Chapter 1,2

P1
Kam and Mike in their 20s, 25/26 and are managers at Waterfalls Inc, a paper packaging
industry.
As auditors we look at revenue then total assets and then net income.
Assumption : 100 year old. Company, has to be in billions.

P2
Georgina CFO telling Kam the manager about selling the poorly performing manufacture
division. Skeptical is saying there is motive here. The division is called Styrene Tech is 100%
subsidiary which means no other shareholders and consolidated financial statements. If they
have subsidiaries, that means they’re big. Publicly traded means IFRS. Styrenetech is not public
so probably ASPE.

Environmental regulation is concern for auditors. Our scope looks at anything that can
materially affect cash flow and financial statements. Penalties range up to $100k/day. Board of
Directors, CEO,CFO could be responsible for this.

Agency theory: CEO spends every moment of the week. 2500-3500 hours /year. Board of
Directors – monthly meetings each 3hrs long = 36hrs/year. Therefore there is information
asymmetry. However, both parties are liable. As board member you have to be cautious about
your oversight to avoid liability of environmental regulation breach.

Fraud- cause of fraud is fraud triangle. Fraud is permitted when there is lack of internal control.

Georgina wants to sell company without venture capitalist sniffling around- What does this
mean? BE SKEPTICAL …

P3
They need aunt Zhang to buy the business.

P4
How large is Syrenetech?
They are small. 2-3 million per year revenue. They can probably buy at discount because it’s a
problem for Waterfalls. If it is not material, it doesn’t need to be audited. ASPE is okay. “review
for accuracy by internal auditors” is not horrible thing for company to do.

P5
Zhang wants audited financial statements but Kam and Mike aren’t accounting people, theyre
business and engineer. They don’t know what to do. She wants evidence the numbers are true
and fair and are consistent with some accounting framework. \
Observation: Issue is Zhang wants audited financial statements. Reason is that we have CAS
200, no independence in financial statements right now. Internal auditors are bias and they
cant give opinion to financial statements. Zhang wants audited financial statement because we
met CAS 200 and we overcome agency theory (Georgina, mgmt. of Waterfalls are agents of
Waterfalls and will do what’s best for them). In Georgina shoes, Sytrenetech is a nuisance so
shell do anything to get rid of it. (agency theory)
Criteria: Internal auditors are not independent (CAS 200 does not apply). Agency theory applies
and we need 3 party accountability to overcome agency theory and information asymmetry.
Recommendation: independent external auditor perform audit of Sytrenetech.

P6
Shareholders Mike Kam Zhang Nina (4 people).
Observation: Mike is confused about role of government auditors.
Criteria: description of types of audit functions. External, internal, Tax Regulatory, Government,
Forensic, Fraud. Duties of each auditor is different. Forensic auditors involved in fraud,
insurance claims, divorce, damages such as minority shareholders etc. They present expert
opinion in court. Regulatory auditor will audit against the ITA. Not everyone can give opinion
about financial statements. Governor general of Canada is governmental auditor and value
money for Canadian citizens. Assess government use of resources and write report on
government waste.

P7
Observation (ISSUE?) What could go wrong? G&Q is conflict of interest because they audit
Waterfall. Risk because G&Q will audit in favour of Waterfall.
Criteria: CAS 200 independence
Recommendation: Hire a different company to audit.

P8- A Misstatement where a contingent liability was not declared in the FS

Observation: Contingent liability
Criteria: for treatment of contingent liability. Has to be put in financial statements and
disclosed. Contingent liabiliaty rules, disclosed and adjust if it is probable and we can estimate
the value, etc
Recommendation: Follow the rule, adjust FS to represent contingent liability and disclose the
information

P9-
Nina tells PAs need to follow GAAS.
Observation: Mike Kam are skeptical of G&Q in that how will they do good job? Will external
auditors perform the function to the level required?
Criteria: What level is required? GAAS?
Recommendation:
 Chapter 3
3 Major OCR issues
1)
Observation – Nina is not an expert in environmental Law
Criteria – Professional competence, she’s not competent to perform that environmental audit
and CAS 200
Recommendation – Hire competent auditors specializing in environmental law. Chp 1,
regulatory auditor will do environmental auditor. They would be a P.Eng to do the work.

