Jonathan, now a CPA, graduated with a CA designation ten years agoand has worked for the GMC Corporation most of that time, eventually becoming the controller, supervising an accounting staff of five people. His position was eliminated in December 2012 when GMC was acquired by another company and Jonathan started his own full-time accounting practice. In 2013 during his first year of practice, he completed many compilations, review engagements for small firms and did some tax planning for various companies. Jonathan has not been involved in conducting an audit since he obtained his CA designation ten years ago.
One of the companies, S-Trailers Inc. that had hired Jonathan in 2013 for a compilation engagement, now wants to hire him to conduct an external audit. S-Trailers Inc. was incorporated in 2011 and is privately-held with two shareholders. One shareholder, who is not involved in any aspect of the business, has requested an audit to be conducted. S-Trailers has grown rapidly and is considering going public by selling shares on the Toronto stock exchange within the next two years. Sales of its machine-crafted trailers have been rapidly increasing. The company expects to expand over the next few years, but has no immediate plans to fund its capital expansion. The business model used by S-Trailers is to build its trailers and try to sell them within three months through trade shows and other advertising. It has been largely successful, and only has a small inventory of twenty-five trailers. The company would like to start building only after a customer has purchased a trailer and has made a down payment, which would provide it with upfront cash.
Due to the rapid growth, S-Trailers intent is to finance next year’s inventory through an increase in its operating line of credit from the bank. The bank has informed S-Trailers that it will not be a problem for them to increase the operating line of credit. Jonathan has accepted the engagement and agreed to conduct the financial statement audit for STrailers’ year ended December 31, 2014. During Jonathan’s visit to S-Trailers’ office, the accounting manager at S-Trailers gave Jonathan a fixed asset report. The report included a list of the land, buildings, office equipment, vehicles and manufacturing equipment owned by S-Trailers Inc. at the start of 2014, and a second list of the items owned at the end of the year 2014. The accounting manager also informed Jonathan that S-Trailers initiated first steps to conduct risk assessments and design better internal controls in 2014 but the task is far from completion and is progressing slowly with scheduled completion by the end of 2015.
Jonathan was requested by the owners of S-Trailers if he could complete the audit by January 20, 2015. Jonathan had no time to plan the audit so he immediately hired a newly graduated university student as a temporary employee. Jonathan relied on his notes from the compilation engagement of the previous year to gain an understanding of the company and . Since Jonathan had conducted the compilation engagement of S-Trailers, he designed his audit procedures without any detailed risk assessment so that the testing work could start right away without any delay.
Jonathan then divided the testing work required between the student he had hired and to one of S-Trailers’ accounting department employees, who is a bookkeeper by profession to ensure that the testing was carried out faster. Jonathan’s reason to ask for help from S-Trailers was to reduce his audit costs and he was very happy when S-Trailers agreed to provide the support. After the testing was completed, Jonathan asked the student and the accounting staff if there were any adverse observations. They indicated to Jonathan that there were none noted. To save time, Jonathan did not review their testing results. Instead, Jonathan carried out analytical procedures deciding to issue an unqualified audit opinion for the 2014 financial statements of S-Trailers. Jonathan was very happy that he was able to complete the audit in a lesser amount of time than he had originally anticipated and was able to meet S-Trailers’ deadline for the audit.
Question:
A. Explain two Management responsibilities relating to the financial statement audit of STrailers have not been properly completed? Justify your response for each responsibility. Use the Format Below
– Management Responsibility not completed
-Justify your response for each responsibility
B.1. Explain four causes of information risk relating to the financial statements.
B.2. Explain with three points how the conduct of a financial statement audit reduces information risk for a company.
B.3. Provide four benefits to S-Trailers of having a financial statement audit conducted.
C. Describe five GAAS Standards that have been violated by Jonathan. Explain why. For each, provide specific quality control recommendations that would prevent the GAAS violation. Use the Format Below
– GAAS Standard Violated by Jonathan
-Explain why
-Quality Control Recommendation
D. Provide five specific risks associated with the audit of fixed assets at S-Trailers. For each, provide a specific balance-related audit objective that applies. Use the Format Below:
– Identify Risk (i.e. what can go wrong) for audit of fixed assets.
-Provide specific balance-related audit objective that applies.
