Busi 3343 01 Assignment Five Due October 18^th.

Question 1 (8 marks)

1. Nicholas Doulas, the partner-in-charge of the Fairfax Financial Holdings audit wrote a

management representation letter. It would have included:

a) written details of verbal representations made by management during the audit.

b) a representation that there have been no material frauds and errors.

c) a and b.

d) none of the above.

2. Abe Freed, a struggling public accountant was being coached by his father. His father told

him that he was using a poor form of evidence as a basis for his conclusions. What type of

evidence was he referring to?

a) computational evidence

b) verbal evidence

c) physical evidence through inspection

d) all of the above

3. Marianne Gilespie, the senior auditor at Manulife Financial was sorting out several sources

of internally generated evidence. Which one of the following would not qualify as internally

generated evidence?

a) minutes of meetings

b) journals and ledgers

c) the annual operating plan presented to the Board of Directors

d) bank confirmations

4. Which of the following is not an assertion used for transactions and events?

a) cut-off

b) existence

c) classification

d) occurrence

5. When testing for accuracy, an auditor searches for evidence:

a) to verify that a recorded transaction or event took place and relates to the entity.

b) that all disclosures that should have been included in the financial statements have been included.

c) that transactions and events have been recorded at appropriate amounts.

d) to verify that recorded assets are owned by the entity.

6. Which assertion do auditors test when they test for the adequacy of the provision for

doubtful debts?

a) valuation and allocation

b) rights and obligations

c) classification

d) occurrence

7. Which of the following forms of evidence is used when gaining an understanding of the

client and its internal control systems?

a) verbal

b) computational

c) physical

d) external confirmations

8. Which broad category of corroborating evidence is the least persuasive to an auditor?

a) externally generated evidence sent directly to the auditor

b) internally generated evidence

c) externally generated evidence held by the client

d) none of the above

8 marks

Question 2 (10 marks)

State the assertion that is violated in the following sentences:

• The client accidently records a maintenance expense twice.
• The client does not adjust its accounts receivable to net realizable value.
• The client recognizes a prepayment of revenue for work to be completed next year as revenue in the current year.
• The client decides to not record management bonuses until they are paid in the next year.
• The client discovers that an ex-employee has been receiving pay checks since he left the company.
• The company has goods on consignment with Jennifers of Nova Scotia. These goods were not included in inventory.
• The client has included related party payables with trade accounts payable.
• During the inventory count, the client neglected to count a section of inventory. This inventory is recorded on the books.
• The client recorded depreciation to a rent expense.
• The client does not adjust the inventory to lower of cost and market.

Question 3 (14 marks)

You are engaged to examine the financial statements of Cooper Inc. for the year ended December 31.

On November 1 Cooper borrowed $200,000 from a local bank to finance a plant expansion. The loan agreement provided for the annual payment of principal and interest over three years. Coopers existing plant was pledged as security for the loan.

Unfortunately Cooper ran into some difficulties in acquiring the new plant site. Thus the plant expansion was delayed. Cooper invested the entire $200,000 of borrowed money in stocks and bonds.

Required:

Identify the assertions applicable to the above, and describe the relevant evidence that needs to be obtained to support them for the audit of investments at December 31. Indicate type of procedure i.e inspection, observation etc.