When the auditor knows that the financial statements may be misleading because they
were not prepared in accordance with an acceptable financial reporting framework, he
or she must issue
A) a qualified opinion.
B) an adverse opinion.
C) a disclaimer of opinion.
D) a qualified or an adverse opinion, depending on the materiality of the item in
question.
Which level of risk does the auditor normally assign to the presentation and
disclosure-related assertion of completeness for contingent liabilities and subsequent
events?
A) low risk for inherent risks that required information may not be disclosed in the
notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high that all required information may not be disclosed in the notes
Which of the following internal control tests would be used in assessing that recorded
payroll transactions are for the amount of time actually worked and at the proper pay
rate, and that withholdings are properly calculated?
A) Foot payroll journal and trace to general ledger
B) Prove the bank reconciliation
C) Recompute gross pay
D) Review the payroll journal for large or unusual amounts
The auditor wants to trace credits from the accounts receivable transaction history files
to the duplicate bank deposit slips and other authorized sources as a test for fictitious
credits in the data files. Which of the following sampling methods would be the least
costly to use in this situation?
A) simple random
B) block
C) systematic
D) probability proportionate-to-size
Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.
To test whether the client has fulfilled its legal obligation in submitting payments for all
payroll withholdings, the auditor must first
A) contact client’s independent legal counsel.
B) know the dates when tax payments are due.
C) trace these payments to the imprest payroll account.
D) determine the client’s requirements for submitting the payments.
A document sent to each customer showing his or her beginning accounts receivable
balance and the amount and date of each sale, cash payment received, credit memo
issued, and the ending balance is the
A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.
The auditor would like to design a test of control to test the following key control:
“there is a separation of duties between billing, recording sales, and handling of cash
receipts.” Which of the following typical tests of controls would be suitable?
A) match the amounts billed to the amounts recorded
B) verify that sales have been recorded in the proper period
C) trace cash receipts to the duplicate bank deposit slips
D) inquire about the duties of the accounting personnel
PAs are members of a professional association that can impose sanctions for violations
of the professional code of conduct. What is an example of a severe penalty that can be
imposed by a professional association?
A) Publication of information about the offence in a newsletter
B) Requirement of the completion of training courses
C) Requirement to have another peer review conducted within one year
D) Expulsion from the professional association
A company has changed its method of inventory valuation from an unacceptable one to
one that complies with ASPE (Accounting Standards for Private Enterprises). The
auditor’s report on the financial statements of the year of the change should include
A) no reference to the item assuming that the change has been properly disclosed.
B) a reference to a change in accounting principle in the opinion paragraph.
C) an explanatory paragraph explaining the change.
D) a justification for making the change and the impact of the change on reported net
income.
The PA is having a discussion with his client about the outcome of several lawsuits that
are presently in progress. The client has requested that the comments during the
discussion be removed from the audit file. The client would like the only documentation
in the audit file to be the legal letter from the client, and brief comments with respect to
the auditor’s judgments with respect to the quality of disclosure in the financial
statements. The client is concerned that
A) only high quality audit working papers be included in the working paper files.
B) auditors may breach confidentiality and disclose information about the client.
C) the auditor’s working paper files may be subpoenaed by the courts.
D) the audit firm does not have adequate quality control procedures.
In determining the quantity and quality of evidence to gather, the auditor will be
satisfied when the evidence is
A) irrefutable.
B) conclusive.
C) highly persuasive.
D) sufficiently convincing.
Which of the following misstatements in the payroll cycle could be detected during the
audit of payroll transactions (but would not be discovered as part of the audit of the
bank reconciliation)?
A) failure to include outstanding payroll cheques on the outstanding cheque list
B) overpayment of Receiver General payments received after the year end but recorded
as cash receipts in the current year
C) unclaimed payroll cheques recorded as a deposit near the end of the year, but
reconciled as deposits in transit
D) payment to fictitious employees that had been set up by the payroll supervisor
Assessing design effectiveness and conducting tests of controls are required when the
auditor
A) chooses to set control risk below 100 percent and relies on the controls.
B) chooses to set control risk below 100 percent even it there is no reliance placed on
controls.
C) is planning the audit.
D) should always test the design effectiveness.
There are many types of analytical procedures that the auditor can conduct during the
planning stage of the financial statement audit. What is the purpose of calculating key
ratios for the client’s business and comparing them with industry averages?
A) understand the client’s industry and business
B) assess going concern
C) indicate possible misstatements
D) reduce detailed tests
Discuss the two most common ways in which employees can defraud a company in the
payroll area.
The auditor’s tests of the adequacy of the physical controls over raw materials,
work-in-process, and finished goods are usually limited to
A) observation and inquiry.
B) inspection and observation.
