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University of Windsor

Odette School of Business


70-360-91
Prof. Jim Stevens
Mid Term Examination
July 5, 2013

Instructions:

1.
2.
3.

Friday,
have marks
4.

The use of point form in answering questions is encouraged


completed sentences and paragraphs are not required.
Please ensure that your name appears in each answer file
submitted.
Completed answers are to be sent to the Instructor
(stevenz@uwindsor.ca) attached to an email by 10:00 pm,
July 5, 2013. Answers emailed after this time may
deducted for late submission.
Exam totals 75 marks in the five questions.

Question 1

20 marks

We have discussed the requirements of professional ethics as set out for public accountants by
organizations such as the International Ethics Standards Board for Accountants and also the other
pronouncements (standards) to ensure quality in the completion of assurance engagements.
Required:
5marks
5marks

listtheindividualbasicprinciplesincludedinthecodeofethics.
foreachoftheprinciples,listedinpart(a),brieflyexplainwhatthe
principlerequiresoftheprofessionalaccountantorwhatis
involvedin
meetingtherequirementsofthatspecificprinciple.
5marks
(c)
listthecommonthreatstoindependence.
2marks
(d)
ifanauditorfindsasignificantproblemorconcerninmeetingthe
requirementsforanyoneormoreoftheethicalprinciplesrequired
indeterminingwhethertoacceptorcontinuean
engagement,whatoptions
doestheauditorhaveavailabletodealwithsuch
problems.
3marks
(e)
listthepronouncementsthatcontrolqualityofauditsandtheorderthat
theyareconsideredandapplied.
Question 2

(a)
(b)

5 marks

Auditors are required to complete certain preliminary (preplanning) engagement activities before
a current audit is started.
List these required activities.
Question 3

12 marks

Thereareanumberofdifferentopinionsthattheauditormayreportintheauditorsreportbased
upontheresultsoftheaudit.Thefirstoftheseistheunmodifiedorunqualifiedopinion.
We have discussed a number of different non standard (modified) auditors reports that are
discussed in CAS 705 among other places.
Required:
4marks
2marks

(a)
(b)

listthetypesofnonstandardauditorsreportsthatwehavediscussed
CAS705andtheprofessionalliteratureoutlinestwodistincttypesof
problemsthatresultinnonstandardauditorsreportswhatare

they?
6marks

(c)

materialityoftheproblemwilldeterminethetypeofthereportthatcan
reportedlistthreedifferentlevelsofmaterialityinreportingthat
discussedandforeachindicatethetypeofreportthatwillresult

wehave

Question 4

18 marks

Inplanninganaudit,auditorsinCanadamaycomputeintheplanningstagethreedifferenttypes
ofmateriality.
3marks

(a)

definematerialitywithinthecontextofacurrentCanadianauditofaset
offinancialstatements

3marks

(b)

whatarethethreedifferenttypesofmateriality(usingthecurrent
Canadianterminologywehavereviewed)?

4marks

(c)

astheauditprogresses,theauditorreviewsauditdifferencesdiscovered
andconsidersthosedifferenceswithreferencetoplanning
Whataretheoptionsavailabletotheauditorifitappears
differencesmayexceedplanningmateriality?

(d)

usingtheprioryearsfinancialstatementsforTestcothatfollowonpages
4and5,andtheguidelinessetoutbelow,computeplanning
for2010usingtheassumptionthatthecurrentauditnow
willhavesimilarfinancialstatementnumbersasperthe
completedfiscalyear.

materiality.
thataudit
8marks
materiality
beingplanned
mostrecently

Guidelines for Materiality Calculations

- 3 to 7% of income before tax is generally recognized as having the


greatest significance to financial statement users.
- Also consider:
Total Assets - 1 to 3%;

Shareholders Equity - 3 to 5%

Revenue (net sales) - 1 to 3%

TESTCOINC.
BalanceSheet
(Unaudited)
December31,2009,withcomparativefiguresfor2008
2009

2008

Assets
Currentassets:
Cash
Accountsreceivable
Inventory,atcost
Prepaidexpensesanddeposits

100
520,000
184,000
6,200
710,300

Property,plantandequipment:
Property,plantandequipment
Lessaccumulatedamortization

