Chat with AIExam 5: Audit Responsibilities and Objectives
Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met. During your audit planning process, management informed you that they have not taken any action but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has upon your audit planning process.
(38) 
Verified•The above situation seems to indicate that management does not take the letter from the provincial government seriously.
•This could affect the ability of the company to continue as a going concern, and as a minimum would require disclosure in the financial statements, possibly with a qualification.
•The audit planning process would need to include gathering knowledge about other companies in this sector-have they also received such letters and have they complied? Have there been charges laid by the provinces where compliance did not occur? The answers to these questions will help assess the potential impact upon the client.
•The auditor should also look at any proposals that the company has received about implementing the anti-pollution equipment to see how quickly it can be implemented.
•The negative attitude about the anti-pollution equipment may also apply to other areas of the business.
•The auditor will need to assess the quality of corporate governance and of management integrity and assess the effect upon the engagement. Why has management really decided to wait so long?
Frank has come to you because he is worried about recovering the cost of his share of a law firm partnership. His partner, Jennifer, is exercising the "shotgun" clause in their partnership agreement and wants to buy him out. Over the last two years, Frank and Jennifer have had numerous battles over the way that Frank handles his accounts receivable. Frank is lenient with his customers and has converted many of his accounts into long-term notes extending two and three years into the future. He is confident that these amounts are collectible because every one of his clients continues to make small monthly payments.
Frank thinks that Jennifer may have been hiding profits from him and collecting some of her accounts in cash. He wants you to audit the books so that he can figure out what the "true" profits are and how much Jennifer should pay him for his share of the partnership.
Required:
A) Explain to Frank what you would be able to do during the audit engagement.
B) List the management assertions that may have been violated. Justify your answer.
(41) VerifiedA)•The purpose of an audit is to provide reasonable assurance that the financial statements are free of material error or fraud.
•The financial statements may not be 100% accurate.
•Since management fraud is difficult to detect, it would be impossible for you to quantify the amount of money that Jennifer has taken, if any.
•Frank might not be happy with the audit results because one of the things that you would have to do would be to assess the collectability of the accounts receivable.
B)Existence: Some accounts receivable may not be recorded if Jennifer took funds.
Completeness: Some sales may not have been recorded if Jennifer took the funds.
Valuation: Accounts receivable may be overvalued for Frank's receivables if they are not collectible.
The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests
(36) VerifiedA
Which of the following statements is true regarding a difference between general audit objectives and specific audit objectives for an account balance?
(44) In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is greater for
(32) The factor that distinguishes an error from fraud or other irregularities is
(37) After the auditor has completed all the procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on
(44) The sole shareholder of Jade Company had a contractor pave the parking lot at the company building as well as the driveway of his home. Both paving jobs were billed to the company on a single invoice. The general balance-related audit objective affected by this activity is
(40) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
(43) There are three phases in the risk response category of the audit process (design further audit procedures, tests of control, substantive tests). When will the auditor conduct tests of controls?
(37) The objective of the audit of financial statements by the auditor is the expression of an opinion on
(39) CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements. This opinion is an assessment of whether the financial statements are presented fairly using
(41) Often, numerous classes of transactions affect the ending balance of a particular general ledger account. This is handled during the audit engagement by
(36) Which of the following is an example of fraudulent financial reporting (management fraud)?
(40) The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead
(38) Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed "select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers." Camilla is concerned that some of the inventory in the store might be on consignment. The account-balance-related objective that Camilla is concerned about is
(38) Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of
(33) Prior to looking at the specific cycles, the auditor will first
(39) 
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