MGAC01H3 Chapter : tb10.docx
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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 | $15,400 |
Required:
Assess inherent risk at the overall financial statement level. Conclude on inherent risk. Is it low, medium or high?
Assess control risk at the overall financial statement level. Conclude on control risk. Is it low, medium or high?
Conclude on detection risk and the level of substantive testing required.
Assess overall (planning) materiality
Question 3
Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help auditors to reduce audit risk to an acceptably low level?
Question 4
What is the relationship between materiality and audit risk?
Sendelbach Corporation is a U.S.-based organization with operations throughout the world. One of its subsidiaries is headquartered in Toronto. Although this wholly owned company operates primarily in Canada, it engages in some transactions through a branch in Mexico. Therefore, the subsidiary maintains a ledger denominated in Mexican pesos (Ps) and a general ledger in Canadian dollars (C$). As of December 31, 2017, the subsidiary is preparing financial statements in anticipation of consolidation with the U.S. parent corporation. Both ledgers for the subsidiary are as follows:
Main OperationâCanada | |||||
Debit | Credit | ||||
Accounts payable | C$ | 41,555 | |||
Accumulated depreciation | 42,000 | ||||
Buildings and equipment | C$ | 182,000 | |||
Cash | 41,000 | ||||
Common stock | 65,000 | ||||
Cost of goods sold | 218,000 | ||||
Depreciation expense | 8,400 | ||||
Dividends, 4/1/17 | 34,000 | ||||
Gain on sale of equipment, 6/1/17 | 6,500 | ||||
Inventory | 94,000 | ||||
Notes payableâdue in 2020 | 84,000 | ||||
Receivables | 83,000 | ||||
Retained earnings, 1/1/17 | 150,590 | ||||
Salary expense | 38,000 | ||||
Sales | 327,000 | ||||
Utility expense | 10,500 | ||||
Branch operation | 7,745 | ||||
Totals | C$ | 716,645 | C$ | 716,645 | |
Branch OperationâMexico | |||||
Debit | Credit | ||||
Accounts payable | Ps | 67,500 | |||
Accumulated depreciation | 40,000 | ||||
Building and equipment | Ps | 55,000 | |||
Cash | 66,500 | ||||
Depreciation expense | 3,500 | ||||
Inventory (beginningâincome statement) | 38,000 | ||||
Inventory (endingâincome statement) | 35,500 | ||||
Inventory (endingâbalance sheet) | 35,500 | ||||
Purchases | 72,000 | ||||
Receivables | 36,000 | ||||
Salary expense | 10,500 | ||||
Sales | 139,000 | ||||
Main office | 35,000 | ||||
Totals | Ps | 317,000 | Ps | 317,000 | |
Additional Information
The Canadian subsidiaryâs functional currency is the Canadian dollar, and Sendelbachâs reporting currency is the U.S. dollar. The Canadian and Mexican operations are not viewed as separate accounting entities.
The building and equipment used in the Mexican operation were acquired in 2007 when the currency exchange rate was C$0.21 = Ps 1.
Purchases of inventory were made evenly throughout the fiscal year.
Beginning inventory was acquired evenly throughout 2016; ending inventory was acquired evenly throughout 2017.
The Main Office account on the Mexican records should be considered an equity account. This balance was remeasured into C$7,745 on December 31, 2017.
Currency exchange rates for 1 Ps applicable to the Mexican operation follow:
Weighted average, 2016 | C$ | 0.26 |
January 1, 2017 | 0.28 | |
Weighted average rate for 2017 | 0.30 | |
December 31, 2017 | 0.31 | |
The December 31, 2016, consolidated balance sheet reported a cumulative translation adjustment with a $51,950 credit (positive) balance.
The subsidiaryâs common stock was issued in 2004 when the exchange rate was $0.44 = C$1.
The subsidiaryâs December 31, 2016, retained earnings balance was C$150,590, an amount that has been translated into U.S.$70,363.
The applicable currency exchange rates for 1 C$ for translation purposes are as follows:
January 1, 2017 | US$ | 0.70 |
April 1, 2017 | 0.69 | |
June 1, 2017 | 0.68 | |
Weighted average rate for 2017 | 0.67 | |
December 31, 2017 | 0.65 | |
Remeasure the Mexican operationâs account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.)
Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
Complete this question by entering your answers in the tabs below.
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Req A
Remeasure the Mexican operationâs account balances into Canadian dollars. (Note: Back into the beginning net monetary asset or liability position.) (Input all amounts as positive values.)
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b. Prepare financial statements (income statement, statement of retained earnings, and balance sheet) for the Canadian subsidiary in its functional currency, Canadian dollars.
c. Translate the Canadian dollar functional currency financial statements into U.S. dollars so that Sendelbach can prepare consolidated financial statements.
(Round U.S. Dollar values to 2 decimal places. Amounts to be deducted and losses should be indicated with a minus sign.)
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