9,100
201,000
165,000
4,000
379,100

197,000
39,000
158,000

146,000
6,000
140,000

868,300

$ 519,100

289,200
78,800
20,000
388,000

$ 407,000
6,000

413,000

100,000

6,000
374,300
380,300

3,000
103,100
106,100

868,300

$ 519,100

LiabilitiesandShareholders'Equity
Currentliabilities:
Accountspayable
Corporateincometaxespayable
Dividendspayable

Longtermdebt:
Longtermnotepayable
Shareholders'equity:
Sharecapital
Retainedearnings

TESTCOINC.
IncomeStatement
(Unaudited)
YearendedDecember31,2009,withcomparativefiguresfor2008
2009

2008

2,015,000

$1,250,000

Costofgoodssold
Grossprofit

1,290,000
725,000

885,000
365,000

Otherrevenue:
Interestincome

10,000

5,000

86,000
246,000
33,000
365,000

108,000
205,000
30,000
343,000

370,000

27,000

78,800

6,000

291,200

$ 21,000

Netsales

Expenses:
Sellingexpenses
Generalandadministrative
Amortizationexpense

Incomebeforeincometaxes
Incometaxes:
Current
Netincome

Question 5

20 marks

Select the one most appropriate answer for each multiple choice question. Only correct answers
are graded no marks are deducted for wrong answers. If more than one answer is recorded, that
question will not be graded. All parts are worth the same 2 marks.
The preferred submission of answers is a vertical listing of question numbers 1 to 10 and the
letter of the selected answer immediately to the right of each question number.
1. Which of the following statements is not true?
A)
B)
C)
D)
E)

a required lower level of statement materiality requires more audit evidence.


a required lower level of audit risk requires more audit evidence.
audit risk is an auditor focus.
materiality is a statement user focus.
none of the above all are true.

2. Which of the following is an auditor of a non-public company allowed to do for that client?
A)
B)
C)
D)
E)
3.

own shares in the company.


provide legal services to the company.
provide corporate finance services.
provide accounting and bookkeeping services.
none of the above are allowed.

Which of the following is not considered a financial statement assertion of management at


the account level?
A)
B)
C)
D)
E)

4.

existence.
completeness.
compliance.
ownership.
valuation.

In accepting a new audit engagement, a prospective auditor is not required to?


A)
B)
C)
D)
E)

determine that the applicable financial reporting framework is acceptable.


obtain agreement with client management that they are responsible for internal
controls adequate to ensure the preparation of financial statements free of material
error.
obtain a written record of the agreed upon terms of the engagement.
finalize the audit fee.
consider the impact of client imposed limitations on the scope of the auditors work.

5.

In the planning stage, analytical procedures are used to?


A)
B)
C)
D)

6.

The concept of materiality refers to?


A)
B)
C)
D)

7.

C)
D)

a letter soliciting a potential client.


a letter from a successor auditor to a predecessor auditor asking to review the
working papers for the previous year.
the audit contract outlining the responsibilities of each party.
a letter providing a fee proposal to complete an audit.

An auditor should assess a client's business risks?


A)
B)
C)
D)

9.

any misstatement in the financial statements.


the overall degree of risk in an organization.
an amount of misstatement that could lead someone to make a poor decision
and suffer a loss.
an amount of risk in an organization sufficient to offset the expected returns of any
investment in the company.

What is the best description of the engagement letter?


A)
B)

8.

assess overall reasonableness of the financial statements.


identify potential problem areas.
determine the mathematical correctness of the financial statements.
provide direct evidence about the balances in accounts.

early in the engagement, based on discussion with management.


at the end of the engagement after all evidence has been assembled.
as part of the year end evidence gathering.
only if the client requests the auditor to do so in the engagement letter.

Because of the risk of material misstatement, an audit of financial statements in accordance


with generally accepted auditing standards should be planned and performed with an
attitude of?
A)
B)
C)
D)
E)

objective judgment.
independent integrity.
professional skepticism.
impartial conservatism.
prayerful judgement.

10.

The primary role and responsibility of independent external auditors is to?


A)
B)
C)
D)

prepare a company's annual financial statements and notes.


perform an audit and provide an opinion on the financial statements of a
company.
provide business consulting advice to audit clients.
obtain an understanding of a client's internal control system and prepare a report for
management about control weaknesses.

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