5 Threats to independence : self review, self interest (shes investor in company), advocacy
(where we as PA would advocate for someone, i.e. plead with bank to give loan), familiarity
(uses 5 year rule, after 5 years of audit partner, we are too familiar with client and cannot serve
as independent auditor so we need to switch), intimidation (act or threat, lawsuits, if you are
intimidated by client, then you have a threat)

2) Company missed out on environmental damaged caused by Styrenetech. It is material

so need to disclosed in financial statement.
Observation: Only phase 1 audit was performed. There is evidence of environmental damage
done to property prior to purchase. This information was not disclosed in the audit performed
by G&Q.
Criteria: CAS 220, G&Q has requirement to disclose all material issues. Independence has been
breached, threat to independence. Integrity. Due care means they didn’t follow standards. The
standards they didn’t follow are intimidation (Georgina could’ve intimidated G&Q). Review
examination standards.
Did G&Q know? If they did and didn’t disclose, they breached CAS/GAAS standards. If they did
know, they TIME 28 mins in lecture 2.
G&Q appears they breached their CAS rules.
Clean up could be millions and fines as well per day.
Since auditor knew about it, it is material. IT should be disclosed. Need to replace 10,000 cubic
metre of soil because of damage caused. 500 dump truck loads needed. To escavate and
remove itll cost $200 (load) x 500 and then $20,000 in excavation. $120,000 for equipment and
remove soil.

3) “Ethical investment management firm approached Kam” (P2).

Criteria: Nina needs to abide by CPA professional conduct rule, CPA handbook. Rules such
as being honest and upstanding, never attaching your name to misleading or incorrect
information, confidentiality, good of the society in terms of the view of the CPA. Nina has
responsibility to meet those standards.
 Chapter 4-5
CAS 210, 700 and other CPA handbook
Ecopak doing well in biomass business and they want to go public and need audited
financial statements for IPO.

Stakeholders: Kam, Mike, Nina and Ella Foure from P&F firm

1) Observation: Asking Ella to appear in the promotional content

Criteria: CAS 200: independence , auditors cannot provide promotional stuff for
clients
Recommendation: Ella declines to be involved in any type of
advertising/promotion for the clients as she is not permitted by the standards

2) Observation: Inventory records; There is issue with inventory system that

allowed 3 months of transactions to be absent/missing. WE don’t have access to
3 months of data. It could lead to understatement/overstatement in Net Income
and COGS so statements wont be reliable. Ellas concern, it could be a scope issue
means Ella is unable to perform tests, obtain evidence so it could be problem.
She would have to determine materiality level of this and if information can be
gathered another way.
Criteria: Ella should apply to this risk, she needs to make opinion. Can the scope
issue lead to GAAS failure. CAS standard 210 -terms of engagement need to be
agreed to., 700 is letter forming opinion. 210 might be something she deals with.
She is not engaged as an auditor yet so we go with CAS 210!!!!!! She cant do
assurance work because data is failed and material. So she doesn’t need to do
audit,
Recommendation: If data is immaterial, she can continue to do some review
engagement or audit. If data is material and unrecoverable and cannot do
rollback/roll forward then might be able to do compilation and provide no
assurance.

3) Observation: The internal systems of Ecopak are weak and inadequate. (P5)
Criteria: Question of accuracy and representation of the financial information.
CAS 200 independence
Recommendation: bring in another IT consultant to do the work. Control
weakness recommendation. She cant do the work herself.
 Unqualified, qualified, adverse, disclaimer

Chapter 5

Audit Observation/ Concern: Ella perspective, Ecopak considering going public.

Concern for Ecopak. Ella is thinking, she doesn’t want to Audit public companies.
Risk has changed from small private company to public company. Engagement
risk is going to be different for Ella. Increased engagement risk because of Ecopaks
IPO consideration.
Criteria: (need to relate to CAS, ASPE,IFRS, GAAS standards). Manipulate financial
statement. CAS standard 210 terms of audit engagement. CAS 300s risk
assessment. Risk of management showing higher prices to attract investors.
Recommendation: Ella should resign. Engagement risk of Ecopak from Ella
perspective, what engagement risks did she perform for them? What are
engagement risk factors auditors should consider before accepting Audit? PG.151
AUDIT ENGAGEMENT ASSESSMENT BELOW (5 criteria)
- What GAAP was used? ASPE is not complex. Ecopak is a simple business.
They buy in bulk and put in containers and make eco-friendly things and
sell it. They have few customers. They are wholesaler and sell to retail
distributors/chains and large restaurant chains. They probably have 5-10
customers. Therefore simple business model and simple accounting
framework. So its not complex. If financials are simple, engagement risk
is low based on the complexity of financial statements.
- How widely distributed are the audited financial statements? Who are
users? Not wide. And not many users when Ella is auditor. You can count
them. Kam,Mike, Nina, Zhang and Bank. It is narrowly distributed. The
audit engagement risk is LOW.
- How strong is financial condition of Ecopak? Strong. If they are strong,
then engagement risk is low for Ella.
- How trustworthy is the management of the firm? What is integrity?
Consider integrity of Mike, Kam, Nina and Zhang? Are they high or low
integrity? High integrity because they take measures to deal with Ellas
concerns. They like their reputation, they are eco-friendly and trying to
do right by the environment. When they come across a problem, they fix
it the right way. Therefore high integrity. Nina also CPA and could lose
 license so she will rather be honest. Since MGMT is high integrity,
engagement risk is low.
- Knowledge of the financial statement users? How knowledgeable are
the users of this financial statement user? Their knowledge is high about
this company, they are either board members or officers of this
company. They are very knowledgeable. Audit engagement risk to Nina
is low.
Since all low, Ella accepted. If Ecopak tells Ella they are going public, what does
this mean to Ella?
All engagement risks become higher now.

