question archive As an audit manager for Gaston & Gaston LLP you are currently trying to complete three separate audit engagements in order to provide an audit opinion on each set of financial statements
As an audit manager for Gaston & Gaston LLP you are currently trying to complete three separate audit engagements in order to provide an audit opinion on each set of financial statements
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As an audit manager for Gaston & Gaston LLP you are currently trying to complete three separate audit engagements in order to provide an audit opinion on each set of financial statements. In connection with your examination of the financial statements of each company for the year ended December 31, 2019, your review of subsequent events noted the following items (Assume all items are material):
Audit A: Harvest Corporation Engagement
On January 17, 2020, it was discovered that a shipment of goods manufactured by Harvest Corporation was in transit to Alberta on December 31, 2019. At year end, the shipment had been recorded on the original source document as FOB shipping point and a sale was recorded in the amount of $100,000. It was subsequently determined by the co-op student on the engagement team that the terms of the sale were FOB destination. (to be recorded as a sale when received by the customer).
Audit B: Big Top Corporation (BTC)
On February 10, 2020, BTC shares were trading on the TSX exchange a $50/share. On the same day, the company announced that a new share issuance would be offered to the public. Shares could be purchased for $50 and the company authorized the issuance of 100,000 shares in an attempt to raise $5,000,000 in capital.
Audit C: Energizer Company
On January 22, 2020, as a result of reduced sales for the Energizer Company, production was reduced by 25% for all day shifts and 50% for all evening shifts. During this time many staff were laid off. On February 3, 2020 all the remaining shift employees went on strike. To date the strike has been unsettled.
Required:
For each of the independent situations above, provide an audit procedure which would have brought the item to your attention. Discuss if the various items should or should not be disclosed and provide reasons for your recommendation. (Note for each situation 1 mark for an audit procedure and 1 mark for noting whether disclosure should or should not be made and 1 mark for explanation totals of 9 marks). Use the table (see next page) to answer the question.
Audit
Audit Procedure (1 mark)
Disclosure or Adjustment with Explanation (2 marks)
A: Harvest Corporation Engagement
B: Big Top Corporation (BTC)
C: Energizer Company
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Answer:
A: Harvest Corporation Engagement :
The cut-off tests for sale and purchase of goods are the audit procedure that would have turned the auditor's attention to the error of shipment.
The material misstatements in the shipping department will be examined by the auditor through gathering all the relevant shipping documents and bills for extracting every possible piece of evidence of the material misstatement related to the shipment of the goods. This error will have to be disclosed because of the fact that the recording of the shipment as a sale before the receipt of goods by the customer will overstate the sales revenue as the company's policy is FOB Destination and not FOB shipping and this would manipulate the financial statement results, therefore, this has to be disclosed by the auditor.
B: Big Top Corporation (BTC) :
The audit procedure that would help in identifying the shares issued is the procedure of Examination and checking of minutes of the board meeting.
The auditor will perform tests and examinations to check and track the share issue and ensure that the issue is authorized by a recognized stock exchange and that all the rules and regulations of the stock exchange for the issue are followed carefully by the company. This issue of share need not be disclosed by the auditor because the issue of shares is a normal share issue to the public for raising the capital of the company and will already be reported in the financial statements and notes of the company.
C: Energizer Company :
The audit procedure that would have drawn the attention of the auditor to the employee issue is the tests of details of the job sheets after the sales went down.
The auditor will be able to detect the lay-offs and strikes by checking and tracking the job sheets of the company and inquiring the human resource changes and activities for the year. The issue is to be disclosed by the auditor because it is an issue of labor laws and workers rights and concerning the fact that the employee strike is not yet settled, the issue must be disclosed to the users.
