Question 1

Dale Baker, the owner of a small private landscaping company, asked Sally Tao, a professional

accountant, to conduct an audit of the company. The landscaping company has a December 31 year end.

Baker told Sally that the audit was to be completed in time to submit audited financial statements to the

bank as part of a loan application. Sally immediately accepted the engagement since she had done some

bookkeeping work for this landscaping company for the past three years. Sally agreed to provide an

auditor's report within one month.

Sally hired two recent accounting graduates to conduct the audit and spent several hours telling them

exactly what to do. She told the new hires not to spend time reviewing the internal control but instead to

spend time on proving mathematical accuracy of the general and subsidiary ledgers and summarizing the

data in the accounting records that supported Baker's financial statements. The new hires followed Sally's

instructions, and after two weeks, gave Sally the financial statements excluding footnotes. Sally reviewed

the financial statements and prepared an unmodified auditor's report.No audit procedures were

conducted to verify the opening balance sheet numbers as the students felt that it was only important to

audit the year-end balance sheet numbers for the current audit.

The audit report was dated on January 31 which was the last day of the fieldwork. Dale accepted the

audited financial statements on February 1. The audit report was issued on February 2.

On February 15, it was discovered that the provision for taxes was materially misstated. Sally

acknowledged that she was more proficient in accounting than tax and acknowledged that an error had

occurred. The financial statements were reissued after performing some additional work on the tax

provision.

Required:

Clearly explain where the Canadian Auditing Standards were violated. (Hint: identify the

specific CSQC 1 / CAS 220 requirements and the corresponding breach from the question). To answer

this question, you will have to go to the CPA Handbook and review the Elements of the Quality Control

Standards. You can also apply the GAAS Standards discussed in the text where applicable.