QUESTION 1 (31 Marks) You have just finished audit testing and are gathering the evidence to determine if the audit work performed is sufficient and appropriate. The audit partner has asked you to analyze the errors identified in the file and determine what entries if any should be made on the Summary of Unadjusted Differences. You have reviewed the working papers and determined that the following items were not adjusted or disclosed in the financial statements, and the client has not yet been asked to adjust any of the identified errors or make additional disclosures in the financial statements. Materiality is $240,000 and performance materiality is $165,000. Tolerable error is equal to one-half of performance materiality. He also has asked you to determine what the preliminary effect of the errors found during the audit were on the financial statements and audit opinion. The Company's year end was December 31, 2019, and the expected board meeting to approve the financial statements will be February 29, 2020. The audit is expected to be finished on February 22, 2020. a) During the completion of the audit and review of the minute book, it was determined that the Company had entered a contract to construct a building. The contract was signed on January 15, 2020, for $3,500,000 and construction will start in April 2020. b) It was also discovered that an offer to purchase land was signed on December 28, 2019, by the Company and the seller on December 31, 2019. The agreement was conditional on obtaining financing by the company for $250,000, the purchase price of the land less the deposit already made. The bank forwarded a letter granting the company a line of credit for up to $5,000,000 on December 31, 2019, and it was signed by both parties on that date, but not returned to the bank until January 5, 2020. The Company had recorded the deposit of $50,000 paid on the land under prepaid expenses on December 21, 2019. c) The Company was being sued by a disgruntled employee for wrongful dismissal for $100,000. The employee filed the suit in October 2019. The company felt that it was not probable that the employee would be successful but offered him $3,000 as a settlement. The Company had not accrued for this amount as it was considered not be material. The legal letter you sent the Company's lawyer and returned by February 25, 2020, indicated that the lawyer's assessment was that there was at least an 80% chance of the employee being successful and being awarded between $25,000 and $60,000 d) During the substantive test related to testing the pricing of inventory held for resale, it was determined that there was an error in the cost of inventory items. It was determined that freight was not being included in the calculation where it was applicable. The test resulted in a known error of $120,000 and a total known and projected error of $171,000. e) When conducting audit procedures on the estimate of the warranty provision, a recalculation of the Company's provision was performed based on statistics obtained from the industry association's website. Based on this, it appeared that the warranty provision was overstated by $50,000. 3 REQUIRED a) Provide the definition of a misstatement as included in the CPA Handbook (1 mark) A misstatement is the difference between the required amount, classification, presentation, or disclosure of a financial statement line item and what is actually reported in order to achieve a fair presentation, as per the applicable accounting framework. b) For each of the above items, indicate what type of error, whether anything should be included in the summary of unadjusted difference and why. (10 marks) TYPE OF ERROR Include Why included or not Y/N a) b) c) d) e) c) Enter each of the above items, where applicable, on the following table (10 marks) Description Assets Liabilities Revenue Total known errors Projected errors Total known projected error d. and Determine the total amount of unadjusted errors. (1 mark) 4 Expenses Disclosures or Presentation e. Explain whether the results of any of the errors identified during the audit would result in additional work needing to be carried out prior to the auditor being able to determine that there was sufficient appropriate evidence gathered and that sampling risk had been reduced to an acceptable level. (5 marks) Testing is adequate to reach a conclusion regarding sufficient appropriate audit evidence Why included or not a) b) c) d) e) f. Explain what conclusion can be reached about the audit opinion that can be given in each of the following scenarios and why this is the appropriate conclusion i. The Company is willing to adjust errors or change the disclosure in the financial statements that are proven as factually wrong (known errors) (2 marks) ii. The Company is not willing to adjust any errors or disclosures in the financial statements that have been determined. (2 marks) 5