Audit & Review Engagement Questions PDF

Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its ma...

Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized, and Securimax does business only with nations that have a recognized, democratically elected government. Securimax maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients. Clarke Field has been the engagement partner on the Securimax audit for the past five years. The board of Securimax is considering changing from an audit engagement to a review engagement and has approached Clarke to discuss the implications of this change. Clarke suggests that KFP could perform the review engagement. Securimax's financial year end is December 31. **Required** What is a review engagement? Why would a review be appropriate for a set of financial statements for Securimax? A review provides limited assurance. The practitioner does adequate work to report whether or not anything came to their attention, which would lead them to conclude that the information being assured is not fairly presented. To comment on the appropriateness of a review for financial statements, the differences between an **audit** and a **review** should be identified. - - - - - - - - - - - - - DDD Motor Sales Inc. is privately owned. It wants to expand its business and has approached its bank for a loan. DDD wants the funds to purchase additional inventory and will be able to provide excellent security to the bank. The bank has agreed that, since DDD can provide good security for the loan, an external audit will not be required. The bank manager has insisted that DDD hire a firm of professional accountants to examine DDD's financial records and provide some level of assurance. **Required** What type of engagement is required? Explain your answer. A review engagement is required because the bank requires a certain level of assurance, but it has already been agreed that an external audit will not be re-quired. A review provides limited assurance. The practitioner does adequate work to report whether or not anything came to their attention that would lead them to conclude that the information being assured is not fairly presented in accordance with the applicable framework. Assume that DDD contracts with Cicak & Jones, CPAs, to perform the required services. What is the title of the report or communication that Cicak & Jones will prepare? The title of the report or communication that Cicak & Jones will prepare is an INDEPENDENT PRACTITIONER'S REVIEW ENGAGEMENT REPORT. Identify the types of procedures Cicak & Jones will be required to conduct. The types of procedures that Cicak & Jones will be required to conduct in this review engagement would be inquiry, analysis, and observation to address high-risk areas where it was determined material misstatements could arise and to address all material items in the financial statements. Some of the procedures performed will be to compare year over year balances, considering the relationships between financial statement data, and to calculate various financial statement ratios. Once unusual or significant fluctuations are identified, the practitioner then discusses with the client whether these fluctuations and changes are plausible. 1.9 What type of audit report would be appropriate in each of the following scenarios? Explain. There is uncertainty relating to a pending exceptional litigation matter that is adequately disclosed in the notes. Unmodified with emphasis of matter. The litigation is adequately disclosed but the issue is significant (exceptional litigation) and there is a need to draw the attention of the users to it in the audit report. The client's records are inadequate and the auditor is unable to obtain sufficient appropriate evidence. A disclaimer of opinion. The client's records are inadequate, creating a scope limitation that is so extreme that the auditor is unable to obtain sufficient and appropriate evidence to base an opinion. There is a GAAP departure concerning a highly material item. Either an adverse opinion or a qualified opinion, depending on how pervasive the GAAP departure is deemed to be. If the material GAAP departure is not pervasive to the overall financial statements, for example if it is localized to opening inventory amounts, and it can be identified and quantified, then a qualified opinion can be expressed identifying the specific GAAP departure. If the material GAAP departure is pervasive to the overall financial statements, for example if management does not want to present consolidated financial statements as per GAAP requirements, then an adverse opinion should be expressed. The client will not allow the auditor to contact the client's legal counsel. Either a disclaimer of opinion or a qualified opinion. Not allowing the auditor to contact the client's legal counsel creates a scope limitation where the practitioner will not be able to mitigate the risk that the accounts associated with litigation exist, are complete and accurate, and are appropriately valued (liabilities, contingent liabilities, expenses, assets, contingent assets, and revenues). If the scope limitation is deemed so extreme that the auditor is unable to obtain sufficient appropriate evidence to base an opinion, a disclaimer of opinion should be expressed. If the effects can be identified, quantified, and explained, then a qualified opinion can be considered by the practitioner. This will be a matter of