Q4
Part A
(a) How does the materiality of a condition that might lead to a departure affect the auditor’s choice of audit opinions? Discuss in detail naming the various types of audit opinions that may be issued given the different amounts of misstatements detected. (10 marks)
(b) For each of the following independent situations, indicate the type of audit report you would issue and provide your reasons. You may assume that each item is material. (10 marks)
(i) On 2 January 2017, the Hot Wheels Auto Parts Limited received a notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of this notice, Hot Wheels Auto Parts revalued its 31 December 2016 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; the effect of the revaluation was material to current assets but not to total assets. The increase in valuation is adequately disclosed in the notes to the financial statements.
(ii) Your client holds a significant investment in Iraq. Due to recent political instability sparked off by a series of terrorist acts by the militants, Iraq’s communication with the outside world has been completely cut-off. You are thus unable to obtain sufficient and appropriate evidence regarding your client’s investment in Iraq.
Part B
During an examination of financial statements, an auditor needs to verify management’s assertions that are part of the financial statements. In doing so, the auditor must choose the quality and quantity of evidence, and the timing of the tests to be performed.
(a) Describe five factors that influence the quality or appropriateness of audit evidence. (5 marks)
(b) Why is it necessary to obtain corroborating evidence for inquiry and for observation? (5 marks)
(c) Describe the highest quality form(s) of evidence an auditor would normally obtain to verify each of the following assertions. Be sure to state the type of audit evidence/audit procedure technique being used, e.g. inquiry. (10 marks)
(i) ownership of share certificates held in a safe deposit box
(ii) valuation of gross trade accounts receivable
(iii) completeness of additions of fixed assets
(iv) validity of trade accounts payable
(v) valuation of finished goods inventory
Part C
An auditor is required to obtain sufficient understanding of each element of a company’s internal control system in order to properly plan the audit of the company’s financial statements and to assess control risk for the assertions included in the account balances.
How does the quantity of evidence differ between procedures to obtain an understanding of internal control and tests of internal controls? (4 marks)
(b) Distinguish between a compliance/reliance strategy and a substantive strategy. (6 marks)
(c) For each of the following, give an example of a physical control the client can use to protect the asset or record: (5 marks)
(i) cash received by retail clerks
(ii) accounts receivable records
(iii) raw material inventory
(iv) manufacturing equipment
(v) marketable securities
(d) Explain what is meant by independent checks on performance! (5 marks)
performance review and give two specific examples.
