q1)

301 on confidentiality recognizes a fundamental public trust between the client and the auditor and reflects the manner in which all professionals conduct themselves. However, in certain instances the auditor may be required to communicate confidential information.

Required

• Briefly explain the purpose of the confidentiality rule. Why is it important to assure the client of the confidentiality of information? 5 points (10 marks)
• Under what circumstances is the CPA allowed to communicate confidential information, and who are the parties to which the information can be communicated? 5 points (5 marks)
• Assume that an auditor is the partner-in-charge of two separate engagements, but during the conduct of the audit of Client A, the auditor learns of information that will materially affect the audit if Client B. Client B is not aware of the information (the inability of Client A to pay its debts). What alternative courses of action are available to the auditor? Would communication of the information to Client B be considered a violation of confidentiality? What guidance might the auditor seek other than Rule 301 in developing an answer to this ethical dilemma? 5 points (10 marks)
• Is the auditors report considered a confidential communication? Explain. (5 marks)

q2)

The auditor needs to understand the business in order to assess the risk of potential account misstatements. In preparing for a new auditor the auditor arranges to take a tour of the manufacturing plant and the distribution centre. The client is a manufacturer of heavy machinery. Its major distribution centre is located in a building next to the manufacturing facility.

The auditor made the following list of observations during the tour of the plant and distribution centre. For each observation indicate:

• The potential audit risk associated with the observation
• How the audit should be adjusted for the knowledge of the risk.

(40 marks)

• The auditor notes three separate lines of production for three dinstict product line. Two seem to be highly automated , but one seems antique
• The auditor notes that a large number of production machines are sitting idle outside and that a second line of one of the companys main products is not in operation.
• The client uses a large amount of chemicals. The waste chemicals are stored in vats and barrels in the yard before being shipped for disposal to an independent disposal firm.
• The distribution centre seems busy and messy. Although there appear to be defined procedures, the supervisor indicates that during peak times when orders must be shipped, the priority is to get them shipped. Employees catch up on paperwork during slack time.
• One area of the distribution center contains some produtcs that seem to have been there for a long time. They are dusty and the packaging looks old.
• Some products are sitting in a transition room outside the receiving area. The supervisor indicates that the products either have not been inspected yet, or they have failed inspection and he is awaiting orders on what to do with them.
• The receiving area is automated. Many products come packaged in cartons or boxes. The receiving department uses computer scanners to read the contents on a bar code. When these bar codes are used, the boxes or containers are moved immediately to the production area where they are to be used.
• One production line uses just-in-time inventory for its major component products. These goods are received in rail cars that sit just outside the production area. When production begins, the rail cars are moved directly into production. There is no receiving function for these goods.
• The company uses minimum security procedures at the warehouse. There is a fence around the facilities but employees and others seem to be able to come and go with ease.