Question

(15 points) 1, Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget" However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything - it will only make us go over the budget" When Alan came to the client near the end of field work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in- town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with the performance principle? Explain. (5 points) 3. Identify the two types of audit plans and indicate the purpose of each.

Answer 1

The examination standards are outlined below.

1. The work should be adequately planned and properly executed using sufficient knowledge of the entity's business as abasis. If assistants are employed, they should be properly supervised.

2. A sufficient understanding of internal control should be obtained to plan the audit. When control risk is assessed belowmaximum, sufficient appropriate audit evidence should be obtained through tests of controls to support the assessment.

3. Sufficient appropriate audit evidence should be obtained, by such means as inspection, observation, enquiry,confirmation, computation, and analysis, to afford a reasonable basis to support the content of the report.