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QUESTION #5 (16 Mаrks | 25 Minutes) Yоu аre the Audit Mаnager оn the year-end audit оf WD Valve Boxes Limited. Your team was assigned a new CPA Articling Student, Sindhu, who recently graduated from university. Sindhu performed the following two audit procedures and provided you with a written explanation about the reliability of audit evidence that she obtained as part of each procedure. Procedure #1: To verify the valuation of Accounts Receivable, I obtained from the Accounts Receivable Manager the Excel schedule where he calculated the year-end adjustment posted to the Allowance for Doubtful Accounts. I reviewed the formulas used in the calculation and recalculated all the totals. Because the recalculation was done directly by me (the Auditor), the reliability of this audit evidence is high, and I confirm that the Accounts Receivable balance at year-end is valued correctly; no further work required. Procedure #2: To verify the existence of Inventory, I attended the year-end inventory count. While walking around the warehouse, I inquired of employees who were taking the count about any possible inventory that could have been missed during the count, such as items located on top shelves. The employees told me that they haven’t missed any items. The reliability of this evidence is high as the inquiry was done directly by me (the Auditor). I confirm that the Inventory balance exists; no further work is required. REQUIRED: 1. Discuss Sindhu’s comments about the reliability of the audit evidence she obtained for each procedure. In your discussion, assess whether the evidence that Sindhu obtained is sufficient to support her conclusions. (6 Marks) 2. Review the assertions covered by each procedure. Does Sindhu’s work cover the stated assertion? If not, what assertion(s) did Sindhu’s work cover? (4 Marks) 3. Recommend more reliable evidence that Sindhu could obtain to support her conclusions for each procedure. Your discussion should include information about how auditors rank the reliability of audit evidence, and at least TWO (2) specific substantive tests that Sindhu could perform to gather this evidence for each procedure (ie. 2 tests for Procedure #1 and 2 tests for Procedure #2). (6 Marks)
QUESTION #2 (18 Mаrks | 30 Minutes) Clоud Airlines Limited (Clоud) is а regiоnаl airline headquartered in Calgary, Alberta. After experiencing massive growth in their first three years of operations, Cloud recently went public on the Toronto Stock Exchange and they are traded under the symbol CLD. They operate flights to major cities and smaller regional airports throughout Alberta, British Columbia, Saskatchewan and Manitoba. Because they have recently gone public and are experiencing rapid growth, Cloud has had to undergo a massive hiring spree. They have recently increased their headcount to 2,000 employees, over a 100% increase from their headcount a year ago. Because of this, Cloud has also hired a VP of Human Resources, Claude Benoit, to oversee their hiring and people strategy. Cloud has a mix of salaried, hourly and unionized employee, and Claude was hired because of his extensive expertise in the airline industry in the United States. Since Claude was hired in 2025, he has implemented a number of new hiring processes. All employees are required to go through background checks, which include a criminal and credit check. Further, for any employees working in safety-sensitive positions, such as pilots, flight attendants or airplane maintenance crews, they are required to complete drug and alcohol screening before they are hired. They also are subject to quarterly screens, and random selection as the airline chooses. As Cloud’s President and CEO, Emily Watson, anticipated the growth of the company, she established a Board of Directors with independent directors about three years ago. The board consists of 10 individuals with diverse experience and expertise, including those with airline industry experience, airplane manufacturing and engineering, a retired lawyer and a partner from one of the Big 4 auditing firms. The Board meets quarterly, and a number of committees also meet on a regular basis, including the Audit Committee, Risk Committee and Capital Maintenance Committee. Each committee has its own mandate, and they provide an update on their activities at the quarterly Board meetings. The Capital Maintenance committee is responsible for overseeing Cloud’s capital budget and maintenance plan on their fleet of aircraft. The Board, with the assistance of the Capital Maintenance committee, approves the annual budget and maintenance plan. So far in the December 31, 2026 fiscal year, Cloud’s operating profit has been positive and senior management continues to anticipate positive growth through the rest of 2026. However, the Capital Maintenance committee has concerns, because the company is currently overbudget on their capital maintenance plan. They have questioned senior management about this, and senior management has reported that the Finance team is having difficulties getting reliable information from their Enterprise Resource Planning (ERP) system, Oracle Cloud. Cloud Airlines implemented Oracle Cloud about 3 months ago. Their previous accounting system, Oracle 11i was no longer supported by their software vendor, so senior management had to make a quick decision whether to upgrade to Oracle Cloud or switch to a different ERP system. After their Information Technology Committee conducted a thorough review, the Board determined that it was best to upgrade to Cloud. The Finance team spent two years converting the accounting system, and they went live with Oracle Cloud on April 1st, 2026. Since upgrading their ERP, the Finance team has continued to experience challenges. The most challenging module has been the Capital Projects module, which tracks all of the capital projects undertaken. Engineers or Project Managers are supposed to submit requests to open up new projects which are in line with the list of projects pre-approved in the capital budget. The Capital Accounting team will then assign each project a project number and set up the budget in Oracle Cloud. As invoices are received, they are to be coded and assigned to their respective project. All of the invoices are meant to be scanned into Oracle Cloud, and then reviewed and approved based on workflows set up in the system. However, the Capital Accounting team has found that the workflow in Oracle Cloud doesn’t work because the company doesn’t have a signing authority policy. This means that there are no guidelines set out as to who is allowed to approve invoices, and what their signing authority limit is. The Finance team found that every department is following a different set of rules, and some departments are allowing any employees to order parts without pre-approval. The Finance team is also finding that the Engineers and Project Managers are not scanning their invoices into Oracle Cloud. They are still receiving hard copy invoices, and they are often lost or have incorrect information on them. It is creating an unmanageable situation for the Accounts Payable team, who is trying to collect paper invoices from Maintenance teams in each airport that Cloud Airlines operates from. The Accounts Payable team regularly receives calls from angry vendors, wondering why they haven’t been paid and many are threatening to cut Cloud Airlines off. It is creating chaos, as the Capital Accounting team is not able to properly account for or control costs. They have complained numerous times to the Controller and CFO, but no action has been taken to date. REQUIRED: 1. Assess the control environment, by providing specific examples of FIVE (5) strengths and FIVE (5) weaknesses that are present at Cloud Airlines Limited. (10 Marks) 2. For each weakness you identified in Part A above, provide a suggestion for how Cloud Airlines can improve their controls. (5 Marks) 3. Based on what you know about Cloud Airlines Limited, assess Control Risk as High, Medium or Low. Explain your decision. (1 Mark) 4. Based on your assessment of Control Risk in Part 3 above, what audit approach would you take for Cloud Airlines’ December 31, 2026 annual audit? Explain your decision. (2 Marks)