AFM202 Chapter Notes - Chapter 4: Workflow, Financial Statement

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cyanbat359

8 Nov 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM202

Professor

Linda Robinson

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Document Summary

Materiality the magnitude of an omission or misstatement of accounting information that makes it probable that the judgement of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. Could still be errors in financial statements. Small firms taking institute prepared working papers prepared by cpem (canadian. # of users: less users = higher % tolerance, more users = lower % tolerance. Focus confirmations on older accounts; aging list. Look for numbers that are higher than materiality. Audit planning: risk assessment procedures, determine auditor strategy, determine audit approach. When preparing the audit plan, the auditor should be guided by the results of the risk assessment procedures performed to gain an understanding of the entity. Identify related parties: a company that could have an influence on your client: parent company, subsidiary, major shareholder. Conduct preliminary analytical procedures: looking at variance analysis. Document audit strategy and plan and prepare audit programs:

Related Questions

SECTION II: MATCHING (10 possible points)
Please match the numbered terms with their definitions by placingthe letter that identifies the best definition in the blank spacenext to the term. The value of each correct answer is 1point.

____ 1. Accrual Basis

____ 2. Cost Principle

____ 3. Credit

____ 4. Debit

____ 5. Generally Accepted Accounting Principles(GAAP)

____ 6. General Ledger

____ 7. Journal

____ 8. Liquidity

____ 9. Matching Principle

____ 10. Materiality

A. The various methods, rules, practices, and other proceduresthat have evolved over time in response to the need
to regulate the preparation offinancial statements.
B. The magnitude of an omission or misstatement in accountinginformation that will affect the judgment of
someone relying on theinformation.

C. A book, file, hard drive, or other devices containing all ofa companyâs accounts.

D. An entry on the left side of an account.

E. An entry on the right side of an account.

F. A chronological record of transactions, also known as thebook of original entry.

G. The association of revenue ofa period with all of the costs necessary to generate thatrevenue.

H. Assets are recorded at the cost to acquire them.

I. The ability of a company to pay the debts as they comedue.

J. A system of accounting in which revenues are recognized whenearned and expenses are recognized when
incurred.

SECTION III. SHORT ANSWER

1. Explain the difference between internal andexternal users of a corporationâs financial information. Give twoexamples of
internal users and two ofexternal users.

2. How do financial accounting andmanagement accounting differ?

3. What does relevance mean with regard to theuse of accounting information?

4. Briefly explain the purpose of a TrialBalance.

5. Explain briefly the Revenue RecognitionPrinciple. When should a publisher of magazines recognizerevenue?

Panzero Bread is a major retailer of specialty sandwich itemsand baked goods. The following information represents the com-panyÃ¢â¬â¢s financial position as of 12/31/14 and 12/31/13. 12/31/14(unaudited) 12/31/13 (audited) Total assets $698,752,000$542,609,000 Accounts receivable $25,152,000 $19,041,000 Totalsales $1,066,691,000 $828,971,000 Cost of goods sold $842,255,000$628,534,000 Net income $57,456,000 $58,849,000 Earnings per share$1.81 $1.88 The auditor of Panzero Bread identifies the company asa client with high audit risk and has set the posting thresholdsfor individ- ual accounts at 10% of overall financial statementmateriality levels. The auditors have detected an overstatement ofaccounts receivable of $345,000. The misstatement is not a surpriseto the auditors, as they have detected misstatements in thisaccount in the past. On a per share basis, the misstatementrepresents $0.01 of earnings per share. The auditor believes thatthe misstatement should be corrected. Management argues stronglythat they prefer not to make the correction because they do notbelieve it is mate- rial; that is, the misstatement represents justover 1% of the account balance. Although left unsaid, the auditorknows that management is under considerable pressure from WallStreet to meet analyst expectations for earnings per share.Reducing earnings per share by even $0.01 would cause the trend inearnings to become even more negative than the unaudited financialnumbers already reveal, and it would cause the company to just missanalyst forecasts for earnings per share. a. Use the three commonbenchmarks for making materiality judgments (net income, totalassets, and net sales) to establish materiality for the financialstatements overall. b. What difficulties does the auditor face whenthe alternative benchmarks yield differing conclusions aboutmateriality? What qualitative factors should the auditor considerin making its materiality judgment in that case? c. Articulate areason for choosing one particular benchmark among the threecalculated in part (a), and use that benchmark to calculate theposting (clearly trivial) threshold for the accounts receivableaccount. d. What effect will the qualitative factors in this casehave on the auditorÃ¢â¬â¢s posting (clearly trivial) threshold for theaccounts receivable account?

Question 2

You, a recent auditor with a local auditing firm, are responsible for the audit of a new client, PresentShop, a retailer of electronic home and office equipment in Western Canada.

PresentShop has 14 locations across Western Canada. It specializes in providing customers with the latest technology in home entertainment electronics such as televisions and DVD players as well as top of the line office technology such as computers.

The business was started 15 years ago in Alberta by two brothers who are still the only owners of the company. The brothers paid themselves a management bonus in 2017 of $60,000. The business has grown as a result of excellent advertising, good locations, and reasonable prices based on the ability of the company to buy in volume. Each store has a high degree of security such as electronic bars and video surveillance.

The accounting for the stores is all electronically performed. The sales tills are downloaded every day to the main office in Calgary which performs the accounting for all of the stores. The main office also has the warehouse from which all inventory is shipped to the stores.

Business has been relatively stable but the company does have pressure from American competitors moving into Canada as well as another Western Canadian competitor, B&C Sound. As well, the business tends to fluctuate with the economic cycles so recent government cutbacks in B.C. have resulted in lower sales. As a result of a decrease in profits, the company requires a significant loan from a bank and the bank has requested audited financial statements. It is the first year that the financial statements have been audited. The bank intends to use the inventory as collateral for the loan.

PresentShop has provided you with the following financial information for the years ending December 31, 2017:

	December 31, 2017 (â000s)
Total assets	$48,900
Total revenues	$124,900
Total net income before tax	$23,500
Total net income after tax	$15,400

Required:

Assess inherent risk at the overall financial statement level. Conclude on inherent risk. Is it low, medium or high?

Assess control risk at the overall financial statement level. Conclude on control risk. Is it low, medium or high?

Conclude on detection risk and the level of substantive testing required.

Assess overall (planning) materiality

Question 3

Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help auditors to reduce audit risk to an acceptably low level?

Question 4

What is the relationship between materiality and audit risk?

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AFM202 Chapter Notes - Chapter 4: Workflow, Financial Statement

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