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Part I a.
Identify the activity that will be done for reducing control risk approach and substantive approach.
Part I b.
Explain the advantagesof reducing control risk approach Person RS planned to used
have over the substantive approach previously used in the audit of Company MP.
Part I c.
Explain the advantages of substantive approach over the reducing control riskapproach.
Part IIa.
Describe the meaning of 0.17 in audit.
Part II b.
Calculate Planned Detection Risk (PDR) assuming that Person RS had assessed control risk at 100% and all otherrisks as they are stated.
Part IIc.
Describe the effect of the answer in requirement b. on the planned audit proceduresand
Part III.
Explain whether the revised judgements of staff person on the effect of tests controlson planned substantive tests and also explain the nature basis of any disagreement. Explain the implicationsof the results on the auditor’s internal control report if auditor B issued a report on internal control over financial reporting.
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Chapter 13 Solutions
EP AUDITING+ASSURANCE...-MYACCT.LAB
- You are in your second year as an auditor with Dantly and Regis, a regional CPA firm. One of the firm’s long-time clients is Mayberry-Cleaver Industries, a national company involved in the manufacturing, marketing, and sales of hydraulic devices used in specialized manufacturing applications. Early in this year’s audit you discover that Mayberry- Cleaver has changed its method of determining inventory from LIFO to FIFO. Your client’s explanation is that FIFO is consistent with the method used by some other companies in the industry. Upon further investigation, you discover an executive stock option plan whose terms call for a significant increase in the shares available to executives if net income this year exceeds $44 million. Some quick calculations convince you that without the change in inventory methods, the target will not be reached; with the change, it will. Required: Do you perceive an ethical dilemma? What would be the likely impact of following the controller’s suggestions?…arrow_forwardUsaha Maju is a garment company that produces family-run uniforms and various clothing. The company is located outside Tangerang, Tangsel, and currently employs 128 workers. Most manufacturing jobs involve freelancers in the cutting and sewing departments. The work is long, monotonous, so employees often move after a few months. Although the company does not issue audited financial statements, the owners have asked you, as a freelance consultant, to conduct a review of its internal controls. The focus of your current review is the payroll process. Usaha Maju employees use a time clock in an unsupervised area to record their time on the job. The time-keeping staff tries to monitor the process, but is often distracted by other duties. Every Friday, the shop foremen collects the time cards for their subordinates, review and approve them, and deliver them to the payroll staff. The payroll staff uses a standalone PC to record the employee earnings in the employee records and print a…arrow_forwardUsaha Maju is a garment company that produces family-run uniforms and various clothing. The company is located outside Tangerang, Tangsel, and currently employs 128 workers. Most manufacturing jobs involve freelancers in the cutting and sewing departments. The work is long, monotonous, so employees often move after a few months. Although the company does not issue audited financial statements, the owners have asked you, as a freelance consultant, to conduct a review of its internal controls. The focus of your current review is the payroll process. Usaha Maju employees use a time clock in an unsupervised area to record their time on the job. The time-keeping staff tries to monitor the process, but is often distracted by other duties. Every Friday, the shop foremen collects the time cards for their subordinates, review and approve them, and deliver them to the payroll staff. The payroll staff uses a standalone PC to record the employee earnings in the employee records and print a…arrow_forward
- ACCO Ltd is a large producer of organic medicinal products. The audit report for the year ended 30 June 20X8 was signed on 6 August 20X8 and along with the financial report was mailed to shareholders on 11 August 20X8. Consider the following independent events. Assume that each event is material. On 5 July, ACCO Ltd entered into a new contract to supply organic facial and skin treatment products to MYA, a new major department store. The contract was similar in nature to other contracts previously negotiated. ACCO Ltd has invested significant funds in developing a new range of organically sourced skin cancer treatment ointments. On 8 July, ACCO Ltd applied for a patent for the ointment, only to discover that a competitor had lodged a similar application on 20 June. The granting of ACCO Ltd’s application is now in serious doubt. Internal audit has uncovered a major fraud at one of ACCO Ltd’s branches. The fraud was perpetrated by two senior staff, acting in collusion over a number of…arrow_forwardUsaha Maju is a garment company that produces family-run uniforms and various clothing. The company is located outside Tangerang, Tangsel, and currently employs 128 workers. Most manufacturing jobs involve freelancers in the cutting and sewing departments. The work is long, monotonous, so employees often move after a few months. Although the company does not issue audited financial statements, the owners have asked you, as a freelance consultant, to conduct a review of its internal controls. The focus of your current review is the payroll process. Usaha Maju employees use a time clock in an unsupervised area to record their time on the job. The time-keeping staff tries to monitor the process, but is often distracted by other duties. Every Friday, the shop foremen collects the time cards for their subordinates, review and approve them, and deliver them to the payroll staff. The payroll staff uses a standalone PC to record the employee earnings in the employee records and print a…arrow_forwardACCO Ltd is a large producer of organic medicinal products. The audit report for the year ended 30 June 20X8 was signed on 6 August 20X8 and along with the financial report was mailed to shareholders on 11 August 20X8. Consider the following independent events. Assume that each event is material. On 5 July, ACCO Ltd entered into a new contract to supply organic facial and skin treatment products to MYA, a new major department store. The contract was similar in nature to other contracts previously negotiated. ACCO Ltd has invested significant funds in developing a new range of organically sourced skin cancer treatment ointments. On 8 July, ACCO Ltd applied for a patent for the ointment, only to discover that a competitor had lodged a similar application on 20 June. The granting of ACCO Ltd's application is now in serious doubt. Internal audit has uncovered a major fraud at one of ACCO Ltd's branches. The fraud was perpetrated by two senior staff, acting in collusion over a number of…arrow_forward
