You work for a large public accounting firm with many offices


You work for a large public accounting firm with many offices across the country. As part of your new job as a senior manager in the national office, you have been assigned to do a quality control review of the Pop Shop Company, an audit conducted by one of your offices in north west Manitoba. 

Your firm has been auditing the Pop Shop Company for the last four years, ever since Pop Shop went public. There may be a problem with the financial statements, as the bank did not recently renew the bank loan, and Pop Shop is scrambling to meet payroll costs. They are also having trouble getting additional financing. There is some concern that the company may have tried to prepare their financial statements in a more favourable light to the bank.  It is now late February 2021 and your firm is planning to issue an unqualified opinion on the December 31, 2020 financial statements of the Pop Shop Company.

The following are your notes from the review of the Pop Shop December 31, 2020 year end audit file:

  • Files appear to be well organized. Working papers were reviewed by a junior audit partner, although not the partner who signed the auditors’ report on the financial statements.
  • This is one of three public company audits conducted by this office.
  • Only the current year audit file was available.  It took several hours before last year’s file and the permanent file could be located.
  • A recently qualified CPA conducted the audit with the help of two assistants. The CPA had no previous experience in the pop industry, but was helped by a senior assistant. The senior assistant had good knowledge of the pop industry because the controller of the Pop Shop was his uncle.  The CPA provided no direction to the assistants as they were considered very bright and had scored high grades on their advanced auditing courses.
  • Substantive audit procedures were specifically designed and conducted for this audit engagement. This was done by following the prior year’s audit approach. It was also decided that the previous year’s assessment of moderate audit risk and materiality level were appropriate for the current year audit.  Due to an initial discussion with respect to poor segregation of duties, control procedures were not documented in detail.
  • During the testing of inventory several items in the sample were overstated due to errors in pricing and obsolescence, but the combination of all errors in the sample was considered immaterial.  Accordingly, no extra testing was completed in the area of inventory.      They also found more errors than in previous years due to a change in the accounting system to computerize the inventory system.
  • It was decided that the prior year’s time budget was a reasonable estimate to complete this year’s audit.  Although more work was anticipated to complete this year’s audit, CPA was confident that the senior assistant’s efficiency would be able to compensate for it.  The partner of the audit would be glad of this because the firm promised the Pop Company that they would not increase the audit fee this year.

Describe which generally accepted auditing standards (GAAS as set out in CAS 200) have been violated.  Using case facts, support your conclusion.

Description of GAAS that has been violated  (1/2 mark for each valid response)Using case facts, support your conclusion (1/2 mark for each valid response)
Description of GAAS that has been violated  (1/2 mark for each valid response)Using case facts, support your conclusion (1/2 mark for each valid response)

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