Auditing: The Art and Science of Assurance Engagements 15th Canadian Edition by Alvin A Arens Test b

operational efficiencies at LSP, improving the profitability of the small company, if acquired.
Required:
A. What type of engagement should be conducted to assess the operational efficiencies of LSP? Justify your
response.
B. Who should be engaged to conduct the engagement?
C. What major problems might the auditors encounter when conducting the audit and writing the report?
Answer: A. Mega should have an operational audit conducted. An operational audit is a review of any part of an
organization's operating procedures and methods for the purpose of evaluating economy, efficiency, and
effectiveness.
B. The operational audit could be conducted by Mega's internal auditors, assuming that they have
internal auditors. It could also be conducted by a public accounting firm. For reasons of independence, if
Mega is a listed company, then Mega should engage a different public accounting firm than its present
auditors.
C. Operational audits are not easily defined. First, the auditors would need to prepare criteria with the
assistance of management to define efficiency. Then, the auditors would need to consider the type of
evidence that might be available. For example, if LSP has older manufacturing equipment than Mega,
LSP might be operating at peak efficiency - evidence will need to be geared to the criteria. Then, the
report will need to be prepared in the context of the criteria and the evidence that will be collected. As
there are no standard reports in operational auditing, the auditors will need to customize the report
based upon the criteria and evidence collected.
52) Jordan set up a not-for- profit corporation several years ago to provide scholarships to disadvantaged youth in
his community. Scholarships Get Up and Go Foundation now has assets of over $5 million and provides about
ten university scholarships every year. Jordan is proud of the new doctors, dentists, and other healthcare
practitioners that his foundation has funded.
Jordan is thinking of starting another foundation in an old building that he has purchased. It would be a youth
drop-in centre offering music lessons, art facilities, and gym facilities, and would have links to local high
schools to offer homework clubs to encourage good grades.
Required:
A. Why should Jordan have the financial statements of both of these foundations audited?
B. Who would be the users of the financial statements of the foundations?
C. What other types of services could PAs provide to Jordan and the foundations?
Answer: A. Auditing provides added assurance with respect to the information provided in the financial
statements: perhaps he could get a better interest rate on invested funds at a financial institution. It might
also give added credibility to potential donors of funds, and would also show the assets, liabilities, and
any surplus/deficit are reported in the proper entity and have not been reported or used in the wrong
entity.
B. Users could be financial institutions that are holding the Foundations' money, Jordan, his employees,
donors and potential donors, tax authorities, and organizations that regulate charitable organizations,
such as provincial and federal regulatory agencies. If the foundations receive government funding, then
the organizations providing funding would also be users of the financial statements.
C. PAs could provide advice on how to invest the capital funding that is used for the scholarships. They
could help design the accounting procedures in place at both foundations. They could provide
bookkeeping and compilation assistance, as well as prepare tax returns and any regulatory filings. They
could assist the foundation in obtaining working capital funding for the new drop- in centre, if needed.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
53) Joe is recording sales transactions in the accounting system so that they can be summarized in a logical manner
for the purpose of providing financial information for decision- making. Joe is performing
A) review. B) auditing.
C) management consulting. D) accounting.
Answer: D
54) Which of the following is an example of accounting rather than auditing?
A) entering sales transactions into the sales order system
B) reviewing sales invoices to see if they have been calculated correctly
C) gathering evidence about the quality of accounts receivable
D) comparing bank deposit documents to the recorded cash received
Answer: A
55) In auditing accounting data, the concern is with
A) analyzing the financial information to be sure that it complies with government requirements.
B) evaluating whether recorded information reasonably reflects the economic events that occurred during the