professional judgement and materiality should be considered. The client's accounting records have been destroyed. A disclaimer of opinion. Because the accounting records have been destroyed, this creates a scope limitation for the practitioner as there is essentially no financial records to audit; therefore, the auditor is unable to obtain sufficient and appropriate evidence to base an opinion. There is a material misstatement in the client's inventory account. The misstatement is deemed to be material but not pervasive to the financial statements. A qualified opinion. The GAAP departure can be identified, quantified, and explained in the audit report as it is localized to inventory and is not pervasive to the overall financial statements. Therefore "except for" inventory, the financial statements can be relied upon by the reader. Inventories are misstated. The misstatement is deemed to be material and pervasive to the financial statements. Either an adverse opinion or a qualified opinion. The GAAP departure due to the inventory misstatement is pervasive to the overall financial statements and therefore it is more than likely that an adverse opinion should be expressed. However, it is possible if the misstatements can be identified, quantified, and explained to specifically the Inventory accounts and/or cost of goods sold, then a qualified opinion can be considered by the practitioner. This will be a matter of professional judgement. Which of the following characteristics accurately describes an audit? Obtains sufficient appropriate audit evidence to reduce risk to an acceptably low level Martha Minnati was reviewing the previous year\'s audited financial statements of a clothing company. She was told that for a financial statement audit, the clothing company was the client, the users were those who rely on the financial statements, and the subject matter was the financial statements. Based on this information, the type of audit engagement is an assurance engagement. An assurance engagement is a type of professional service where a practitioner expresses an opinion on a subject matter, such as financial statements. In this case, the auditor is providing an opinion on the fairness of the clothing company\'s financial statements. 1.10 Types of audit opinions Situation 1 The accounting firm of Aschari and Di Tomaso was engaged to perform an audit of the financial statements of Pammenter Inc. During the audit, Pammenter's senior managers refused to give the auditors the information they needed to confirm any of the accounts receivable. As a result, Aschari and Di Tomaso were not able to confirm the accounts receivable balance. However, they did not encounter any other problems during the audit. a\) Unmodified, qualified, or disclaimer of opinion. b\) The client has, in effect, imposed a scope limitation on Aschari and Di Tomaso. The type of report issued depends upon the materiality of accounts receivable and the likelihood that a potential error would be material. If the accounts receivable balance was immaterial, then an unmodified report could still be issued. If the likelihood that a potential error would be material, but not pervasive, then an opinion qualified as to scope would be appropriate. If the likelihood that a potential error would be material and pervasive, then a disclaimer of opinion would be warranted. Situation 2 The accounting firm of Jovanovic and St. Pierre has discovered, during its audit of Robson Chemicals Inc., that the client is being sued for \$3 million. Allegedly, one of its products exploded and severely injured a customer. In the firm's discussion with Robson's lawyers, Jovanovic and St. Pierre ascertained that it is very likely that Robson will indeed have to pay this entire amount when the lawsuit is resolved. To provide for this, Robson's chief financial officer has included information relating to the lawsuit in the notes to its financial statements, but did not otherwise reflect it in its financial statements. Required For each of the independent situations presented above: state what type of audit opinion should be issued; explain your reasoning. 1.12 The audit expectation gap Certek Technologies Inc. is a biotechnology company whose shares traded on a major Canadian stock exchange. Over the 22 months following its initial public offering in May 2009, Certek's share price rose an astounding 1,350 percent. In mid-March 2011, Certek's share price began to decline. Then, in April 2011, the share price plummeted when it was announced that Certek had stopped all research activities on its major projects due to unsatisfactory scientific results. You, a CPA, are sitting with some friends who make the following comments: Ruby: I lost a bundle on the Certek shares. The price went up with every press release. It seemed like the company was going to solve every medical problem in the world. I thought the auditors had a responsibility to investors and the capital markets for information released to the public. Omid: I don't understand how audited financial statements are the least bit useful. Certek was investing huge amounts of money in researching new pharmaceutical products, yet the financial statements provided no information on whether its research would develop into viable products. Couldn't the auditors take some responsibility for evaluating the research that companies are doing? Required What is the auditor's responsibility for information