Observation: Switching to Tariq.

Criteria: switching to IFRS. Changes in estimate, depreciate or revenue
recognization. FV vs. Historical value mistakes. Need appraisal. Engageemnt risk is
higher when we go from ASPE to IFRS. Depending on his engagement risk and
audit plan- he will charge up to $250,000. Vs Ella who charged probably $25,000.

AR (risk of taking on this audit) = IR x CR x DR

AR = 10%, 5%, 1% (based on engagement risk factors)
Confidence Level- 90%, 95%, 99%
- In a high risk audit, this says, 1% AR means I want to reduce audit risk.
Which means im doing a lot of work and will charge a lot.
- If I am Ella, who has low risk audit, and low engagement, this means I
can accept higher Audit RISk which means 10% audit risk and 90%
confidence level. Probability of Ella making mistake is low because
engagement is low.
- If I am Tariq, going to transition from ASPE to IFRS, audit risk will start
around 5% and confidence level 95%.
 Chapter 6

Observation: Tariq doesn’t have much experience about the industry, materials
packaging. But it’s a simple business and he has knowledge to be competent.
Criteria: He’s got to meet CAS 210 standard. How? IF you are manager how do
you make sure the objective is met? What do you do with your team? Hire an
auditor who is highly skilled in this type of audit. Rely upon the advice of a partner
in your firm who is highly skilled in this type of audit.
Must have access to predecessor auditor, He can ask Ella as well. She should send
working papers to them as well so they can read and understand.
Recommendation: bring in another auditor with experience in this industry.

Observation: Ecopak is going to IPO which affects many users of F/S. Observation
for Tariq the auditor is, he has to address these items and flag the risk. There is
engagement risk, AR, IR, CR and DR. Tariq has to assess all these risks based on
information of this case. Overall assessment of Tariq is low because they are
private at this point- going public. They are ASPE at this point but shifting to IFRS.
At first year audit of this company, you can assess engagement risk to be low.
- Tariq accepts Audit Risk (AR) as 5%. 5% makes sense because Tariq is a
new partner, he doesn’t want high risk and doesn’t want to look bad on
his first audit. HE wont select 10% audit risk. He know whats going on in
this company and understands there are some plans.
- IR CR DR, high moderate low,
25%, 50%, 75%, 100%
IR is risk of material misstatement. Need to consider business risks. (Chp
6, pg 195) PESTEL is way of thinking of business risk. Ecopak is Ontario
based in Sauga, work in safe political environment, no environmental
risk, socially theres no indication they are underpaying or employing
minors or nothing socially acceptable, technological, no new technology
risking this business, economical with covid there could be upturn or
downturn, and legal- simple packaging company. Not many legal issues
at this time. Assess al PESTEL risks and find out risk of material
misstatement. Lets assess IR is 100% which is 1. This means 100% risk of
material misstatement. Until I assess it better I will assume this.
CR- risk of internal controls will fail to fix/find material misstatement.
That means if internal control are strong, we use low CR. Inverse
relationship. If internal controls are weak- we use high CR. Weak
controls mean they don’t exist or don’t work. Moderate- exist and
sometimes work. Strong- exist and always work. In Ecopak, Nina as CPA-
moderate is fine. Therefore 50%

AR = 5%, IR= 100%, CR=50%

DR?
0.05 = 1 x .5 x DR
DR = 0.1

This means DR is risk of audit procedures failing to detect material

misstatement. Inverse relationships. Lower the DR, the more work for
auditor, larger sample size.. High DR is smaller sample size, less risk.
CR relates to approach, if we have high CR then that means controls are
weak so we will use substantive approach. Which means we test details
and balance. Low CR means we have strong controls and use combined
approach, which means use control tests.