45) 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.
46) Juniper Berry is a private company, operating in the fruits and vegetable industry, located in
the Niagara region. In its main St-Catharines plant, it receives the picked berries and proceeds to
sort, package and also make 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 he took at a recent
meeting with the management of Juniper Berry.
– Juniper Berry (JB) sells and manufactures a wide range of products. From fresh to frozen
berries, to jam, cookies and pies. Fresh and Frozen berries make up most of the revenues of JB.
– JB sells mostly to grocery stores directly. Its frozen berries however 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 high tech scale system where the berries received from the various farms
are weighed when they are delivered and the amount to be paid to the farmer is calculated and
recorded immediately. The system automatically records the inventory and the central system
also issues an electronic payment for the amount calculated by the scale. JB is proud to be
technologically advanced as it 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
large bank loan in 2011 when the plant upgrade took place.
47) 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?
48) 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.
49) White Top Telephones is the largest telephone distributor in the province, distributing wired
and wireless phones, as well as cellular phones. Management always seems to be in a rush, and
difficult to approach. Unfortunately, this attitude has permeated down to all of the staff, and
everyone seems to be hurrying about, doing what needs to be done. Sometimes, it seems as if
they don’t even have time for the customers, moving on to the next task.
Yet everything seems to get done. The company’s web site has a lengthy privacy policy
statement indicating that customers are number one, and that all data are kept secure.
Required:
Explain the importance of the control environment and corporate governance structure. During
what phases of the risk assessment and planning process would the control environment and
corporate governance structure be documented and assessed?
6.2 Describe the type of evidence that the auditor collects when developing the client risk
profile and assessing client business risk
1) During discussion and inquiry with management, the auditor determined that the company has
started a new line of business, requiring a substantial investment in manufacturing equipment.
The company has also implemented wireless scanning for its warehouse and inventory. Which of
the following techniques will the auditor likely use to corroborate these statements?
A) further inquiry of the accounting personnel
B) inspection of recent sales invoices for types of sales
C) use of analytical procedures, comparing last year to this year
D) observation during the plant tour
2) 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 the industry averages,
she found the results were unusually low compared to the industry norm. Anna can conclude that
A) the accounts receivable balance is wrong.
B) the accounts receivable has an increased risk of misstatement.
C) the integrity of the company’s management is questionable.
D) she will not be able to rely on internal controls for accounts receivable for audit purposes.
6.3 Determine what working papers the auditor retains to document the financial statement
audit
1) 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
A) aid the auditor in adequately planning the work.
B) provide a point of reference for future audit engagements.
C) support the underlying concepts included in the preparation of the basic financial statements.
D) support the auditor’s report.
2) The working papers are
A) the property of client.
B) prepared by the client’s internal auditors.
C) the primary means of documenting that an adequate audit was conducted in accordance with
GAAS.
D) used primarily as a basis for the partners to review and reward the work of the managers,
seniors, and staff.
3) The new Canadian Auditing Standards require the auditor to complete the audit working
papers within how many days of the audit report date?
A) 45
B) 60
C) 90
D) 183
4) The audit working papers serve as a record of the evidence accumulated and the results of the
audit tests. This helps to demonstrate that the audit was
A) properly kept confidential; information was held secure.
B) completed using Canadian generally accepted accounting principles.
C) organized effectively with no mistakes in calculations.
D) conducted in accordance with Canadian generally accepted auditing standards.
5) The working papers contain data useful for evaluating the adequacy of the audit scope and the
fairness of the financial statements. This data helps the auditor to conclude whether
A) control risks were accurately identified and tested.
B) inherent risks were set as low as possible.
C) an unqualified audit report can be issued.
D) the current files properly contain copies of client contracts and agreements.
6) The audit of Simcoe Transports Inc. was completed three months ago so the PA firm
proceeded to the file archive stage in accordance with Canadian Audit Standards. If the audit
firm receives additional information related to the audit but the information does not affect the
audit conclusions, the information should be
A) disregarded as it the file archive was already done.
B) added to the audit file in the section to which it pertains.
C) separately identified and added at the front of the audit file.
D) added to the audit file and request that the reviewing partner reviews the new information.
7) With the use of electronic working papers, each team member should have a unique access
identification code and a password to access the working papers. Once a working paper is
completed, what type of access should the staff auditor who prepared the working paper file
have?
A) edit capability
B) update for current information
C) read only
D) change based upon review
8) In addition to including on each working paper the name of the client, the period covered, the
date of preparation and an index code, each working paper should clearly include
A) the name of the preparer and a description of the contents.
B) symbols used and a reconciliation to the general ledger balance.
C) audit working paper steps that were completed.
D) the nature of the transaction-based risk that is being audited.
9) To facilitate the working paper preparation process, defaults can be established to
automatically insert client name, period covered, and preparer. This can best be done using
A) the junior staff assigned to the engagement.
B) an old-fashioned rubber stamp on each printed page.
C) cut and paste from word processing or spreadsheet software.
D) automated working paper software.
10) Renaldo compared shipping reports to sales documents, checking to see that the sales invoice
date matched the shipping date, and that quantities invoiced matched quantities shipped. On his
working paper, he said that he vouched invoices. What else should his working paper include
with respect to the audit procedure conducted?
A) details of tests conducted, with results
B) results of analytical review procedures on the aging of accounts receivable
C) employee number and wage rate of the employees he spoke to
D) a statement that the information will be held confidential
11) Each working paper should include enough information to fulfill the objectives for which it
was designed. For example, if a working paper is designed to list the detail and show the
verification of support of a balance sheet account such as prepaid insurance, it is essential that
the detail on the working paper
A) reconcile the change in costs from last year to this year.
B) use analytical review to consider the reasonableness of the account.
C) reconcile with the associated general ledger account.
D) use observation to identify controls in place over the transactions.
12) The working papers prepared during the engagement are the property of the
A) auditor, but do not include the working papers prepared by the client for the auditor.
B) auditor, even including those prepared by the client for the auditor.
C) client, who will provide copies to the auditor.
D) auditor and client jointly.
13) Ordinarily, the working papers can be provided to someone else only with the express
permission of the client. This is the case even if the papers are
A) subpoenaed by a court.
B) used as a part of a provincial institute practice inspection.
C) requested as evidence in a provincial institute disciplinary hearing.
D) transferred as a result of a public accountant selling his/her practice to another public
accounting firm.
14) Identify the characteristics that working papers should have. For each characteristic, briefly
explain why it is important.
15) At the first day of work at a PA firm, staff are given their own laptop computer for use in
working with clients and other data.
Required:
A) What is the typical structure of client working paper files?
B) How is client data protected from unauthorized change?