C) inspection and confirmation.
D) inspection and inquiry.
When the auditor examines the board of directors’ minutes for dividends declared, the
auditor should be alert to the possibility of unrecorded dividends declared, particularly
shortly before the balance sheet date. Which audit assertion does this address?
A) valuation
B) existence
C) completeness
D) understandability
Professional skepticism during the financial statement audit requires an appropriate
state of mind, being impartial and objective and continuing to be throughout the whole
audit engagement. Which of the following illustrates an appropriate state of mind?
A) not having any ownership in the client’s shares or being a debt-holder
B) carefully assessing documents and not being the company’s advocate
C) matching documents to make sure that they are accurate and fair
D) being aware that there could be material misstatements in the financial statements
Marianne is currently performing tests of controls on the presence of an employee code
of conduct, the presence of a whistle blower line and on how management responded
and implemented systematic penalties for instances where violations of the code of
conduct existed. Marianne is currently evaluating the
A) industry and business environment.
B) risk of fraud.
C) client acceptance.
D) entity-level controls.
While performing services for their clients, professionals have always had a duty to
provide a level of care which is
A) reasonable.
B) greater than average.
C) superior.
D) guaranteed to be free from error.
Positive accounts receivable confirmations were circularized, and there were many
differences where the client stated that the goods had not been received as of the date of
the confirmation. In addition to the possibility that the goods were not received by the
client, this type of reported difference could be an indication of
A) a cutoff misstatement.
B) timing differences with respect to recording sales returns.
C) improper recording of sales allowances.
D) theft of cash or lapping.
Which of the following is a typical consequence to a PA or PA firm if practice
inspectors find any files or quality control procedures to be unsatisfactory? The PA
A) will lose the right immediately to conduct audit engagements.
B) will no longer be allowed to sign audit reports for a period of time (such as a year).
C) may be required to revise processes or attend training courses.
D) will be required to rewrite the professional qualification examinations.
When does the auditor normally conduct tests of controls?
A) prior to the completion of the tests of details
B) after the completion of all analytical review
C) prior to the preparation of the client risk analysis
D) prior to the finalization of the audit risk model
How do quality control processes for the financial statement audit process incorporate
consideration of legislation that affects the client?
A) requiring second partner review of all working partners that relate to legislative
matters
B) provide auditors with copies of legislation that affects their client
C) train all auditors in legislation details that could affect all clients
D) include in audit checklists questions that address relevant new legislation
A) An auditor is concerned that accounts receivable may be understated due to sales to
customers that have been omitted from the sales journal and from the accounts
receivable master file. Describe the procedure(s) the auditor should perform in these
circumstances.
B) Describe how the auditor tests the classification objective for accounts receivable.
Evidence is generally considered appropriate when
A) it has the qualities of being relevant, objective, and free from known bias.
B) there is enough of it to afford a reasonable basis for an opinion on financial
statements.
C) it has been obtained by random selection.
D) it consists of written statements made by managers of the enterprise under audit.
Fabio recently sold his restaurant for $650,000, the value of the net assets as reported
on the balance sheet. After the sale, Fabio realized that he could’ve sold the restaurant
for as much as $950,000 as the fair value of the assets was $300,000 higher than what
was reported on the balance sheet. Fabio is suing the auditors for his loss. The auditor’s
best defence is
A) absence of a misstatement.
B) lack of duty.
C) no damages.
D) absence of causal connection.
On a bank transfer schedule, if a cash disbursement was recorded in the current fiscal
year, and the receipt in the subsequent fiscal year, this might be
A) the best way to record this type of transaction.
B) an indication of increased inherent risk with respect to cash.
C) an attempt to cover a cash shortage.
D) an indication of an error in recording information by the bank.
The costs used to value the physical inventory must be tested to determine whether the
client has correctly followed an inventory method that is in accordance with an
acceptable financial reporting framework and is consistent with previous years. The
audit procedures used to verify these costs are referred to as inventory
A) price tests.
B) compilation tests.
C) cost allocation tests.
D) consistency tests.
At the first day of work at a PA firm, staff are given their own laptop computer for use
in working with clients and other data.
Required:
A) What is the typical structure of client working paper files?
B) How is client data protected from unauthorized change?
Balance-related audit objectives are applied to which types of general ledger accounts?
A) balance sheet accounts only
B) income statement accounts only
C) balance sheet accounts and some income statement accounts
D) accounts that affect the cash flow statement
Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago,
a letter was received from the provincial government informing them that they needed
to reduce the level of contaminants that they were releasing into the air and into local
waterways. The deadline for this reduction is three months from today. The letter
indicates significant fines (several hundred thousand dollars) if the targets are not met.
Alternatively, the Company will need to shut down operations until the targets are met.
