Reference no: EM137442

AP/ADMS 4551 Auditing: and Other Assurance Services

Question 1

As part of the audit of corporate governance, Global Insurance Inc. (GII) has agreed that it will conduct an audit of the audit committee oversight process. The audit will be conducted by a consulting organization that specializes in internal audit outsourcing and audit consulting. The scope of the audit is to compare GII's audit committee practices to published best practices for audit committees. GII has requested an analysis of its audit committee practices, as well as suggestions for improvement where warranted.

To facilitate the audit, you, CIA (Certified Internal Auditor), an employee of the consulting organization, have accumulated a list of audit committee best practices from two internal control frameworks and from publications provided by the CPA (Chartered Professional Accountants) Canada and from the (IIA) Institute of Internal Auditors.

GII will provide a copy of the corporate audit committee charter, as well as the minutes of the board meetings of both the audit committee and the board for the last two years. GII has agreed that one hour interviews will be held with individual audit committee members, executive management, the director of internal audit and the audit partner responsible for the financial statement audit of GII. These interviews have been scheduled over a two week period.

Required:

Describe the five components of the definition of auditing. For each component, identify which aspects of the audit committee oversight audit fit the definition.

Use a table, as shown below, to organize your response:

 

Description of definition of auditing components (1 mark each)	Aspect of the narrative above that fits the definition (1 mark each)

Question 2  

Yves Laurent has just been put in charge of the BeautyNatural Inc. audit.  BeautyNatural is a small, but growing retail chain of natural cosmetics stores. BeautyNatural needs to borrow from the bank to finance its growth, and the bank has asked to see BeautyNatural's audited financial statements before it will increase the loan. This is the first year BeautyNatural has been audited.

Because this is his first audit as a senior, Yves was determined to bring the job in on budget.  He felt that this task would be made easier by the fact he would receive excellent co-operation from the client as his sister-in-law was the accounting manager at Beauty Natural. Yves has been assigned two inexperienced staff assistants for the audit. To save time, Yves gave the assistants the audit plan for Health Drug Stores (Health), another audit he worked on. He told his staff that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business because "my time is billed out at such a high rate, we'll go right over budget." He did call them once a day from another audit on which he was working. The assistants told Yves that the audit programs did not always match up with what they found at Beauty Natural. Yves responded, "Just delete whatever is not relevant in the audit program, but don't add anything-it will only make us go over the budget."

On the last day the staff assistants were scheduled to be at BeautyNatural's offices, Yves came out to review their work. One assistant told Yves she was concerned that they had not attended the inventory counts at any of Beauty Natural's out-of-town locations. The Health audit program stated that inventory should be observed for in-town stores only, because Health had only one small store out of town. For BeautyNatural three of its five stores are in other cities, including its largest store. In addition, internal control at Health was assessed by the auditors and found to be very effective. For the BeautyNatural audit, the staff assistants asked the warehouse manager about the controls over inventory and he told them "BeautyNatural is as strong a company as Health Drugs, in every way." The assistants assumed that internal controls were also effective at BeautyNatural based on this evidence.

When he heard about the additional stores, Yves told the assistants to get inventory listing sheets from the client for its inventory counts at the out-of-town stores. He told them, "Before you leave here today, make sure that the inventory balance in  BeautyNatural's general ledger agrees with the total for all their inventory sheets." The next day the staff brought their working papers in to Yves in his office at the audit firm. Yves reviewed the working papers, and recorded his conclusion that "the financial statements are fairly stated."  He submitted the completed working papers to his manager for review.

Required:

Describe which generally accepted auditing standards (GAAS) have been violated.  Using case facts, support your conclusion.

Arrange your answer in the table below:

Description of GAAS that has been violated  (1/2 mark for each valid response)	Using case facts, support your conclusion (1/2 mark for each valid response)

Question 3 

For each of the following procedures performed in the audit of inventory state the relevant specific balance-related audit objective(s):

Audit Procedure	Specific Balance Related Audit Objective(s)
Trace selected quantities from the inventory listing to the physical inventory on hand in the warehouse at year end.
Ask the inventory manager about the condition of inventory that has not sold recently.
Review contracts with suppliers to determine whether goods are held on consignment.
Recount client's counts to make sure the recorded counts are accurate on the tags.
Examine inventory descriptions on the tags and compare with the actual inventory for raw materials, work in progress and finished goods
Record in the working papers for subsequent follow-up the last shipping document used at year end.
Select a sample of products in the warehouse at year end, count the quantity on hand and agree the quantity and product description to the client's count records.
During the inventory count be alert for inventory that is damaged, or dust-covered.