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Indicate whether you agree or disagree with the following statements and explain your reasoning:

a) Rejean feels that an internal auditor that reports to the chief financial officer of the company can be as independent as an auditor that reports to the audit committee.

b) Angela discovered a very material overstatement in the financial statements. She felt the misstatement would have an impact on the decisions of users of the financial statements, and indicated to her audit senior that she would be including it as an “emphasis of matter” paragraph in the audit report.

c) An auditor is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

d) An assurance engagement involves evaluation or measurement of subject matter against criteria.

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Beverley Smith
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25 Jan 2018

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2–31. Simulation
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an
audit of the fi nancial statements for the current year. Howard Smythe, the partner in charge of
the audit, drafted the following unmodifi ed report:

To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and
its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income,
retained earnings, and cash fl ows for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
fi nancial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated fi nancial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these fi nancial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free of material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated fi nancial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated
fi nancial statements, whether due to fraud or illegal acts. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of
the consolidated fi nancial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of signifi cant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material
respects, the fi nancial position of Casa Royale, Inc., and its subsidiaries as of December 31,
20X1, and the results of their operations and their cash fl ows for the years then ended in accordance
with auditing standards generally accepted in the United States of America.
Howard Smythe , Partner
Phoenix, Arizona
February 12, 20X2
Reviewer’s Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have “audited,” rather than “examined,”
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning management’s
responsibility for internal control.
d. The report should state that the auditors’ responsibility is to express
“reasonable assurance,” not an opinion (fi rst paragraph under “auditor’s”
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term “illegal acts” is incorrect (second paragraph
under auditor’s responsibility).
f. The report should not refer to the auditors “evaluating the appropriateness
of accounting policies,” since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than “adequate”
(third paragraph under auditor’s responsibility).

Reviewer’s Comments
Comment Is
Correct (yes or no)
h. The opinion should not include “in all material respects” since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on “accounting principles generally accepted in the
United States of America,” not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA fi rm, not that of
the partner.

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.
2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.
3-There are no restrictions in relying upon the work of internal auditors.
4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.
2-amount of misstatement on the financial statements that would influence a decision maker.
3-underlying evidence upon which the audit opinion is based.
4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.
2-perform preliminary analytical review procedures.
3-do all of the listed actions.
4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.
2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.
3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.
4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.
2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.
3-internal controls are not adequate to prevent or detect material errors.
4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.
2-a less expensive audit.
3-reduced substantive testing.
4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.
2-approval of items for payment.
3-authorized request for goods and services.
4-cash receipts.

The following statements relate to general principles or terms used in the audit of financial statements. Identify at least two errors from each of the following statements (a)-(e) and explain why these are errors and suggest corrections.

(a) Audit objective (4 marks)

The objective of an audit of financial statements is for auditors to make sure the financial statements give a true and correct view in all respects in accordance with an identified financial reporting framework and to ensure that they detect all fraud that may have taken place.

(b) HKSA (4 marks)

The Hong Kong Standards on Auditing specify exactly the necessary audit procedures that auditors should perform. For all private and listed companies, the Financial Reporting Council is responsible for investigating all deviations from the Hong Kong Standards on Auditing.

(c) Terms of engagement (4 marks)

Auditors and their clients should agree on the terms of the engagement, which can be recorded either in the management representation letter or other suitable form of verbal contract. This letter is required to be reissued before the start of every audit, regardless of whether there are any changes to the terms.

(d) Audit opinion (4 marks)

The auditor was unable to attend and observe the inventory count of the company’s subsidiary in Bangkok due to the recent riots over the current government. The inventory in Bangkok accounts for 80% of the group’s total inventory. lnventory is a significant amount within current assets but is not considered significant in respect of total assets. The auditor decided the most appropriate audit opinion is an adverse opinion.

(e) Audit documentation (4 marks)

Since the client paid for the audit, the audit working papers are the property of the audit client and they can be used as substitutes for the company's accounting records in case the company’s accounting records are destroyed in a fire.

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