ca_exm_au1_2009-03

EXTERNAL AUDITING [AU1] EXAMINATION

March 2009

Marks Time: 3 Hours

30 Question 1

EAU1M09

Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.

Note:

2 marks each

a. At the conclusion of the audit of ABC Company in which the auditor found no material

misstatements, which of the following statements is required in the scope paragraph of the standard audit report? 1) My responsibility is to express an opinion on these financial statements based on my audit. 2) I conducted my audit in accordance with Canadian generally accepted auditing standards.

3) I have audited the balance sheet of ABC Company as at December 31, 2008, and the statements of

income, retained earnings, and cash flows for the year then ended.

4) In my opinion, these financial statements present fairly, in all material respects, the financial

position of the company as at December 31, 2008, and the results of its operations and the cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

b. Which of the following statements would be considered negative assurance? 1) In my opinion, except for the effects of the failure to record amortization of the company’s

South American manufacturing plant, these financial statements are, in all material respects, in accordance with Canadian GAAP.

2) In my opinion, because the balance sheet and income statement do not reflect the decline in value

of the company’s inventory, these financial statements do not present fairly the financial position of the company as at December 31, 2008.

3) In view of the possible material effects on the financial statements of the company’s failure to

record the write-down of its investment in its foreign manufacturing facilities, I am unable to express an opinion whether these financial statements are presented in accordance with GAAP.

4) Based on my review, nothing has come to my attention that causes me to believe that these

financial statements are not, in all material respects, in accordance with Canadian GAAP.

c. Which of the following statements is required in the introductory paragraph of the standard audit

report? 1) My responsibility is to express an opinion on these financial statements based on my audit.

2) I have planned my audit to obtain reasonable assurance whether the financial statements are free

from material misstatement.

3) An audit includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial presentation.

4) In my opinion, these financial statements present fairly, in all material respects, the financial

position of the company as at December 31, 2008, and the results of its operations and the cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Continued...

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Page 1 of 7

EAU1M09

d. John is a CGA and has just concluded the field work for the audit of YY Company. John found no

material misstatements during the audit. YY did have a change in accounting principle during the year regarding depreciable assets, but the change was presented according to GAAP in the financial statements. How should the standard audit report be worded or changed in this situation? 1) The introductory paragraph should include a statement indicating that there was a change in

accounting principle during the year under audit.

2) The opinion paragraph should refer the reader to a note that would explain that the change was

made but the financial statements are still presented according to GAAP.

3) The scope paragraph should include a statement indicating that there was a change in accounting

principle during the year under audit.

4) The audit report should express an opinion without reservation.

e. When an auditor is sued for negligence in the performance of an audit, to what parties does the

contributory negligence defence apply? 1) Only to the parties having a contractual relationship with the auditor 2) To any third party that relied on the audited financial statements

3) To any third party that lost money or suffered damages from investing in the audited company

4)

Only to those third parties that the auditor could reasonably have known would have relied on the audited financial statements

f. Which of the following would be considered to be an application control in an information system? 1) Controls over system software acquisition 2) Controls pertaining to system access security

3) Controls pertaining to the follow-up of exception reports 4)

Controls pertaining to application systems maintenance

g. Which of the following would be an example of sampling error?

1) The auditor chose a random sample, calculated a sample error rate of 4%, and concluded that the

population error rate was 4%. The true population error rate was 6%.

2) The auditor selected a non-random sample and generalized the sample results to the population

using statistical methods.

3) The auditor chose a non-random sample to focus on transactions for only 2 months of the year.

4) The auditor chose a random sample and divided the number of errors in the sample by the number

of accounts in the sample to calculate the sample error rate.

h. An auditor selected a random sample of credit sales invoices, reviewed each one for the approval of

the credit manager (all credit sales require the credit manager’s initial), and found that 3% of the invoices were not initialled by the credit manager. The auditor therefore concluded that the recorded sales must be incorrect, although he could not determine if they were overstated or understated. Which of the following best describes the auditor’s error? 1) Type II error 2) Non-sampling error 3) Beta error 4) Type I error

i. Which of the following is true? 1) The risk of incorrect acceptance is not relevant when auditors use non-statistical sampling

methods.

