You are doing the audit of the UTE Corporation for

You are doing the audit of the UTE Corporation for the year ended December 31, 2018. The following schedule for the property, plant, and equipment and related allowance for amortization accounts has been prepared by the client. You have compared the opening balances with your prior year’s audit documentation.

The following information is found during your audit:

1. All equipment is amortized on the straight-line basis (no taken into consideration) based on the following estimated lives: buildings, 25 years; all other items, 10 years. The corporation’s policy is to take one-half year’s amortization on all asset acquisitions and disposals during the year.

2. On April 1, the corporation entered into a 10-year lease contract for a die-casting machine with annual rentals of $50 000, payable in advance every April 1. The lease is cancellable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is 10 years with no . The corporation recorded the die-casting machine in the machinery and equipment account at $404 000, the present value at the date of the lease, and $20 200, applicable to the machine, has been included in amortization expense for the year.

3. The corporation completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was $175 000, the amount recorded in the buildings account. Company personnel were used to construct the addition at a cost of $160 000 (materials, $75 000; labour, $55 000; and overhead, $30 000).

4. On August 18, $50 000 was paid for paving and fencing a portion of land owned by the corporation and used as a parking lot for employees. The expenditure was charged to the land account.

5. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5, upon disposal of a machine acquired in July 2014 for $480 000. The bookkeeper recorded amortization expense of $35 000 on this machine in 2018.

6. Crux City donated land and a building appraised at $100 000 and $400 000, respectively, to the UTE Corporation for a plant. On September 1, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction.


a. In addition to inquiry of the client, explain how you would have found each of these six items during the audit.

Biomed Products Incorporated (BPI) is a public company, listed on

Biomed Products Incorporated (BPI) is a public company, listed on the Toronto Stock Exchange (TSX), that manufactures and markets various types of medical equipment that monitors patients’ vital signs (i.e., heart rate, breathing, blood pressure). BPI has been audited by Cooper & Zhang, a large public accounting firm, since its inception 10 years ago.

You are the audit senior responsible for the March 2019 yearend audit. Within the next day or two, you will be meeting with the audit manager to go over significant accounting and audit issues regarding the revenue cycle. Excerpts from the income statement for the first nine months of the current fiscal year and the previous two years are below:

Over the past week, you have been updating the preliminary planning related to the revenue cycle, visiting BPI’s premises, and interviewing the client staff. Your notes are summarized below.

1. The preliminary materiality is based upon revenue and overall materiality is set at $250 000. Performance materiality is $200 000. Due to each hospital contract being unique, inherent risk for revenue recognition is high; however, controls have been effective; therefore, risk of material misstatement is set at moderate.

2. Cooper & Zhang have relied upon internal controls in past audits. The internal control environment is strong. The staff members in the accounting area are competent and there is adequate segregation of duties. Based upon your update and testing of the systems, no changes have occurred in the accounting area.

However, your documentation of the processing of revenue reveals that BPI has begun to expand into foreign countries through distributor agreements. This is different from its usual customer base of Canadian hospitals. Your preliminary discussions with the VP sales reveal that initial contacts with the distributors are made through foreign trade shows. He notes that before signing a deal, BPI does background and credit checks on the companies. However, the quality of information received varies by country.

3. Your review of foreign revenue reveals that BPI has entered into a agreement with a Russian distributor for a five-year period commencing June 2019. 

BPI is quite excited about the agreement since the opportunities in Russia are vast—a significant portion of hospital medical equipment is worn and needs replacement.

BPI believes this agreement has phenomenal prospects since the distributor is established and knows which hospitals are refurbishing and have money.

As part of the agreement, the distributor has paid BPI an up-front and nonrefundable fee of $250 000. BPI has recorded the fee as part of its current revenue. As part of normal Russian business practice, the distributor pays the individual hospital administrator a commission for agreeing to purchase BPI products. Each month, the distributor will submit a list of individuals who have received the commission and BPI will reimburse the distributor the amount. Although no hospital sales have been finalized, the distributor has the promise of three separate administrators and has paid them each a commission of $5000.

The distributor has requested that BPI reimburse it the $15 000.

4. In late August, BPI shipped 500 units (at a sale price of $650 per unit and a cost of $400 per unit) to the distributor so that the distributor may have stock on hand. 