released to the public? The auditor is responsible to provide an opinion on the fair presentation of the historical financial statements in accordance with Canadian GAAP, unless they are engaged to provide assurance on other information. Therefore, auditors do not review press releases and other information that may be distributed to the users and other stakeholders. Auditors do have a responsibility to ensure offering documents provided by the company are consistent with the financial statements, but they do not provide assurance over that information. Discuss Omid's comment with reference to the expectation gap. The audit expectation gap occurs when there is a difference between the expectations of assurance providers and financial statement users. In this case, the users seem to believe the auditor should have provided more information with respect to the future success of the company. This demonstrates the "expectation gap," where users tend to blame the auditor when companies fail. Users tend to believe that the auditor should have done more (i.e., provided assurance over the success of research expenditures). A financial statement audit will include procedures on the risks associated with the research costs recorded (e.g., Are all the expenditures recorded and complete? Is the information provided mathematically accurate? Were the expenditures appropriately valued? Are the expenditures appropriately classified as an expenditure or should they be recorded as an asset?). A financial statement audit will however not provide an opinion as to whether they will lead to a future benefit. Auditors tend to avoid special engagements that would provide an opinion over such subjective information, as it is too difficult to verify. What can auditors do to reduce the expectation gap? - - - - - - Source: Adapted from the Uniform Final Exam (UFE), CPA Canada, Paper 2, 2000. 1.13 Audit reports Required: Using the reports below. What is the auditor's responsibility as determined in the audit report? Find the lines in the audit report that express the auditor's opinion. Is it an unqualified or modified audit opinion? Find the lines in the review report that express the auditor's conclusion. Is it an audit opinion? Is it a positive or negative statement? Make a list of the other differences between the audit report and the review report. INDEPENDENT PRACTITIONER'S REVIEW ENGAGEMENT REPORT To the Board of Directors of Janeway Ltd. We have reviewed the accompanying financial statements of Janeway Ltd. that comprise the balance sheet as at December 31, 2023, and the statements of income, retained earnings and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Practitioner's Responsibility Our responsibility is to express a conclusion on the accompanying financial statements based on our review. We conducted our review in accordance with Canadian generally accepted standards for review engagements, which require us to comply with relevant ethical requirements. A review of financial statements in accordance with Canadian generally accepted standards for review engagements is a limited assurance engagement. The practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained. The procedures performed in a review are substantially less in extent than, and vary in nature from, those performed in an audit conducted in accordance with Canadian generally accepted auditing standards. Accordingly, we do not express an audit opinion on these financial statements. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the financial statements do not present fairly, in all material respects, the financial position of Janeway Ltd. as at December 31, 2023, and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprises. Toronto, Canada March X, 2024 "W&S Partners, LLP" Chartered Professional Accountants Licensed Public Accountant A close-up of a document Description automatically generated The audit report highlights to readers that the management of the company and the auditors have separate and distinct responsibilities. Management is responsible for the oversight of the financial reporting process (maintaining accounting systems and internal controls), assessing the ability to continue as a going concern, and preparing and ensuring the fair presentation of the financial statements in accordance with GAAP that are free from material misstatement. The auditors are responsible for conducting an audit of the financial statements by evaluating their contents against the criteria of the accounting standards and relevant legislation. The auditor's responsibilities do not include preparing the financial statements and the auditor must use judgement when choosing procedures and evaluating audit evidence. It also highlights that there is no guarantee that an audit performed in accordance with standards will detect all material misstatements. Figure 1.3 has a paragraph that is headed "Opinion." It states that in the independent auditor's opinion the financial statements present fairly, in all material respects, the financial position and financial performance of the company in accordance with the applicable framework. This means that the opinion is unmodified. In a review engagement report, the practitioner expresses a conclusion, not an opinion. It is not an opinion because they did not conduct an audit. The statement is negative --" nothing has come to our attention \...". Other differences include: - - - -