2) The risk of incorrect acceptance varies inversely with audit risk. 3) Sample size varies inversely with the risk of incorrect acceptance.

4) The acceptable risk of incorrect acceptance is not related to inherent risk.

Continued...

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Page 2 of 7

EAU1M09 j. Which of the following would require auditing through the computer rather than auditing around the

computer? 1) There are small volumes of input/output data.

2) The internal controls are not embedded in the computer system.

3) The system is complex and includes key parts of the accounting system.

4)

The system was audited with computer-assisted audit techniques (CAATs) in the previous year.

k. Which of the following is true concerning the external audit of a client that has inventory?

1) If goods of significant value are stored at locations that are not convenient for the auditors to visit,

they may appoint representatives to attend the client’s physical stocktaking on their behalf. 2) Auditors should inspect all of a client’s inventory.

3) If attendance at the stocktaking is not possible, then a qualified opinion must be issued.

4) If the client does not conduct its inventory count at the end of the fiscal period, the auditor cannot

issue an unqualified opinion.

l. A CGA designed an audit program for property, plant and equipment to include the following

procedure “compare maintenance expense to prior period and budget.” Which of the following best describes this audit procedure? 1) Test of controls procedure 2) Vouching test procedure 3) Analytical test procedure 4) Dual test procedure

m. Which of the following types of evidence would an auditor consider to be the least reliable for an

external audit? 1) Representations in writing from the director of the audit client 2) A sales invoice prepared by the client

3) A sales invoice prepared by a vendor to the client 4)

A bank confirmation form signed by the client’s bank

n. Which management assertion is the auditor most likely testing by recalculating the interest expense from paid notes payable? 1) Validity of notes payable 2) Accuracy of interest expense 3) Classification of notes payable 4)

Classification of interest expense

o.

In previous years, a client recorded between $100,000 to $112,000 in miscellaneous expenses, and the account has always been tested with analytical procedures only, due to the low balance. This year the general ledger records $120,000 in the miscellaneous expense account, and last year’s balance was $112,000. If the critical cut-off percentage rule established for this year’s audit is 7%, which of the following calculations of the critical cut-off percentage rule would suggest that the account should be investigated further? 1) (120 – 112) / 112 = 7.14% 2) (120 – 112) / 100 = 8.0% 3) (120 – 100) / 120 = 16.7%

4)

(120 – 100) / 112 = 17.9%

©CGA-Canada, 2009 Page 3 of 7

10 Question 2

HHH Corporation manufactures automobile engines. In 2007, the treasurer at HHH decided to invest the company’s surplus funds in the commodities market. She intended for it to be a short-term investment, as the company had $1,000,000 in extra funds that would not be needed for 3 months. Unfortunately, the market price of the commodity she purchased declined sharply and in 3 months the investment was sold for only $500,000. The treasurer prepared documents to make the loss of the investment appear as a sale of excess inventory, so the company showed a lower profit on sales than usual, but no trading loss. The auditor audited the 2007 financial statements and issued an unqualified report, even though the amount in question exceeded the materiality threshold. HHH has always been owned privately. In 2006, all of the shares of the company were purchased by a group of engineers who had retired from the automobile industry. There were no other changes in the shareholders during 2007 or 2008.

Required

Assume that the shareholders of HHH sued the auditors. Explain how the 4 elements of negligence would apply to this case.

Question 3

You are the senior manager in a small audit firm and your responsibilities include obtaining new clients. New Health Food Inc. is a privately owned business with 3 stores. The shares are owned by family

members. Your firm was initially contacted to consult regarding setting up a new accounting system for the growing business. In discussing the business, you learned that New Health Food is thinking of

expanding to a fourth store in a nearby city but is undecided about how to finance the expansion. They are considering either borrowing from a bank or from the existing shareholders. Currently the only debt that the company has is to the existing shareholders, so financing from an outside source is an attractive option.

The owners are 2 brothers and 2 sisters, 3 of whom actively manage 1 store each, and the fourth who will manage the new store next year.

Required Explain which factors would suggest that the company should have an external audit and which factors would suggest that an external audit is not required.

