Question 1

Builders Direct was incorporated in December of 2013 and started operating in January of 2014. The company operata retail web site that sells home building products to contractors in Canada. The business is owned and managed by two brothers, Jamand Jackie Collingham. Despite a slowdown in the very competitive construction sector, the brothers have developed several unique interactive on line shopping featurthat have led to significant revenue growth. As a result of this revenue growth, the owners have had to hire more sales, customer service, IT and accounting staff. This has increased the payroll costs to the extent the company is now experiencing cash flow difficulties. The local bank has provided interim financing, but a new cash injection is required. Jamand Jackie are considering making a public share offering to raise further capital. The brothers have approached a CPA firm to determine what may be involved with an initial public offering. They have been advised that one requirement is annual audited financial statements. They have discussed this requirement with their Controller, who believthey may have some challengobtaining an unqualified audit opinion. She has expressed this concern due to the issushe has had with the new accounting hirand the turnover within the accounting area. She has had to let a couple of the staff go as they made several material accounting errors. She has since implemented stronger controls over the accounting processes, but she is still uncertain whether material errors remain. Required: Discuss the factors that will increase the inherent risk of Builders Direct.

Accepted Answer

The answer of Builders Direct was incorporated in December of...

Question 2

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Roxanne Deboer, the in-charge auditor, was explaining to her junior auditors why she was setting inherent risk high. "It is appropriate to set higher inherent risk for this company as our client is in an industry that is very competitive."
b) In selecting an appropriate materiality base, an auditor can choose an item from the balance sheet or income statement.
c) Tyler Rappaport has mentioned to his staff auditors that audit risk is based on factors that relate to the entity, while materiality is based on the user needs. As a result, materiality and audit risk are two concepts that need to be considered separately when considering material misstatements.
d) Paloma Schenker has determined control risk at a biochem company to be high. She plans to use a combined audit strategy.

Accepted Answer

The answer of Indicate whether you agree or disagree with...

Question 3

Gaining an understanding of a client includauditors learning how their clients measure their performance. How is this information used by auditors in audit planning and what are examplof non-financial performance measurcommonly used by auditors?

Accepted Answer

The answer of Gaining an understanding of a client includauditors...

Question 4

What is the relationship between materiality and audit risk?

Accepted Answer

The answer of What is the relationship between materiality and...

Question 5

Which of the following statements relating to debt covenants is incorrect?

Accepted Answer

If a company breaches a debt covenant, it may need to renegotiate the terms or find a way to repay the loan. Breaching a covenant can lead to penalties and damage the company's relationship with lenders.

Question 6

Analytical procedurare used by auditors to evaluate their clients' financial information by studying plausible relationships among both financial and non-financial data. Explain how analytical procedurare used at the different stagof an audit. CASE

Accepted Answer

The answer of Analytical procedurare used by auditors to evaluate...

Question 7

Analytical procedurare conducted at the planning stage of the audit to:

Accepted Answer

Analytical procedures are used during the planning stage of an audit to identify and assess the risk of material misstatement in financial statements, and to enhance the auditor's understanding of the client's business and industry. They can also help identify areas where further audit procedures may be required. Additionally, analytical procedures can be used during the audit to detect fraud, but this is not their primary purpose during the planning stage. Therefore, option D is the correct answer as it includes both (a) aiding in the identification of risk and (c) enhancing the understanding of a client.

Question 8

Audit risk is the risk that an auditor expressan inappropriate audit opinion when the financial statements are materially stated. Why is the concept of audit risk so important to auditors and what can they do to reduce it to an acceptably low level?

Accepted Answer

The answer of Audit risk is the risk that an...

Question 9

Analytical procedurare used at which of the following stagof an audit?

Accepted Answer

Analytical procedures are used at all stages of an audit: planning, execution, and final review, to help auditors understand the business, identify risks, and evaluate financial information.

Question 10

Explain the audit approach used by an auditor when they assess control risk as high.

Accepted Answer

The answer of Explain the audit approach used by an...

