Question 1

Jorge Yulia was anxious to start the selection and testing of controls at Walley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Chaz Walley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Chaz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Jorge had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.
Jorge was concerned about the following issues:
1. Revenue recognition was the trickiest as many of the transactions took place over a year to complete. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.
2. The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Walley Real Estate Group's profile and the deep pockets of its clientele.
Required:
a) What are detective and preventive controls?
b) Can Jorge use these preventive and detective controls to help him resolve the two issues he is concerned about?
c) Which factors will Jorge have to consider when determining the "extent" of tests to be performed?
d) When would Jorge perform substantive testing of revenue?

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Question 2

Which of the following statements is correct?

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Significant professional judgment is needed when deciding whether a weakness identified is important enough to bring to management's attention. Option A is incorrect because it implies that assessment is straightforward and does not necessitate judgment. Option B is incorrect because management letters are generated by auditors rather than the management themselves. Option D is incorrect because option A is false.

Question 3

Explain the key elements of the control environment.

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Question 4

Why are internal controls so important to companies? What are the implications for companies if their internal controls are not operating effectively?

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Question 5

What are the main items commonly included in tests of controls working papers?

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Question 6

Explain the seven generally accepted objectives of internal control activities and identify the relevant assertions.

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Question 7

Discuss the factors that relate to the likelihood that an internal control operates as intended.

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Question 8

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) The audit senior was explaining how different controls work: "Detective controls can be applied to each transaction during normal processing to avoid errors occurring."
b) The public accountant was reviewing the audit program and was convinced that the following item did not belong in the IT General Controls (ITGC) part of her audit program: "Program change controls - only appropriately authorized, tested and approved changes are made to applications, interfaces, databases and operating systems. All changes are documented so systems documentation is up to date."
c) The techniques for testing are made up of enquiry, observation, inspection of physical evidence and re-performance. Inspection of physical evidence relies on the auditor testing the physical evidence to verify that a control has been performed properly.
d) The manager of a large client realizes that when testing controls, either statistically based sampling techniques or professional judgment can be used to determine the extent of testing. One of the factors to con?sider when deciding the extent of testing should include the competence of the person who performs the control.

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Question 9

What is a management letter and what are its major purposes?

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Question 10

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

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Question 11

In the United States, what have been the major impacts on companies and auditors of section 404 of the Sarbanes-Oxley Act (2002)? Has this section improved the quality of companies' internal controls?

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Question 12

What are control activities and explain the major categories of them?

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Question 13

CAS 260 Communication with Those Charged with Governance requires auditors to communicate audit matters of governance interest arising from the audit of the financial report with those charged with governance of an entity. What are some examples of these matters and why is it important for auditors to communicate them?

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Question 14

Explain the differences between preventive controls and detective controls.

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Question 15

CAS 230 Audit Documentation requires auditors to document each stage of the audit in their working papers. Regarding the contents of working papers, what are the specific requirements in CAS 230? Explain the importance of auditors effectively documenting the tests of controls they have performed.

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Question 16

What are the most common forms of documentation used by auditors to document their understanding of internal controls?