Question 4

McRae & Company, CGAs, has been working for a few weeks on the preliminary tasks in the audit of a new client, XX Company. The partner in charge of the audit has asked you to verify transactions

concerning the company’s outstanding shares. From your experience, the minutes of the board of directors would have most of the information you need; however, the client has advised that it suspects that the previous audit firm disclosed confidential information from the directors’ minutes last year, and the company has decided that this year, no one outside of the company, including the auditors, can have

access to the minutes. In a meeting, the company president questioned why you should be allowed to view the minutes, since the minutes are not an accounting record, and therefore are not related to the financial statements. The president said the amount of dividends paid in the year can easily be determined by reviewing the payments themselves.

Required 5 4

a. To answer the company president, identify 5 examples of information concerning the company’s

shares, in addition to the amount of dividends paid, that an auditor would find in the directors’ minutes.

b. At the conclusion of the audit of XX, you are still unable to persuade the company to change the

valuation of an investment in a resource property to its fair market value. In your opinion, the value of the investment on XX’s balance sheet is $150,000 higher than fair market value. Assume there are no other audit issues or misstatements. Explain which audit opinion(s) you should issue. State any assumptions you make in your explanation.

8

9

EAU1M09 ©CGA-Canada, 2009 Page 4 of 7

11 Question 5

6 2

3

EAU1M09 EE Company manufactures and sells computers to stores. The company’s income statement has shown high net income, which has been increasing for each of the last 4 years. The company owner now wants to sell shares on the stock exchange and so has contacted you for an external audit. He has provided you with the financial statements for the past 4 years, which were prepared by a family member that works at EE. Selected information from the statements follows:

Year Net Income

2005 $400,000 2006 $500,000 2007 $600,000 2008 $800,000

You expected to find some errors, as the company accountant was not a professional accountant and had no staff to help him. You have analyzed the financial statements, and after correcting a few errors in the inventory account, the revised results are: Year

Net Income (Loss)

2005 $ 400,000 2006 $ (350,000) 2007 $ (350,000) 2008 $ 100,000

The errors were related to a bribe EE paid to another company in a foreign country, and a large fine

EE paid when the bribe was discovered. The accountant had mistakenly added the bribe and the fine to the ending inventory costs.

Required

a. Explain 3 factors that would decrease the amount that the auditor would consider to be material in this

audit. b. The auditor did not want to use income as a base for determining materiality, because there were

2 years of losses. State 2 examples of other bases that the auditor could use in determining materiality in this case. c. After the audit started, your assistant, a CGA student, prepared the following confirmation to be sent

to EE’s bank by the client, along with a covering letter from EE’s president, requesting that the bank respond directly to you. Identify strengths and weaknesses in the student’s confirmation.

Bank Confirmation

Credit Bank 15 Money Street Calgary AB

Balance Please confirm all of our outstanding loan balances as at December 31, 2008.

©CGA-Canada, 2009 Page 5 of 7

8

Question 6

In your review of the controls over purchasing of your client, XYZ Electronics Inc., you have found

2 problems related to unauthorized vendors. There was $25,000 of inventory that could not be found when the company conducted a physical inventory count. There was also $36,000 of inventory, purchased from LL Ltd., that was of low quality and could not be sold. Neither of the vendors for these 2 purchases has ever been approved as vendors for the company. Normally, a purchase order is prepared by a purchasing clerk, who notes the approved vendor number on the purchase order. The purchase order must then be signed for approval by the purchasing manager. When the accounts payable clerk receives an invoice for payment, he prepares a voucher and attaches the approved purchase order. After the purchasing manager approves the invoice for payment, the accounts payable clerk processes the payment by electronic funds transfer. The voucher for the $25,000 purchase shows that the inventory was purchased from AU Ltd., an authorized vendor, but the electronic funds payment were paid to M. Smith, who is not an authorized vendor.

The company president cannot understand how this could have happened, as an internal control was designed to have one clerk enter the vendor number on the purchase order, and another clerk process the payment, to segregate the duties. The low-quality merchandise was approved by the vice-president of operations, who is a higher level of authority than the purchasing manager, so the president does not feel there should be any problems.

