(A) Tim is an auditor with a CPA firm. He was formerly an internal auditor and has extensive experience in that field. The CPA firm is auditing MMM Inc., a plastics manufacturer where Tim formerly worked as an internal auditor. Tims experience in this industry is considered invaluable by the CPA firm. During his last year of employment at MMM, he conducted reviews and designed controls for the acquisition and expenditure cycle. He was hired by the CPA firm right after MMMs year end. As this is Tims first experience in external audit, he has been assigned an assistant, Hassan, who is a co-op accounting student. Tim assigned Hassan to develop a test of controls for the work-in-process inventory. Hassan designed the program, which Tim reviewed and suggested some changes to. Tim also reviewed the evidence that Hassan obtained to ensure that it was sufficient and appropriate.

Required: (6 Marks)

i) Briefly define and explain the general standard of GAAS. (3 Marks)

ii) List and explain three points indicating that the situation above violates the general standard of GAAS. (3 Marks)

Question 2

(B) As a partner in a CPA firm, you are reviewing the evidence obtained during the field work phase of an audit. The auditor obtained sufficient appropriate evidence showing that the bad debts were understated by $200,000. The bad debt relates to a sale made 2 years ago. When the client would not adjust the amount, the auditor decided to recommend a qualified audit opinion. This was the only material misstatement found. Gross accounts receivable were $4,000,000 (audited balance) at year end.

Required (8 Marks)

i. Is this a GAAP departure or a scope limitation? Explain the reasons. (4 Marks)

ii Explain why the auditor would recommend a qualified opinion rather than an adverse or denial of opinion in this case. (4 Marks)

Question 2

(C) The following are five independent situations. For each case, state whether or not the CPA or CPA student has violated the Code of Ethical Principles and Rules of Conduct and explain your reasoning (2 marks for each situation). (10 marks)

1. In the course of providing professional services to a client, Sam, a CPA, becomes aware that the client has committed a non-criminal breach of one or more governmental regulations. Sam reports the matter to the regulatory authorities.
2. Jennifer, a CPA, is a partner in a professional accounting firm. Jennifer acted as a cheque signatory for a client for whom the firm provided review services.
3. James, a partner in a CPA firm, owns a material amount of shares in a mutual fund. The mutual fund has a significant investment in the common stock of one of the CPA firms clients for whom the firm provides only tax and consulting services.
4. Justin, CPA student, currently employed by CPAs firm in public practice. Justin discusses the details of his audit assignment with his sister, who is a CPA student employed at another firm.
5. Mighty Construction Ltd. has applied for a loan at the local bank. The bank has requested audited financial statements. Ann, a CPA, agrees to perform the audit of Mighty Construction Ltd. for a fee below what she would normally charge. In exchange for the lower fee, Mighty Construction agrees to pay Ann an additional $15,000 if the loan application with the bank is approved.As a partner in a CPA firm, you are reviewing the evidence obtained during the field work phase of an audit. The auditor obtained sufficient appropriate evidence showing that the bad debts were understated by $200,000. The bad debt relates to a sale made 2 years ago. When the client would not adjust the amount, the auditor decided to recommend a qualified audit opinion. This was the only material misstatement found. Gross accounts receivable were $4,000,000 (audited balance) at year end.