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Question 17

(Reproduced from: CICA UFE Question 2009 - Paper 2 - Question 3)
Bazaar buys computers, parts, and related equipment and resells them at a mark-up to a loyal base of corporate customers. Competition is growing, but the market is favourable, and Bazaar offers excellent customer service, giving it a competitive advantage. The owner is very involved in most of the important operating decisions. His capable assistant steps in when necessary. The owner plans to implement a code of ethics at some point and also wishes to improve certain controls.
Bazaar is a medium-sized private company that operates multiple warehouses, each carrying a mix of inventory items. The first type of inventory, which can be quite costly, consists of specialized computer hardware, desktop computers, and laptop computers. The turnover rate for this inventory is high since new technology is always emerging. Because the company orders months in advance, Bazaar occasionally overestimates demand. After three or four months, products are difficult to sell, but they are kept because most cannot be returned to the supplier, and Bazaar is reluctant to hold liquidation sales for fear they would negatively affect the sales at regular prices. The second type of inventory, parts and peripherals, generates a significant portion of Bazaar's sales. This category includes items such as monitors, printers, and toner cartridges. The third type of inventory includes software packages ranging from sophisticated operating systems to games. This inventory can be returned to suppliers if unsold after a certain period.
This year, Bazaar implemented an integrated computer system to manage the general ledger as well as inventory, purchases, and sales. Sales representatives enter orders into the sales database, and can modify the information, including quantities and selling prices. Any changes are usually made to orders before shipping. Problems result if representatives make changes after shipping, since they should issue credits instead. The timing differences create reconciliation problems for both customers and Bazaar when settling invoices. Also, sometimes credits have been issued in error. For example, the owner described one example where a credit was issued for a price adjustment made by a sales representative. The supporting paperwork stated that the credit had been issued in error (which seems to happen often) and the refund cheque was cancelled. However, the details of the refund cheque could not be located. When asked, the clerk said he left the cheque copies on his desk and the next morning they were gone. He gave up looking for them.
Electronic purchase orders require authorization from either the owner or his assistant through the use of a personal identification number (PIN). Each user has a specific PIN. Orders greater than $5,000 require the owner's authorization. Occasionally, the owner is not available. He has given one of the accounting clerks he trusts his PIN to be used for emergency situations. Before making a payment, the accounting department matches the invoice to the authorized purchase order and the receiving slip.
Other Information:
The owner noted that Bazaar's costs seem higher than expected, particularly since this year he decided to pay suppliers faster in order to benefit from discounts. According to his calculation, the cost of goods sold should have decreased by around 2% over last year, since most suppliers offer discounts and did not increase prices. Instead, he noted a 3% increase in costs. 
The sales mix has not changed significantly from previous years. Purchases increased and were distributed across the inventory types in amounts similar to the overall sales mix. To help retain the sales team, stock options were given this year for the first time as an added form of compensation. The options are available of Bazaar's net income after tax is at least $5 million per year. 
Customers have 30 days to pay invoices, but most take advantage of a 2% discount offered for payment within 10 days. Customers make payments in full payments and discounts are reimbursed later by system-generated cheques. Cheques may be issued with or without supporting documentation. 
The owner noted he just received a memo from a clerk at one of the warehouses. It says the amount of damaged inventory has been gradually increasing over the past eight months. The clerk suggests this is because the forklift is not operating properly and items are being dropped as they are loaded for shipment. He wants the forklift replaced. He asks what he should do with the damaged inventory that has been piling up in a corner of the warehouse. He suggests holding a liquidation sale to get rid of it,
Required:
a) Assess and conclude on inherent risk. Be sure to discuss items that both increase and decrease risk for a balanced discussion. 
b) Assess and conclude on the control risk. 
c) Based on your inherent and control risk assessment, conclude on detection risk. 
d) Based on the risk assessment, what type of audit strategy should be implemented?
e) Identify five control weaknesses at Bazaar. For each weakness, indicate the implication and make a specific recommendation how Bazaar can fix it.
f) What is the auditor's responsibility with respect to fraud when performing a financial statement audit? Assess the fraud risk at Bazaar and indicate what should be done when planning the audit.

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Question 18

The purpose of management letters is to

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The purpose of management letters is to discuss weaknesses in internal control and other matters discovered in the audit, so option C is correct. Option A is incorrect as the purpose of engagement letters is to confirm the terms of the audit engagement. Option B is incorrect as this information is generally contained in the engagement letter or other documentation. Option D is incorrect as substantive procedures are determined during the planning stage of the audit and do not typically appear in management letters.

Question 19

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) During her career as a public accountant, Faye Teller has performed audits of large and medium sized clients. When she visited a small business client, a food wholesaler that has a history of poor controls, she gave a lot of thought to performing her planned audit approach. She decided to use the combined audit approach.
b) Lea Konczynski was discussing with her audit manager how she could assess whether controls are being monitored. Her audit manager mentioned that the internal audit function is a primary source of assessing and monitoring control activities.
c) The audit senior has been reviewing the key controls in the purchasing and payables process. She has been asked by a junior auditor: "When should the client set up the payable?" She answers: "The company can set up the payable when the goods are received in good order and then the client can make the payment when the invoice is received."
d) The auditor decided to review transaction-level controls at year-end.

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