BPI has recorded this shipment as a sale since part of the agreement is that the distributor pays for all goods received. You note that the Russian distributor balance is still outstanding as of December 31, 2018. The VP sales is not concerned since it is normal for BPI customers to pay anywhere between 30 and 60 days after receiving the invoice.


a. Explain how the expansion of BPI to foreign markets impacts the audit strategy for Biomed Products.

b. The two key accounting issues are the upfront fee and the shipment of the 500 units in November. For each accounting issue perform the following:

i Analyze the accounting issue.

ii Identify the accounts and assertions most at risk related to this transaction. Provide your rationale.

iii Provide one substantive audit procedure that would address the assertions at risk.

c. Explain the audit implications of the upfront commission payable to the Russian hospital administrators.

You are the audit senior for the 2018 yearend audit

You are the audit senior for the 2018 yearend audit of Vision Quest (VQ), a publicly traded Canadian company that is one of the largest and fastest online vision care providers in the world. Because of the efficiencies of the internet to bypass middlemen, VQ has a significant competitive advantage in its market. You are responsible for auditing the revenue cycle. Performance materiality for the VQ audit is $100 000. VQ’s year-end is October 31, 2018.

Below is a summary of key information regarding the revenue cycle:

Revenue Recognition Policy—Revenue from product sales is recognized when the product has been shipped to the customer. At that point, the amount of sales revenue is determinable, no significant vendor obligations remain, and the collection of the revenue is reasonably assured. A provision is made for product returns. Revenue collected in advance of the product being shipped is deferred.

Audit Strategy for Revenue—The audit strategy relies upon tests of controls (including substantive tests of transactions) and substantive analytical procedures. No accounts receivable confirmations are sent out. Your audit team has tested controls related to revenue transactions and concluded that controls are effective and support the control risk assessment of low for the revenue transaction-related assertions.

Change in Credit Policy—When reviewing the accounts, you noted that a new account, allowance for doubtful accounts, has been set up. Upon investigation, you find that in February 2018, VQ implemented a program where the majority of customers were granted credit. VQ developed this program to attract new customers who might be wary of ordering contact lenses from an online retailer and having to pay for them prior to receiving them. The company’s program, named “Invoice Me Later” or “the IML program,” allows customers to order from VQ and pay after receiving the product. Management estimates payment should generally be received in less than 15 days.

Estimate for Allowance for Doubtful Accounts—The majority of the balances outstanding are less than $150 and there are a large number of records. Management estimates an allowance based upon the aging of the receivable portfolio. Below is a summary of the aging and management’s estimate for the allowance for doubtful accounts.


a. Explain the impact of the IML program on your audit strategy for the revenue cycle of VQ. (Use the audit risk model and assertions to support your analysis.)

b. Do you agree with the auditors’ decision not to send out accounts receivable confirmations? Why or why not?

c. If the auditors planned to send out accounts receivable confirmations, what type of confirmations would you recommend? Explain why.

For the audit of Carbald Supply Company, Farda is conducting

For the audit of Carbald Supply Company, Farda is conducting a test of sales for the first nine months of the fiscal year ended December 31, 2018. Incorrect revenue recognition has been assessed as a significant risk. Materiality is set at $750 000.

Included in the audit procedures are the following:

1. Foot and cross-foot the sales journal and trace the balance to the general ledger.

2. Review all sales transactions for reasonableness.

3. Select a sample of recorded sales from the sales journal and trace the customer name and amounts to duplicate sales invoices and the related shipping document.

4. Select a sample of shipping document numbers and perform the following tests:

4.1 Trace the shipping document to the related duplicate sales invoice.

4.2 Examine the duplicate sales invoice to determine whether copies of the shipping document, shipping order, and customer order are attached.

4.3 Examine the shipping order for an authorized credit approval.

4.4 Examine the duplicate sales invoice for an indication of internal verification of quantity, price, extensions, and footings; trace the balance to the master file.

4.5 Compare the price on the duplicate sales invoice with the sales price in the product master file and the quantity with the shipping document.

