Audit of Hillsburg Hardware Limited: Assignment 2

Assignment 2 (Due November 5, 2021, 11:59 PM) – 15%

This assignment uses the scenario in the appendix of the course textbook, Auditing: The Art and Science of Assurance Engagements, Canadian 15th edition, Pearson, Arens, Elder, Beasley, Jones. You will need to read the appendix of the textbook to complete this assignment. This assignment places you as an audit junior (assistant) within an audit team of Hillsburg Hardware Ltd. This assignment is expected to establish your critical thinking and professional judgement skills similar to what would be expected of you within a financial statement audit.

1. Read the appendix which provides background information on Hillsburg Hardware Ltd. that is required context before reading the below questions.
2. Read the below additional information and questions and provide your response within this document.
3. Upload this document on Brightspace to the Assignment 2 submission folder prior to November 5^th, 2021, at 11:59.

1. Based on the information of Hillsburg Hardware, Fran is asking you to assess overall materiality for the audit. Please provide your rationale and calculation. (5 marks)
2. Assess performance materiality. Please provide your rationale and calculation. (4 marks)
3. Assess the need for specific materiality. Recommend a specific materiality. (3 marks)
4. Explain what trivial amounts mean. Recommend the trivial amount for the audit of Hillsburg. (3 marks)

Below is a conversation between Mitch and you:

Mitch: Hey, guess what?!!

You: What?!

Mitch: Shhh... come here, closer…

You: What’s going on?

Mitch: Don’t say anything! But I just overheard Joe and Leslie discussing something about some fraud at Hillsburg!

You: Fraud?! No way.

Mitch: Yes, but be quiet! Someone ACTUALLY called the whistle-blower hotline and reported some accounting fraud. I’ve already told some of the other juniors! They were all so jealous that they weren’t on this audit. I’ve also reached out to the juniors who were on the audit last year, I hope we hear from them soon to see what they think.

You: No way. Didn’t those juniors quit and go somewhere else?

Mitch: Yeah, but we keep in touch over Messenger. If this fraud turns out to be real, then this could really change the audit!

1. Identify the ethical requirements of auditors that auditors are required to comply to and identify and explain the relevant ethical requirements that were breached (6 marks)
2. List the proc Identify the ethical requirements of auditors that auditors are required to comply to and identify and explain the relevant ethical requirements that were breached  edures that the auditor should perform to obtain information that will enable the auditor to assess fraud risk. (4 marks)
3. Discuss management’s and auditor’s responsibilities for the prevention and detection of fraud. (6 marks)
4. Discuss the impact of the reported fraud on Hillsburg’s financial statement audit. (5 marks)

Given the information received about the ONHAND system cyber attack, answer the following questions:

1. Based upon the description of the cyberattack, what concerns should the audit team have regarding the system of internal control? (4 marks)
2. How does the cyberattack impact the risk of material misstatement at the financial statement level? Discuss the impact of the WannaCry cyberattack on Hillsburg’s financial statement audit. (3 marks)
3. Based upon your assessment of the risk of material misstatement, how should the auditors adjust their overall risk response? (2 marks)

Fran has asked you to assist on the inventory working papers, but before you get started, you reviewed the working papers in Hillsburg’s las-year’s audit file. You noted the following:

• Hardware stores can place their orders directly through the ONHAND system and that the system automatically generates a picklist that lists the ordered products and their location in the warehouse.
• Only part-time staff, who wear a grey uniform are allowed to gather the products listed on the pick list.
• Full time staff, who wear blue uniforms, are not allowed to gather any products, but are solely responsible for verifying that the part-time staff correctly gathers all the ordered products.
• Once the order is verified, the picklist is signed off by a full-time staff and filed.
• Once a month, one of the full-time staff is also responsible for counting all the high-value inventory items.
• The warehouse supervisor is supposed to do a recount to verify the count results and resolve any discrepancies. Once this is one, the supervisor signs off on the count sheets and they are filed.

She has asked you the following to clarify your understanding before conducting any work:

1. Explain the difference between substantive procedures and test of controls (4 marks)
2. Describe the difference among substantive tests of transactions, substantive analytical procedures, and substantive tests of balances. (6 marks)
3. Describe the process of designing and performing test of controls.  (6 marks)
4. Suggest two tests of controls that you could conduct to test Hillsburg’s inventory controls. (4 marks)

The following are audit procedures from different transaction cycles.

1. Examine sales invoices for evidence of internal verification of prices, quantities, and extensions.
2. Select items from Hillsburg’s inventory records and examine the items in the warehouse.
3. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger.
4. Select a sample of entries in the acquisitions journal and trace each one to a related vendor’s invoice to determine whether one exists.
5. Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period.
6. Inquire with Avis Zomer whether each account receivable in the aged trial balance is collectible.
7. Compute inventory turnover for each major product and compare with that in previous years.
8. Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger.

For each of the following audit procedures:

1. Identify the transaction cycle being audited (8 marks)
2. Identify the type of evidence (i.e., specific type of procedure) (8 marks)
3. Identify if it is a test of control or a substantive test. (24 marks)
   1. For each substantive test, identify if it is a test of details or an analytical procedure.
   2. For each test of control or test of details of transactions procedure, identify the transaction-related assertion being tested.
   3. For each analytical procedure or test of details of balances procedure, identify the balance-related assertion being tested.