1 (19 marks) The Carmichael Museum operates a not-for-profit museum for the benefit of the community. During the hours when the museum is open to the public, a clerk is positioned at the main entrance to sell $5.00 admission tickets. The two-part tickets are pre-printed and pre-numbered. Upon payment of the admission fee, the patron is allowed to pass through a turnstile that is equipped with a counter. There is a separate turnstile (also equipped with a counter) set up for members of the museum that is operational only when the bar-coded membership card is scanned. Members of the museum are permitted to enter free of charge by scanning their membership card. Based on frequency of usage, a members list is prepared for use by the museum as a source of target lists for special campaigns and volunteering opportunities. Each member is asked to prepare a contribution pledge card on an annual basis (at the beginning of the year) to keep their membership active. The pledge is regarded as a commitment by the member to contribute the amount pledged by December of that year. Contributions are sent by members in the mail or in a drop box located on-site. Upon request, based on the amounts shown on the pledge cards, the treasurer prepares tax receipts for members to support the contribution amounts. At the end of the day, the clerk counts the cash received and prepares a two-part daily receipts reconciliation that reconciles the amount received to the number of tickets sold and the turnstile counter. All discrepancies are explained by the clerk and the form is signed and dated. A common discrepancy would occur if a ticket were voided. For example, on one day there were 50 tickets used but cash receipts for only 49 tickets. The clerk attached the voided ticket to the reconciliation as an explanation for the discrepancy. Any contributions received for pledges are also recorded at this time. The original is placed with the cash in an unlocked filing cabinet in the office overnight, while part two is sent to the treasurers home. Every morning, the treasurer an unpaid volunteer and board member visits the museum, obtains the cash receipts from the cabinet, counts the cash received and compares it to his copies of the receipt forms. He then compares the number of tickets sold to ticket batch and to the turnstile counter. He prepares the bank deposit daily. The clerk is responsible for maintaining the cash receipts journal, which is basically a record of the bank deposits. All disbursements are made by cheques and require the signature of the treasurer and the president. The treasurer is responsible for maintaining the disbursements journal (cheque register). The treasurer also prepares the monthly bank reconciliation. The president reviews the bank reconciliation monthly. You are a member of the board of directors of the museum, and at a recent meeting several board members expressed interest in learning about the museums internal control procedures. They asked that you, as a CGA, perform an audit of the museums financial statements, to identify any strengths and weaknesses in the internal control system and make suggestions to improve controls. Required a. Provide the board of directors with a brief description of the objective of a financial statement audit. Will a financial statement audit fulfill the boards expectation of gaining an understanding of the strengths and weaknesses of the companys system of internal control? (2 marks) b. Indicate and describe any threats to the auditors independence. Should the auditor accept this engagement? (2 marks) c. List three weaknesses in the existing system of internal control. For each weakness, state the risk to the museum if the control is not improved, and recommend improvements. Format your answer as follows: (9 marks) Weakness Risk Recommended Improvement d. List three strengths in the existing system of internal control and, for each strength, indicate an audit procedure that could be used to determine if the control is operating effectively. (6 marks) Question 2 (10 marks) Comfy Travel Inc. manufactures RVs and sells them all over North America. The RVs are sold directly to dealers, who typically finance the purchases of RVs with their banks. Comfy Travel manufactures the RVs (that is, orders the parts and assembles the RVs) only upon receiving the dealers orders. The dealers banks usually pay Comfy Travel Inc. within two weeks of shipment. In the past, the demand and margins earned on RV sales have remained relatively consistent. However, this year, the declining cost of air travel and the increasing cost of gasoline have caused a general decline in the demand for RVs. Comfy Travel Inc.s management responded to the declining demand by offering dealers increased incentives. For example, Comfy Travel offered a $1,000 rebate on each RV purchase. It is now October 15, 2013, and you have been assigned as the