4.6 Trace the total on the duplicate sales invoice to the sales journal and the master file for customer, name, amount, and date.


a. State the audit objective (or assertion) associated with each of the audit procedures.

b. Identify those audit procedures that are potential controls with respect to revenue recognition. Justify your response.

c. Identify those audit procedures where computer-assisted audit tests (CAATs) can be used for all or part of the audit procedure. State the process that the CAATs can complete.

d. What type of sampling would you use for these audit procedures? Justify your response.

e. State the appropriate sampling unit, define the attribute that you would test, and define exception conditions for each of the audit procedures.

f. Which of the audit procedures are dual-purpose tests? Justify your response.

Jeff Jacobs is a junior accountant with the public accounting

Jeff Jacobs is a junior accountant with the public accounting firm of Maxwell and King LLP. Jeff was assigned to do the audit of Astor Electronics Inc. The in-charge auditor informed Jeff that, based upon the procedures performed to obtain the understanding of the controls related to the procurement process, controls are effective and the preliminary assessment of control risk is low. Based upon this assessment, Jeff decided to perform test of controls over procurement transactions using attribute sampling.

Jeff figured that a tolerable exception rate of 9 percent and a 5 percent ARO were appropriate for the tests he planned to perform. He had no idea how many deviations actually might exist in the population so he set the estimated population exception rate at 2 percent to be conservative. Based on the AICPA sampling tables, Jeff selected a sample of 70 items.

Because Jeff believed larger items deserved more attention than smaller items, he selected 50 items with values greater than or equal to $2500 and 20 items with values less than $2500. He thought it would be most appropriate to select transactions near the end of the fiscal year, so he randomly selected items for testing from the last two months.

Jeff was relieved when he found only six deviations from the prescribed controls. One deviation was a missing supplier’s invoice. Jeff spoke to the client who informed him that they lost a few invoices during their recent move. Jeff accepted the client’s explanation since this was the only supplier invoice missing from the results of his work. Two deviations were missing approval signatures by an authorized manager. The manager explained that he had not approved the supplier invoices because he had been out of the office on the date the invoices were received and entered into the system. He reviewed the two supplier invoices in question and told Jeff there were no problems with them. The other three deviations involved dollar errors. Two were errors in the extension of the supplier invoices that had not been detected by the client and the other was a misclassification error between expenses, which did not affect net income. Jeff considered these three dollar errors to be the only three actual control deviations.

Based on the tables, using a 5 percent risk of assessing control risk as low, three deviations found in a sample 70, Jeff determined that the computed upper exception rate was 10.7. Given these results, Jeff concluded that that procurement controls over supplier invoices were effective and accordingly he assessed the control risk at moderate (below maximum).


Explain the deficiencies you note in Jeff’s attribute sampling application.

You have just completed control testing for accounts payable. You

You have just completed control testing for You found three items for which no supporting documentation could be located and noted the exceptions. The explanation for the lack of supporting documentation was that the payments were to a related company and often documentation was lax. You discussed the issue with your senior, who asked you to confirm the details with the related company. The confirmation agreed with the amounts in your client’s records, and you concluded that the deviations were anomalous. Your senior agreed with your conclusion and explained, “Since they are not exceptions, we do not have to adjust our audit approach. The partner has been really concerned about the time budget and we do not want to waste time on additional testing just because of poor documentation.”


a. Using the professional judgement framework, explain what is wrong with the alternative procedures performed.

b. What is a possible explanation for the lack of documentation supporting the with the related company?

Dev is working on the testing of internal controls over

Dev is working on the testing of internal controls over price changes in the inventory system. Dev has completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms.

In order to place reliance on this control, his audit supervisor has decided that the estimated population exception rate error rate should be less than 1 percent. When Dev calculated the sample size, he used an ARO of 10 percent and a TER of 4 percent. Based on these decisions, Dev examined 150 inventory price master file change forms. Based upon Dev’s firm sampling guidelines for ARO of 10 percent, the following computed upper exception rate (CUER) for actual number of deviations is:

0 (1.4%), 2 (1.4%), 2 (3.3%), 3 (3.3%), 4 (4.1%), 5 (4.9%)

In his testing, Dev uncovered five deviations. Answer the following questions to explain the impact on the audit.

a. Since the number of deviations represents an actual error rate of 3.3 percent, which is less than TER, Dev concluded that the control is effective. Explain whether or not his conclusion is correct.

b. Assume Dev’s quantitative assessment indicates that the control for inventory price changes is ineffective. List two further actions Dev should perform before making his final conclusion. Explain the purpose of each action.

c. What potential misstatement could occur if the controls over price file changes are ineffective? Be sure to identify the affected account(s) and the type of misstatement (over/understated), as well as the relevant assertion(s).

