7-24 CA has been the auditor of Niles Ltd., a medium¬ sized manufacturing company, for just over two years. After CA billed the company for the first year audit, Mr. Hiles, the president, called CA to his office to discuss the audit fee, expressing surprise and concern as to its size. CA pointed out that an audit fee for a first-time audit is always higher than normal and gave Mr. Hiles several examples of the work he had to do that would not be required in subsequent years.

CA reminded Mr. Hiles that they had previously dis¬ cussed this point in broad terms and Mr. Hiles accepted the explanation. CA suggested that the audit fee for subsequent years could be reduced if the staff of Niles Ltd. were to pre¬ pare some of the schedules for CA's working papers. Mr. Hiles agreed with this suggestion.
For the second year audit, Niles Ltd.'s staff prepared sev¬ eral of the schedules, and CA was able to reduce his fee. However, Mr. Hiles, on receiving the billing for the second year's audit fee, was still concerned as to its size.
When discussing the results of the audit with CA, Mr. Hiles expressed surprise as to the quantity of schedules that had to be prepared by his staff, particularly considering the fact that CA and his staff prepared additional working papers themselves. He asked CA what were the purposes of audit working papers. Mr. Hiles also expressed concern about all the information in the working papers on his com¬ pany being in CA's files and asked who owned the working papers.

Required
a. What are the purposes or functions of audit working papers? (Include the benefits to the client and the auditor.)
b. What records may be included in audit working papers?
c. What factors affect the public accountant's judgment of the type and content of the working papers for a particu¬ lar engagement?
d. Who owns or has access to audit working papers?
(CICA adapted)
7-25 Do the following with regard to the working paper
for ABC Company Inc. shown below.
a. List the deficiencies in the working paper.
b. For each deficiency, state how the working paper could be improved.

c. Prepare an improved working paper using an electronic spreadsheet software program. Include an indication of the audit work done as well as the analysis of the client data. (Instructor's option)

Transcribed Image Text:

ABC Company Inc. Notes Receivable 31/12/01 Schedule Date Prepared by ID 21/1/02 Approved by PP 5/2/02 Acct 110 Maker Apex Co. Ajax, Inc. JJ. Co. P. Smith Martin-Peterson Tent Co. Date Made 15/6/00 21/11/00 1/11/00 26/7/01 12/5/00 3/9/01 Due 15/6/02 Demand $200/mo $1000/mo Demand $400/mo Face amount 5000 < 3591 < 13180 < 25000 < 2100 < 12000 < Value of Security none none 24000 50000 none 10000 Notes: Beg. bal. 4000PWP 3591PWP 12780PWP 2100PWP Additions. 25000 12000 Payments >(1000) >(3591) >(2400) >(5000) >(2100) >(1600) End bal. Current 3000 2400 12000 Long term 7980 8000 - Total 3000 C -0- 10380 C 20000 C -0- 4800 5600 10400 C Interest Rate 5% 5% 5% 5% 5% 6% Pd. to date none paid 31/12/01 30/9/01 paid 30/11/01 Beg. bal. 104PWP -O-PWP 24PWP -0- -Q-PWP -0- Earned 175 102 Received Accrued at -0- >(102) 577 >(601) 468 >(200) 105 X105) 162 31/12/01 - Tested 279 -0- -0- 268 -0- (108) 54 PWP-Agrees with prior year's working papers. Total of $22,200 agrees with working trial balance. Total of 21,580 agrees with working trial balance. Total of $43,780 agrees with working trial balance. Total of $1,589 agrees with miscellaneous income analysis in operations W/P. Total of $601 agrees with A/R lead schedule.