Auditing: A Practical Approach 4th Canadian Edition by Robyn Moroney Test bank

 
Compilation Engagement: Provides no assurance.  The practitioner should gain an understanding of the business, systems, and operations, and discuss with management the assumptions made in the preparation of the financial statements.  The practitioner would also format the financial statements and verify the mathematical accuracy.
 
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
AACSB: Analytic
 
 
68. What does pervasive mean? What report would an auditor use if financial statements contained a misstatement that was material and pervasive?
 
Answer: ”Pervasive” refers to misstatements that are not confined to individual accounts or elements of a financial statement, or, if confined, the misstatements impact an extensive portion of a financial statement or are disclosures that are vital to a user’s understanding of the financial statements.
 
An auditor would use an audit report that identified material and pervasive misstatements either in a situation that the auditor was either able to identify (adverse) or not able to identify (disclaimer of opinion) through sufficient and appropriate audit procedures.
 
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Difference audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
 
 
69. How is the expectation gap caused and how can the effects on the expectation gap be reduced?
 
Answer:
In particular, the gap is caused by unrealistic user expectations such as:
• the auditor is providing complete assurance
• the auditor is guaranteeing the future viability of the entity
• an unqualified (clean) audit opinion is an indicator of complete accuracy
• the auditor will definitely find any fraud
• the auditor has checked all transactions.


The expectation gap can be reduced by:
• auditors performing their duties appropriately, complying with auditing standards, and meeting the minimum standards of performance that should be expected of all auditors;
• peer reviews of audits to ensure that auditing standards have been applied correctly;
• auditing standards being reviewed and updated on a regular basis to enhance the work being done by auditors;
• education of the public;
• enhanced reporting to explain what processes have been followed in arriving at an audit (reasonable assurance) or a review (limited assurance) opinion (significant improvements have been introduced by standard setters improving assurance reporting); and
• assurance providers reporting accurately the level of assurance being provided (reasonable, limited or none).
 
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
 
 

 
CASE QUESTION
 
 
70. Vince Deroy owns Val D’Or Vineyards, a successful winery in the Thousand Islands region. Annual sales are $3,500,000 and he has a $1,200,000 loan with a local bank.

Sales are split between wine sales (88%) and wine tasting and catering (12%).

Vince has excellent personal relationships with his suppliers and has been provided with special contractual terms which allow him delays of up to 120 days to make invoice payments. These arrangements run out this year and he will have 30 days to pay after being invoiced.

The bank has made the $1,200,000 loan to Val D’Or Vineyards based on an understanding that the company will undergo an annual audit of its financial statements.

Vince is an astute entrepreneur and has set up an advisory board which consists of his bank manager, another wine grower in the region, his old high school ethics instructor and track coach, himself, and his accountant.

The board has discussed certain issues including the following:
• The need for assurance service providers to audit his financial statements so that users can be provided with assurance that his statements are relevant and reliable.
• Non-audit services that would provide advice on special projects he may be considering in the future.
• A proper accounting firm to conduct an audit mandate.
 
Required:
a) What is the objective of a financial statement audit and how does it relate to Val D’Or Vineyards?
b) Vince Deroy’s financial statements must be