Required 4 4

a. Explain what collusion is and give an example of how collusion could have limited the effectiveness

of the company’s internal controls, in causing one of the problems found at XYZ Electronics. b. Explain the weakness in the company’s internal controls that led to the purchase of low-quality

merchandise from LL.

Question 7

Hao received his CGA designation last year and is establishing an audit practice. A new client has invited Hao to conduct an external audit of its financial statements. The client is a manufacturing company, with several production departments. In the past year, there have been many complaints from production

supervisors concerning errors in the reports that the information system has produced for them. Because of the complaints, the accountant has personally been preparing and distributing the computer reports to each department supervisor. Hao began his review of the client’s information system, and found the following:

The accountant seems very knowledgeable, as she not only enters the journal entries, prepares and authorizes the payroll, but she also distributes the computer reports to each department.

• The office has 3 desktop computers, situated on the desks of the accountant, her assistant, and the treasurer. All computers are linked by a local area network (LAN). The office is locked at the end of each working day and the LAN is protected with a password.

• Each of the 6 production departments has only 1 computer, which is situated on the production supervisor’s desk in the production areas.

• The company hires a professional computer consultant whenever it needs updates to its computer hardware or software.

• The LAN does not keep an access log.

Required

•

6

Review Hao’s findings and indicate the strengths and weaknesses in the client’s personal computer control environment.

EAU1M09 ©CGA-Canada, 2009 Page 6 of 7

12 Question 8

Shunfa Toys Ltd. manufactures toys and sells them to large department stores in Canada. When

manufacturing supervisors need more raw materials, they prepare a purchase requisition, which is sent to the purchasing department. If the purchasing manager approves the item, a purchase order is prepared, which the purchasing manager initials to show approval. The purchasing department keeps a file listing all authorized suppliers. When goods are received, the receiver prepares a receiving report that is sent to the purchasing department to be matched to the purchase order. The matched copies are then sent to the

accounting department to be recorded in the purchases journal, and unmatched purchase orders are kept in a separate file in the purchasing department. All documents are pre-numbered. Occasionally, the company purchases some excess inventory from its subsidiary company in the United States. This is recorded by a memorandum from the controller, which is attached to the purchase order. A copy of the memorandum is sent to the accounting department for recording purposes.

Required

4 4 4

a. Prepare an audit plan with 2 audit procedures, other than sample selection, to test the internal control

objective of authorization of purchases at Shunfa Toys. Do not use analytical procedures. b. Prepare an audit plan with 2 audit procedures, other than sample selection, to test the internal control

objective of classification of purchases at Shunfa Toys. Do not use analytical procedures. c. Assume you have conducted analytical procedures at Shunfa Toys and found the following

unexpected results:

i) Compared the gross profit for current year to prior year:

Findings: Unexplained increased gross profits; sales revenue is exactly the same in the current and the prior year, and yet gross profit is higher in the current year.

ii) Compared inventory turnover to prior year:

Findings: Unexpected change in inventory turnover ratio; the ratio is much lower this year than in prior year.

6

Indicate 1 possible explanation for each of the unexpected results of the analytical procedures.

Question 9

Your audit firm has conducted the external audit of JJ Ltd. for the past 4 years and issued an unqualified opinion each year. JJ provides flight services to travel companies, mainly in western Canada. Last year, profits declined because of a sudden increase in the price of fuel. This year, the company president retired and, under the guidance of the new president, JJ acquired 100% ownership of a small oil company called X-OIL Inc. to protect its profits from increases in fuel prices. X-OIL was for sale because its production of fuel was too small to compete with the larger multinational companies in that industry. JJ expects better profits in the future because it can be guaranteed a steady supply of fuel for its airplanes.

Required

Explain any concerns you would have as the auditor regarding the action taken by JJ to protect its profits.

END OF EXAMINATION

100

EAU1M09 ©CGA-Canada, 2009 Page 7 of 7

EXTERNAL AUDITING [AU1]

EXAMINATION

Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 7 pages. There are 9 questions for a total of 100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.

To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.

Glossary of Assessment Terms

Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.

Calculate Compare Contrast Compare Criticize Define Describe Design Determine Diagram Discuss Evaluate Mathematically determine the

amount or number, showing

formulas used and steps taken. (Also

Compute).