- In order to form an audit opinion, auditors must obtain sufficient appropriate audit evidence. ISA 500 identifies the types of auditing procedures that an auditor might carry out in order to obtain audit evidence. The auditor is planning for the audit of a We can LLC, assembles specialist motor vehicles for industrial purposes such as earth movers and trucks. The total assets of the business are OMR 150 Million. The company owns four assembly plants to which parts are delivered and assembled into the motor vehicles. The auditor believes that the financial statements are at risk of material misstatement but as the part of his audit engagement an auditor wishes to: 1. Test the plant and equipment recorded in the financial statements of the We can LLC does exist in all four assemble plants. 2. Test the Sales transaction have been recorded in the financial statements at appropriate amount. 3. Test the cash balance has been included in the financial statements at appropriate amount. 4. Test…arrow_forwardou are the audit manager at KPMG & Coopers a medium-sized audit firm undertaking the audit for the year ended 30 June 2018 of Vesta Tech Ltd, an electronic component manufacturer located in Sydney. During the planning stage of the audit you discovered that one of Vesta Tech Ltd’s major suppliers went bankrupt one month ago, causing major product shortages. To overcome the problem, Jonathon Marshall, the husband of the finance director, Nimat Marshall provided electronic components to Vesta Tech Ltd through his private company. There is no formal agreement in place with Jonathon Marshall, however, the goods are being provided at competitive prices. You are concerned about the electronic components that Jonathon Marshall’s company is supplying, because his products are new to the market and you have heard some of Vesta Tech Ltd’s staff complaining that they are of poor quality.The board has informed you that although sales have been strong this year, Vesta Tech Ltd has suffered…arrow_forwardYour audit firm has recently accepted a new client, Crafts PLC, a manufacturer of building materials (cement, mortar and bricks). The company has experienced rapid growth in the last three years. The company’s financial year ends on 31st December. Crafts PLC has yet to have its financial statements audited since the company has recently changed from a limited liability partnership to a PLC. Given the soaring demand for the building materials, the Crafts PLC requires high levels of inventory. This has led the company to request an increase in its bank overdraft facility. The company’s financial analysts and bankers have suggested that an external audit is performed on Crafts PLC’s financial statements for the year ending 31st December 2021. The company's bankers have requested that an audit is undertaken on the financial On 31st December, Crafts PLC’s inventory includes raw materials, work-in-progress and finished goods. Crafts PLC does not perform perpetual inventory counting. However,…arrow_forward
- Is it an entity inherent risk for the information below? Supervisors working at Marco Inc. interview all perspective employees for positions they supervise. In addition, at least one of the corporate officers also interviews each perspective employee. Most of the key employees, including the officers, have been with Marco for more than ten years. However, due to the high demand for accountants, Stephen Violet an accountant and most of the accounting staff have been employed at Marco for less than 3 years. While Marco checks references for any prospective employee, they do not check criminal records or perform other forms of background checks. If it is an inherent risk, what is the feature of the firm that will possibly affect inherent risk and explain how and why; that is whether it increases or decreases inherent risk. Please address a specific risk to the accuracy of the financial statements with the "how" and whether audit effort should be increased or decreased for specific…arrow_forwardLuxwell, a Copenhagen, Denmark company that manufactures security devices, has contacted Christian Jespersen, certified auditor, to submit a proposal to do a financial statement audit. Luxwell was a bit taken aback when saw the cost of the financial audit, even though the fees were about average for an audit of a company Luxwell's size. The board of directors determined that the company could not afford to pay the price.Required: 1. Discuss the alternatives to having a financial statement audit2. What should Luxwell consider when choosing the assurance service?arrow_forwardYou are the manager in charge of the audit of Nananom Company, a public limited liability company which manufactures specialist equipment and costumes for use in Kumahwood and Nafftti films in Ghana. Audited revenue is $ 100 million with profit before tax of $ 6.25 million. Audit work up to but not including, the obtaining of written representations has been completed. A review of the audit file has disclosed the following outstanding point: 1. Kumahwood Nananom Company is facing a potential legal claim from the Kumahwood Company in respect of a defective equipment that was supplied for one of their films. Kumahwood sustains that the equipment built was not robust enough, while the directors of Nananom argue that the specification was not sufficiently detailed. Nananom were of the view that using such sophisticated equipment under conditions that require heavy falls, may render them not in the best of working conditions after a couple of films produced. However, this is what Kumahwood…arrow_forward
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