Binu is performing tests of controls in the purchases cycle

Binu is performing tests of controls in the purchases cycle of Oakland Hardware Company. Based on the audit firm guidelines, a sample size of 50 purchases is selected from the cash disbursements file. The following summarizes Binu’s results of one of his tests:


a. If the controls that Binu was testing were not effective, what would be the potential misstatement?

b. Complete Table 2 to evaluate Binu’s results. Because internal controls were considered effective, Binu used a 10 percent ARO (Acceptable Risk of Overeliance) a zero EPER (Estimated Population Error Rate), and a 5 percent TER (Tolerable Exception Rate) for the attribute. Binu used the information in Table 1 (for a population of 5000 invoices) to evaluate his results results:

PawLow Inc. is a private manufacturer of specialized lubricants for

PawLow Inc. is a private manufacturer of specialized lubricants for the space industry. Its lubricants are used to cover moving mechanical parts inside rocket ships, the Space Station, and the Mars Rover. Its year-end was February 28, 2018, and the unaudited net income before tax is $4 million. You are an audit manager who is responsible for reviewing PawLow’s yearend

audit file. The audit file contains the following information:

• In 2019, PawLow will be expanding its business and establishing operations in Russia and China. These two countries have their own space programs and PawLow sees great opportunities there. To fund the expansion, in November 2017 the company obtained a loan from a bank. As part of the loan agreement, the bank requires PawLow to provide audited and to maintain a specific debt ratio (Debt Ratio = Total Debt/Total Assets) loan covenant.

• In 2017, management undertook an extensive review of PawLow’s non-current asset valuations and as a result decided to update the carrying value of all property, plant, and equipment. The VP of finance, Thomas Wolanski, contacted his brother, Joseph who is a valuer, and requested that Joseph’s firm undertake the valuation, which took place in September 2017.

• Enquired Thomas Wolanski about the competence and capability of the valuer, Joseph Wolanski.

• Verbally confirmed with Thomas that Joseph has proper qualification as a valuer and that Joseph is a member of a professional body and has experience in valuing the type of assets that are at PawLow.

• Obtained a schedule of all PPE revalued during the year. Reviewed the formulas used in the Excel calculation sheet and manually recalculated all the totals.

• To confirm completeness and accuracy of the revaluation adjustment traced all totals from the schedule to the trial balance and financial statements.

PawLow’s main customer, the National Aeronautics and Space Administration (NASA), has had its space exploration budget significantly reduced. As a result NASA has been late paying PawLow for some of its largest orders. This had a significant impact on PawLow’s cashflow and the company had to miss its January and February 2018 monthly bank loan repayments.


• Obtained PawLow’s cash flow forecast and reviewed the cash in and out flows. Assessed the assumptions for reasonableness and discussed the findings with management to determine whether the company will have sufficient cash flows to meet liabilities as they fall due.

• Discussed with management the current bank agreement and inquired whether any key ratios or covenants have been breached with regard to the bank loan.


1. Review the audit procedures and discuss the method and reliability of the gathered audit evidence in relation to the risks discussed in the case.

2. What other procedures could the auditor have used to gather evidence?

3. What more reliable evidence would you suggest the auditor gather in order to adequately address the risks?

Sylvie Beaubien is the engagement manager for the audit of

Sylvie Beaubien is the engagement manager for the audit of Terra Enterprises. Sylvie is currently planning tests of details of balances for and is considering the use of electronic confirmation requests to improve response rates. The historical response rate to written confirmation requests sent to Terra’s customers has been below 50 percent and Sylvie believes they can increase that to over 80 percent using electronic requests. Sylvie is considering two different options. The first option is to use email confirmation requests, with requests emailed directly to customers and the customers emailing responses directly to the audit firm. The second option is to use direct access to customers’ electronic records through website links for Terra’s largest customers, and then written requests to the remaining customers.


a. What factors does Sylvie need to consider in deciding whether to use written confirmation requests, email requests, or direct access to electronic records?

b. How will the audit firm ensure the reliability of the responses? For example, how might they verify the email addresses or the reliability of the electronic records?

Who should provide the email addresses for the email confirmations, or the website links for direct access to electronic records?