Examine qualities or characteristics

that resemble each other. Emphasize

similarities, although differences

may be mentioned.

by observing differences.

Stress the dissimilarities of qualities

or characteristics. (Also Distinguish

between)

Express your own judgment

concerning the topic or viewpoint in

question. Discuss both pros and

cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item

defined differs from items in other

classes.

Provide detail on the relevant characteristics, qualities, or events. Create an outcome (e.g., a plan or program) that incorporates the relevant issues and information. Calculate or formulate a response that considers the relevant qualitative and quantitative factors. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. (Also Draw)

This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly

requires you to state in a few

sentences the critical factors.

This requires making an informed judgment. Your judgment must be

shown to be based on knowledge and

information about the subject. (Just

stating your own ideas is not

sufficient.) Cite authorities. Cite

advantages and limitations.

Explain In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. Identify Distinguish and specify the important issues, factors, or items, usually based on an evaluation or analysis of a scenario. Illustrate Make clear by giving an example, e.g., a figure, diagram or concrete example. Interpret Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Justify Prove or give reasons for decisions or

conclusions.

List Present an itemized series or tabulation. Be concise. Point form is often acceptable. Outline This is an organized description. Give

a general overview, stating main and

supporting ideas. Use headings and

sub-headings, usually in point form.

Omit minor details.

Prove Establish that something is true by

citing evidence or giving clear logical reasons.

Recommend Propose an appropriate solution or

course of action based on an evaluation or analysis of a scenario.

Relate Show how things are connected with

each other or how one causes another, correlates with another, or is like another. Review Examine a subject critically,

analyzing and commenting on the

important statements to be made about it. State Clearly provide a position based on

an evaluation, e.g., Agree/Disagree,

Correct/Incorrect, Yes/No. (Also

Indicate)

Summarize Give the main points or facts in

condensed form, like the summary of

a chapter, omitting details and

illustrations.

Trace In narrative form, describe progress, development, or historical events from some point of origin.

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION

March 2009

SUGGESTED SOLUTIONS

Marks

30 Question 1

Time: 3 Hours

SAU1M09 Note:

2 marks each

Sources: a. 2) Topic 1.8 (Level 1) b. 4) Topic 1.7 (Level 1) c. 1) Topic 1.8 (Level 1) d. 4) Topic 1.8 (Level 1) e. 1) Topic 2.7 (Level 2) f. 3) Topic 7.5 (Level 2) g. 1) Topic 6.3 (Level 2) h. 2) Topic 6.3 (Level 2) i. 3) Topic 6.9 (Level 2) j. 3) Topic 7.10 (Level 1) k. 1) Topic 9.3 (Level 1) l. 3) Topic 9.5 (Level 2) m. 1) Topic 3.3 (Level 1) n. 2) Topic 9.11 (Level 2) o. 1) Topic 4.3 (Level 1)

©CGA-Canada, 2009 Page 1 of 6

10 Question 2

Source: Topic 2.7 (Level 2)

Negligence Element

There must be a duty of care owed to the party suing the auditor.

There must be a breach of duty of care (failure to follow GAAS, negligent audit).

HHH Company’s case

HHH hired the auditors, therefore the auditors owe a duty of care to the shareholders.

The shareholders would have to show that the auditors were negligent in their audit, that is, the auditor issued an unqualified report even though there is a misstatement in the financial statements. HHH lost its investment in the commodities. HHH shareholders would have to show that they suffered the loss due to the auditor’s negligence.

There must be proof that the party suffered a loss or damage.

There must be a connection between the party’s loss or damage and the breach of the duty. Note:

8

/2 mark per element plus 2 marks for explanation to a maximum of 10 marks

Question 3

Source: Topic 3.6 (Level 1)

Each store is managed by an owner of the business, which suggests that an external audit is not required. • The company is not public, so there is no statutory requirement for an audit.

• If the company borrows from an outside source, then an external audit may be a requirement by the lender.

