Exam 6: Client Acceptance and Planning the Audit

What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.

Frontenac Construction, your audit client, is a construction company. In the initial planning phase of the audit, you identified that it has many contracts with severe non-performance clauses if any of the current constructions are not completed on the dates set in the contracts over the next three years. As the auditor, you would set the inherent risk for sales and penalties as

Vanovo Ltd. has purchased several companies in the retail sector. Recently, Vanovo purchased both a coffee and donut chain (that also owned bakeries) and a submarine sandwich chain. Unfortunately, the planned synergies between these two retail chains did not arise. What effect would this have on the financial statements of Vanovo Ltd., the parent company?

Brandon is working on the audit of Michum Inc. In accordance with CAS 550 (related parties), Brandon had obtained a management confirmation of all related-party transactions. When auditing the purchasing cycle of Michum, Brandon found that the company had purchased over $500 000 of merchandise from Elite Crust Inc., a company that is owned by the CEO's brother. The $500 000 purchase is a material amount and it was not included in the confirmation provided by Michum. Brandon should

Mario, the owner of Clayton's ice cream, is giving Steve, the manager of the audit, a private tour of the production facilities. By doing the tour, Steve will

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

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 2011, 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 2011 when the plant upgrade took place.

Your client, Macilbink Ltd., manufactures calendars, books, and magazines. The printing presses that they use are only three years old, yet new technology has been developed that would result in cuts in ink and electricity costs by over 20%, while simplifying the setup process, making smaller production runs more feasible. Macilbink Ltd. is facing lowered demand for its products and will need to change direction or innovate to stay in business. The effect of the new printing technology has resulted in which of the following risk assessment changes by Macilbink Ltd.'s auditors?

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 three types of documents that an auditor should be aware of early in the audit.

It is important for the auditor to obtain a good understanding of the client's industry to develop a client risk profile. If the auditor is looking at a client in the fashion clothing industry, a risk specific to the industry would be

When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level that is consistent with the objective of the audit, this means that the auditor has conducted enough work to

Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "incentives or pressures" risk factor?

It is important that the policies, procedures, and key decisions of senior management, the board of directors, and the audit committee be considered when developing a client risk profile because

Anna performed a trend analysis of accounts receivable (AR) balances and computed the days to collect AR ratio. When she compared the results of her analysis with industry averages, she found the results were unusually low compared to the industry norm. Anna can conclude that

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 unqualified opinion has been issued is the

An effective audit is one that

The Canadian Auditing Standards state that the auditor must develop an audit plan. List and explain the components that must be included in the auditor's plan.

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

Your preliminary discussion with European Real Estate Management (EREM) Corporation indicated that the company was owned by three Swedish individuals who sold limited liability partnerships of shopping malls, office buildings, and large residential apartment buildings to European investors. Often, a single shopping mall was broken up into several limited liability partnerships to make the ownership pieces small enough to sell easily. In some cases these partnership units were sold to European companies, who diversified and bought units in several buildings. Other units were purchased by individuals. If a property looked particularly promising, the owners of EREM occasionally purchased units or advised their wives and family members to purchase units. Required: Explain why it is important for the auditor to identify related party transactions. Why are related party transactions a high-risk area for the EREM audit?

Jibbery Company has numerous transactions with related parties. For example, it has borrowed money from shareholders, purchases raw materials from a subsidiary company, and sells finished goods to its parent company. Which of the following describes one of the impacts of these transactions on risk assessment ?