different materials.For example,a different supplier handles steel mugs versus plastics or glass.Ceramics are rarely used as they are quite breakable,whereas some forms of glass are very durable.MBL does not hold any inventory,as manufacturing is all done to order.However,as there have been some collection problems from customers,the company has had to go to the maximum of its line of credit and has no additional borrowing capacity available.It is waiting for the results of the audited financial statements to approach its bank for an increase in its line of credit. Internet sales are prepared (via credit card),while sales to distributors are net 30 days.The company has an April year end.Following are extracts from the annual financial statements. Required:A)What audit risk would you assign to the company? Why? [Tip: Do some calculations and consider client business risk.] B)Calculate preliminary materiality.Justify your decision of materiality base and choice of materiality.

CAS 320 (materiality in planning and performing an audit)defines materiality in terms of three key concepts.The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making;and that material is relative to circumstances surrounding the decision and nature of the information.The third concept is

What are the responsibilities of an external auditor when a specialist is used in an audit?

When reading the corporate minutes,the auditor extracted the approved annual salary for the President,the Chief Executive Officer,and other senior executives.What audit step would the auditor likely conduct with this information?

Juniper Berry is a private company in the Niagara region that operates in the fruit and vegetable industry.In its main St.Catharines plant,it receives picked berries,and sorts and packages them.It also makes some related products such as jams,cookies,and pies.Your firm has recently been hired as the auditor of Juniper Berry.The partner in charge of the audit has asked you to write a memo explaining why it is important to gain understanding of the business operations and processes of Juniper Berry and also to list some suggested procedures to be performed in the process of understanding the business operations and processes. To assist you with your memo,the partner provided you with some notes she took at a recent meeting with the management of Juniper Berry: - Juniper Berry (JB)sells and manufactures a wide range of products,including fresh and frozen berries,jam,cookies,and pies.Fresh and frozen berries make up most of JB's revenues. - JB sells mostly to grocery stores directly.However,its frozen berries are packaged with the Mondo Grocers logo as they have an exclusive contract to sell all of their frozen berry production to Mondo. - In 2016,JB installed a new scale system to weigh berries when they are delivered from various farms.The amount to be paid to the farmer is then calculated and recorded immediately.The system automatically records the inventory and issues an electronic payment for the amount calculated by the scale.JB is proud to be technologically advanced,as it has allowed the company to cut some jobs and be more cost efficient. - Given that most of the packaging and processing of berries into derived products is automated,capital assets represent a significant portion of the balance sheet and also required JB to obtain a large bank loan in 2016 when the plant upgrade took place.

A client's performance measurement system includes key performance indicators that management uses to

Knowledge of the client's industry and external environment can be obtained in different ways.Discuss some of the ways that this knowledge can be obtained.

An effective board of directors helps ensure that the company takes only appropriate risks.The audit committee can

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the