• The existing shareholders are already creditors of the company, and they may wish to have an audit. Note:

•

1

2 marks per bullet to a maximum of 8 marks

SAU1M09 ©CGA-Canada, 2009 Page 2 of 6

9 Question 4 5 4

SAU1M09 a. Source: Topic 4.2 (Level 1)

The board of directors’ minutes would contain the following types of information that would be useful

for an auditor:

•

The amount of dividends declared • Authorization of dividends • Shares issued

• Shares purchased and cancelled

• Corporate organization transactions (for example, stock splits)

• Authorization for changes to share rights (for example, cumulative feature, dividend rate, redemption amount)

Note:

1 mark per bullet to a maximum of 5 marks

b. Source: Topic 1.9 (Level 1)

•

If the $150,000 misstatement is not material, then as there were no other misstatements found, the audit opinion should be unqualified.

• If the $150,000 misstatement is material, but not super-material, then a qualified opinion should be issued.

• If the $150,000 misstatement is super-material and renders the financial statements to be misleading, then an adverse opinion should be issued.

Note:

2 marks per bullet to a maximum of 4 marks

©CGA-Canada, 2009 Page 3 of 6

11 Question 5 6 a. Source: Topic 4.4 (Level 1)

The following factors would decrease the amount considered to be material:

•

The income reported originally showed a trend of increasing net income, but after the errors were

corrected, the actual results show that income was decreasing.

• Reported net income for 2006 and 2007 were changed into net losses after the errors were corrected. • The results of the initial audit of this client would be considered.

• Normalized after-tax income may not be appropriate here, since it is fluctuating between net income 2

3

SAU1M09 and losses.

Note:

2 marks per bullet to a maximum of 6 marks

b. Source: Topic 4.4 (Level 1)

Other bases that might be appropriate include: •

Current assets

• Net working capital • Total assets • Total revenues • Gross profit • Total equity

• Cash flows from operations

Note:

1 mark per bullet to a maximum of 2 marks

c. Source: Topic 10.2 (Level 2)

•

Reply directly to the auditor (strength)

• Requests balances for all outstanding loans (strength)

• Covering letter sent by client, therefore authorizes disclosure (strength) • Does not ask for interest rate or due date (weakness) • Does not ask for collateral (weakness)

• Does not have the client’s identification on the confirmation letter (weakness) • Confirmation sent by client (weakness)

Note:

1 mark per bullet to a maximum of 3 marks

©CGA-Canada, 2009 Page 4 of 6

8 Question 6 Source: Topic 5.2 (Level 1) 4 a. Collusion requires 2 or more people to work together to circumvent the controls. In this case, the

2 purchasing clerks could have colluded by having 1 clerk record a false vendor number on the invoice and then the other clerk prepare the payment to M. Smith.

Note:

2 marks for definition, plus 2 marks for example for a total of 4 marks (other reasonable answers accepted).

4

b. This is an example of management override. In this case, the control procedure to have the purchasing

manager approve all purchases was not followed. The control was overridden by the vice-president of operations. Note

2 marks for identifying management override plus 2 marks for example for a total of 4 marks

6

Question 7

Source: Topic 7.9 (Level 1)

The company hires a professional computer consultant whenever it needs updates to its computer hardware or software, which is a segregation of duties.

• The company’s 3 desktop computers are in a locked room with password control. • The LAN is protected with a password. Note:

•

Strength Weakness

There is a lack of segregation of accounting functions since the accountant can enter and authorize journal entries.

• The LAN does not provide an audit trail for access by various individuals.

•

2 marks per bullet to a maximum of 6 marks

SAU1M09 ©CGA-Canada, 2009 Page 5 of 6

12 Question 8 Source: Topic 8.9 (Level 1)

4 a. Authorization

Trace a sample of purchases from the purchase journal to the authorized purchase orders to verify

that the manager has authorized the purchase

• Trace a sample of purchases from the purchase journal to the authorized purchase orders to verify that the purchase was from an authorized supplier

•

Note:

2 marks per bullet to a maximum of 4 marks

4 b. Classification

Trace a sample of purchases from the purchase journal to the purchase order and supporting

documentation to identify intercompany purchases

• Compare intercompany purchases in purchase journal to general ledger (G/L) to ensure that any purchases from related company are recorded separately as intercompany purchases in the G/L • Trace purchase returns in purchase journal to G/L to ensure these are classified as returns

•

Note:

2 marks per bullet to maximum of 4 marks

4

c. Source: Topic 9.1 (Level 1)

i) Compared the gross profit for current year to prior year:

•

Possible inventory overstatement: if cost of goods sold is understated, gross profit would be overstated.

ii) Compared inventory turnover to prior year:

•

The lower inventory turnover ratio could mean that some inventory items have become obsolete, and therefore, inventory is overstated.