Question 11

Allentown Credit Union (ACU) is located in a rural community in Canada. Membership is open to people in the community and the surrounding area. The local economy, which is predominantly agricultural, has been harmed by droughts in recent years and by declinin commodity prices, leading to a decline in ACU's profitability. ACU has always had an external audit and has always prepared its financial statements in accordance with International Financial Reporting Standards. Ellino & Co. has audited ACU for the last several years. You, CPA, a senior with Ellino & Co., have been appointed to the audit of ACU for the year ended December 31, 2016. It is now early January 2017, and you are at the client's premisreviewing the information gathered to date. ACU was founded in 1942, and it has always maintained a philosophy of serving the community. This has resulted in liberal lending practicand investment in the local community whenever possible. This stance has distinguished it from other financial institutions, which are primarily branchof national banks, and has given ACU a 75% share of the market. ACU has been headed by the general manager, Ted Richards, for the past ten years. Ted reports directly to the Board of Directors, which is comprised of local people, some of whom have no formal financial training. Ted has always been accessible to members of the credit union and, on occasion, he has intervened in favour of the customer over the staff. He maintains that this flexibility is crucial to generating revenue, which is an important objective of the Board. The loan manager, Sheila Meigs, joined ACU in the past year. She is responsible for the entire lending function, which includauthorization of loans, appraisal of collateral, and assessment of the collectability of outstanding loans. The loan portfolio is the largest asset on the balance sheet, representing 75% of total assets. The accountant, Vivian Larson, and the head teller, Joanne Blake, both have 15 years of experience at ACU. Both are married to farmers and work to supplement their income. Both familiare members of ACU, and all their personal and business transactions are conducted through the credit union. As you read through your notes, Ted Richards interrupts you to tell you about some of the events that have occurred at ACU during the year. ACU foreclosed on a large loan and sold the land held as collateral. One effect of this sale was to depress the land pricin the surrounding area. ACU still maintains a high inventory of land received from past foreclosurbut has decided to hold onto this land for fear of depressing land pricfurther. As a result of the depressed state of the local economy, provisions have recently been made to allow some customers to repay their loans with grains (i.e., oats and barley) instead of cash. Although such payments are not a common practice, Ted has approved these transactions on an exception basis. Even though the economy is depressed, Ted believthis will turn around and loans will be collected over the long term. Therefore, he has instructed to Sheila Meigs, Loan Manager, not to write off any significant loans as loan balances. 
Required: 
(a) Define inherent risk and perform an inherent risk assessment for ACU.
 (b) Perform a control risk assessment 
(c) Conclude on the overall risk of material misstatement 
(d) How will your audit risk conclusion impact the audit strategy?

Accepted Answer

The answer of Allentown Credit Union (ACU) is located in...

Question 12

Discuss the purpose and some common examplof profitability ratios.

Accepted Answer

The answer of Discuss the purpose and some common examplof...

Question 13

Common measurof a company's profitability include:

Accepted Answer

Both price-earnings ratio and earnings per share are commonly used measures of a company's profitability. The price-earnings ratio compares a company's current stock price to its earnings per share and is often used by investors to evaluate a company's potential for growth. Earnings per share, on the other hand, is calculated by dividing a company's net income by the number of outstanding shares of stock and indicates how much profit is being generated per share. Both measures provide valuable insight into a company's profitability, making choice C the best answer. The quick ratio, however, is a measure of a company's liquidity and does not reflect its profitability.

Question 14

John Primo, the senior auditor at Delahanty, Forbes, CA's was planning for the audit of Canadian Light Source (CLS) and decided to use benchmarking as an analytical procedure. His manager agreed with John's approach and suggested information sourcthat would ensure the reliability of the data for his benchmarking exercise. As John walked out of the office he ran into Gina Stevenson, a newly hired auditor. He congratulated her on her decision to use a substantive approach to her accounts receivable section of the audit program. Gina was also going to be reviewing certain internal controls in the CLS audit program. She asked him to whom she should report weaknessin the client's internal controls. Required:
a) Which information sources are generally considered to be reliable when conducting benchmarking exercises?
b) What circumstances would have made Gina use a substantive approach?
c) To whom will Gina report weaknesses in a client's system of internal controls?

Accepted Answer

The answer of John Primo, the senior auditor at Delahanty,...

Question 15

Explain audit risk and the three components of the audit risk model.

Accepted Answer

The answer of Explain audit risk and the three components...

Question 16

Which of the following is not an example of a profitability ratio?

Accepted Answer

Current ratio is a liquidity ratio, not a profitability ratio. Profitability ratios are used to measure a company's ability to generate earnings and profits relative to its expenses and other costs. B, C, and D are all examples of profitability ratios.

Question 17

Describe the profitability and liquidity approachto measuring a client's performance.

Accepted Answer

The answer of Describe the profitability and liquidity approachto measuring...

Question 18

Liquidity refers to:

Accepted Answer

Liquidity refers to the ability of a company to pay its debts when they fall due. It is a measure of a company's ability to convert its assets into cash quickly so that it can meet its financial obligations. A company that is highly liquid has a lower risk of experiencing financial difficulties because it can easily pay its bills without having to rely on external sources of funding.

Question 19

Which of the following is an example of a liquidity ratio?

Accepted Answer

Current assets divided by current liabilities is the formula for the current ratio, which is a type of liquidity ratio. Liquidity ratios measure a company's ability to meet short-term obligations and the current ratio specifically measures whether a company has enough current assets to cover its current liabilities. A higher current ratio indicates better liquidity. Choices A, B, and C are not examples of liquidity ratios.

Question 20

In conducting analytical procedures, which of the following information sourcare not generally considered to be reliable?

Accepted Answer

Information generated by an accounting system with ineffective internal controls is not generally considered reliable as it may contain errors, inconsistencies or inaccuracies. Audited information and information generated using consistent accounting methods are generally considered reliable, while information generated by an accounting system with effective internal controls is considered most reliable.

Quiz 4: Audit Planning II