senior in charge of the Comfy Travel Inc. audit for the year ended September 30, 2013. You obtained the following September 30 preliminary figures in millions of dollars: 2013 2012 (Audited) 2011 (Audited) 2010 (Audited) 2009 (Audited) Industry Average 2013 Industry Average 2012 Inventory 4.8 3 2.95 3 3.1 5.3 4.8 Sales 28.8 27.4 27.5 28 28.2 38.6 38.6 Cost of goods sold 19.6 19 19.1 19.5 19.6 29 27.6 Required a. Based on the information provided, do you expect the gross margin as a percent of sales and inventory turnover to remain consistent with prior years, to increase, or to decrease? Explain your reasoning. (2 marks) b. Calculate the following ratios for each year and for the industry average, and indicate whether the results are consistent with your expectation. (5 marks) i. Gross margin as a percent of sales ii. Inventory turnover c. Suggest two possible reasons for any unexpected results. (1 mark) d. Provide two examples of inquiries or substantive audit procedures that could be performed in response to the results of the analytical procedures performed. (2 marks) Question 3 (6 marks) Samantha, CGA, has been assigned to audit the accounts receivable and inventory of Tasty Treats Inc., a large distributor of food products (canned goods, rice, frozen foods). Tasty Treats Inc. has a December 31 year end. Tasty Treats Inc. imports a variety of food products from various European countries to its central warehouse in Halifax and distributes the goods to various grocery chains across Canada. Tasty Treats customers consist of two large national grocery chain operators as well as approximately 200 small independent grocers. The two large national grocers make up approximately 40% of Tasty Treats accounts receivable balance. In order to facilitate distribution to central Canada, Tasty Treats Inc. also maintains inventory in several off-site warehouses. Samantha estimates that inventories and accounts receivable make up approximately 35% and 30% of total assets, respectively. Required a. Provide two examples of the risks of material misstatement for the inventory and accounts receivable balances at Tasty Treats. (2 marks) b. Samantha was provided with a detailed accounts receivable sub-ledger and an open invoice file at year end in two electronic computer files. The sub-ledger listed each customer, the customers credit limit, the amount owing at year end, and an aging classification (0 to 30 days, greater than 30 days old, greater than 60 days old, and greater than 90 days old). The open invoice file listed all unpaid invoices by customer. For each invoice listed in the open invoice file, she was provided with the customer name, the invoice number, the date of the invoice, and the amount. Provide two examples of computer-assisted audit techniques that Samantha could perform on the accounts receivable sub-ledger file and open invoice file. (2 marks) c. Meetings with the inventory manager reveal that a material amount of inventory is located off-site in warehouse outlets and on consignment. List two procedures that Samantha should conduct. (2 marks) Question 4 (15 marks) This is the first year that you are auditing Majestic Inc. for the period ended December 31, 2013. You are the senior auditor in charge of the accounts receivable section of the audit file. Majestics controller has provided you with two files: a customer data file and an unpaid invoice file. The customer data file included a listing of all of Majestics active customers. For each custowing information was included in the customer data file: Customer name Billing address Shipping address Unique customer identification number Phone number Credit limit Total purchases year-to-date Contact name The unpaid invoice file included all unpaid invoices at December 31, 2013. For each unpaid invoice, the following information was provided: Invoice number Customer number Invoice date Date of shipment Credit terms Amount of invoice Shipping document reference number Purchase order reference number Required a. Describe five substantive auditing procedures that you may consider performing with generalized audit software (GAS) using the two data files outlined. The substantive auditing procedures you describe may indicate that the reports could be used for follow-up with subsequent manual procedures. Indicate which of the data files (or both in combination) are required to complete each of the substantive procedures identified. (7.5 marks) b. For each substantive audit procedure, indicate whether a subsequent manual follow-up procedure is necessary. If so, provide a description of this procedure. (5 marks) c. For each substantive audit procedure, provide the audit assertion tested. (2.5 marks) Use the following table to complete your solution. Substantive audit procedure using GAS Description of subsequent manual follow-up, if required Related assertion being tested [Part (a)] [Part (b)] [Part (c)]