Note:

2 marks per bullet to a maximum of 4 marks

6

Question 9

Source: Topic 10.8 (Level 1)

My concerns as JJ’s auditor would be that the company will now have transactions with a related party, X-OIL.

• I will have to ensure that I obtain information regarding all transactions with X-OIL.

• I will have to ensure that there is appropriate disclosure in JJ’s financial statements concerning X-OIL and the transactions between the 2 companies.

Note:

•

2 marks per bullet to a maximum of 6 marks

END OF SOLUTIONS

100

SAU1M09 ©CGA-Canada, 2009 Page 6 of 6

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION

March 2009

EXAMINER’S COMMENTS

General Comments

The overall performance of the students on this examination was satisfactory.

Students demonstrated a good awareness of documentation, evidence, independence, audit report opinions, and materiality and ethics. Some students did not obtain full marks because they did not read the questions carefully.

Specific Comments

Question 1 Multiple choice (Levels 1 and 2)

This question was answered satisfactorily. Students had the most difficulty with questions from Topic 1.8, 2.7, 3.3, 7.5, 6.3, and 6.9.

Question 2 Responding to legal liability (Level 2)

Question 2 was done well, with most students obtaining either full marks or almost full marks.

Question 3 Pre-engagement arrangements (Level 1)

Most students obtained almost full marks on this question, with no particular problems noted.

Question 4 Role of analysis in audit planning and reservation of opinion (Level 1)

a. For this part, students often did not provide answers that dealt with shares, and instead listed asset

acquisitions and liability issues. Some students incorrectly indicated that the minutes were the articles of incorporation and listed the number of shares authorized, or other corporate records, such as the calculation of EPS, or the names of shareholders.

b. This part of the question was answered very well. Students who had difficulty tended to overlook any

discussion of materiality.

Question 5 Determining materiality and long-term debt — Substantive procedures (Levels 1 and 2 )

a. This part was answered very well, with most students obtaining full marks. The few students who had

difficulty provided general answers that did not address the situation in the question. Many AU1

examination questions will require students to analyze a given fact situation and then apply the course material to those facts.

b. Virtually all students obtained at least part marks and many obtained full marks for this part, as there

are many different possible bases that an auditor could reference.

c. Most students obtained full or almost full marks for this part, with no particular problems noted.

Question 6 Management and auditor responsibility (Level 1)

a. Many students were able to explain what collusion is and so obtained full marks, although other

students provided answers that had nothing to do with the topic and received no marks for this part.

b. Overall, students answered this part better than part (a). Almost all students were able to obtain part

marks, although some did not recognize management override as a problem in internal control.

Question 7 Internal control considerations in personal computer, online, and database environments (Level 1)

Almost all students obtained full marks for this questions, with no particular problems noted.

Continued...

©CGA-Canada, 2009

Question 8 Acquisition and expenditure cycle — Tests of controls (Level 1)

a. This part was answered satisfactorily by most students, but some students could only provide one

audit procedure, and so obtained only part marks. There were no significant problems noted.

b. Students had more difficulty with part (b). Many students did not identify any classification issues,

and instead provided vague answers, such as “verify that purchases are classified correctly.” An audit procedure should specify the document or records to be examined and the reason or expected evidence.

Question 9 Related parties (Level 1)

AU1M09 ©CGA-Canada, Overall, this question was not answered very well. The question asked for the concerns that an auditor would have, but many students instead discussed the question from a business standpoint, such as the price of oil, or the amount of oil that the subsidiary could provide. An auditor’s concern is to obtain all relevant information and to report on the financial statements, not to discuss the business strategies of the client. At this level in the CGA program, students should be prepared to analyze the given facts in relation to the course material. In this case, the important concerns are the concerns of the auditor, not of operating the business. It is very important on examinations to read the question carefully, and to answer the Required.

2009