Reference no: EM132540187

Question 1 - Dale Baker, the owner of a small private landscaping company, asked Sally Tao, a professional accountant, to conduct an audit of the company. The landscaping company has a December 31 year end. Baker told Sally that the audit was to be completed in time to submit audited financial statements to the bank as part of a loan application. Sally immediately accepted the engagement since she had done some bookkeeping work for this landscaping company for the past three years. Sally agreed to provide an auditor's report within one month.

Sally hired two recent accounting graduates to conduct the audit and spent several hours telling them exactly what to do. She told the new hires not to spend time reviewing the internal control but instead to spend time on proving mathematical accuracy of the general and subsidiary ledgers and summarizing the data in the accounting records that supported Baker's financial statements. The new hires followed Sally's instructions, and after two weeks, gave Sally the financial statements excluding footnotes. Sally reviewed the financial statements and prepared an unmodified auditor's report. No audit procedures were conducted to verify the opening balance sheet numbers as the students felt that it was only important to audit the year-end balance sheet numbers for the current audit.

The audit report was dated on January 31 which was the last day of the fieldwork. Dale accepted the audited financial statements on February 1. The audit report was issued on February 2.

On February 15, it was discovered that the provision for taxes was materially misstated. Sally acknowledged that she was more proficient in accounting than tax and acknowledged that an error had occurred. The financial statements were reissued after performing some additional work on the tax provision.

Required - Clearly explain where the Canadian Auditing Standards were violated. (Hint: identify the specific CSQC 1 / CAS 220 requirements and the corresponding breach from the question). To answer this question, you will have to go to the CPA Handbook and review the Elements of the Quality Control Standards. You can also apply the GAAS Standards discussed in the text where applicable.

Question 2 - Greenbloom Garden Centers is a small, privately held corporation that has two stores in ON. The Greenbloom family owns 100% of the company's shares, and family members manage their operations. Sales at the company's stores have been growing rapidly and there appears to be a market for the company's sales concept - providing bulk garden equipment and supplies at low prices. The controller prepares the company's financial statements, which are not audited. The company has no debt but is considering expanding to other cities. Such expansion may consider long term financing and is likely to reduce the family's day to day operations. The family does not intend to sell the shares to the public.

Required -

I. Discuss two factors that make an audit necessary for the company.

II. Discuss two reasons why an audit may not be necessary for Greenbloom.

Question 3 - a. Identify and explain 4 factors that may give rise to information risk from the perspective of the user.

b. Explain how auditors can reduce information risk (or how auditors lend credibility to the audited financial statements).

Question 4 - During the audit of a company, management refuses to allow you to confirm an accounts receivable because he is concerned about complaints from his customers. You are unable to perform alternative procedures on the accounts receivable. The amount is considered material.

Required -

a. Explain, with reason(s), whether the situation described above gives rise to a GAAP departure or a scope limitation.

b. Explain with reason(s) the type of audit opinion that would be provided. Be sure to fully explain the impact on the changes to the standard audit report (unmodified).