During your audit planning process management informed you that they have not taken
any action, but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has upon your audit planning process.
Define “direct reporting engagements.”
The Canadian Auditing Standards state the the auditor must develop an audit plan. List
and explain the components that must be included in the auditor’s plan.
Describe the items the auditor is required to report to the audit committee.
What is the purpose of developing a client risk profile? List the steps involved in
developing a client risk profile.
There are two conditions requiring a departure from an unqualified audit report. Discuss
each of these conditions and state the appropriate audit report for each condition.
You have just been given the approval to conduct statistical sampling for the audit of
capital assets acquisitions. Previously, this work was completed using a judgmental
sample.
Required:
Explain the key areas where decisions need to be made when conducting audit work
using a statistical sample.
Joan is the owner of a small manufacturing company. In prior years, your firm has
conducted a review engagement of the company. However, this year, Joan obtained a
loan from the federal business development bank, and is required to have an audit of
her financial statements. When you started asking about controls and procedures at the
company, Joan got pretty upset.
“All you need to be concerned about is the numbers! Why are you asking all of these
questions? It takes too much time away from my staff to answer these questions! Just
check the numbers and let us get on with our work!”
You calmed her down a bit, and reminded her about the general discussion that occurred
with the engagement letter. You invited her for coffee to briefly explain the following
items:
1. Why auditors are concerned about internal controls
2. Why auditors are required to be concerned about internal controls
3. What you need to do to understand internal controls
4. What you will do once you have documented your understanding of internal controls
Required:
Explain what you would say to Joan.
White Top Telephones is the largest telephone distributor in the province, distributing
wired and wireless phones, as well as cellular phones. Management always seems to be
in a rush, and difficult to approach. Unfortunately, this attitude has permeated down to
all of the staff, and everyone seems to be hurrying about, doing what needs to be done.
Sometimes, it seems as if they don’t even have time for the customers, moving on to the
next task.
Yet everything seems to get done. The company’s web site has a lengthy privacy policy
statement indicating that customers are number one, and that all data are kept secure.
Required:
Explain the importance of the control environment and corporate governance structure.
During what phases of the risk assessment and planning process would the control
environment and corporate governance structure be documented and assessed?
You are the auditor of Foundry Inc., a company that manufactures chocolate bars and
assorted candies. The description of the sales and collection cycle for Foundry is as
follow:
Clients & Credit Limits
Foundry has 50 clients as they mostly sell to grocery stores’ central purchasing
departments or distributors. For each customer, Foundry performs a credit check prior
to setting the credit limit for the client. The credit limit is reviewed each year.
In the past year, the credit limits were increased by 10%. This is due to the growth in
product lines of Foundry and increased demand from customers. This also came at the
same time the CEO of Foundry set the objective of growing the company’s revenue by
25% over the next two years. Increasing the credit limit has helped Foundry move
towards that objective.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is calculated by the controller by taking a
percentage of the total sales for the month. The controller has been taking 3% of total
sales. The estimate has not been revised in the current year, but it has always been
sufficient to cover for any write-off incurred.
Required: For each of the two areas discussed above, identify the risk areas and the
most likely misstatements for Foundry.
Your preliminary discussion with European Real Estate Management (EREM)
Corporation indicated that the company was owned by three Swedish individuals who
sold limited liability partnerships of shopping malls, office buildings and large
residential apartment buildings to European investors. Often, a single shopping mall
was broken up into several limited liability partnerships to make the ownership pieces
small enough to sell easily.
In some cases, these partnership units were sold to European companies, who
diversified and bought units in several buildings. Other units were purchased by
individuals. If a property looked particularly promising, the owners of EREM
occasionally purchased units or advised their wives and family members to purchase
units.
Required:
Explain why it is important for the auditor to identify related party transactions. Why
are related party transactions a high risk area for the EREM audit?
Raul, PA, received a call from his friend Cristobal Franco. He needed an audit urgently,
because the bank might call his loan for his computer store CF Ltd. Since Cristobal had
been his high school friend and they still played soccer together every two weeks, Raul
agreed. Raul and Cristobal had a quick meeting, where Raul fixed the audit fee at
$10,000. Cristobal stressed the importance of an unqualified opinion for the bank.
Raul sent two available junior staff to CF’s offices. The junior staff were experienced in
review engagements, and had been working for Raul for about six months. The two
staff had a quick look around the store, noting the documents strewn everywhere. The
accounting staff came in and chatted briefly after their smoke break. They were about a
month behind on recording transactions, because Cristobal had laid off one sales
person. The accounting staff also helped out with providing sales quotes and Cristobal
did all of the technical work.
At the end of the day, the junior staff were each given a $250 gift certificate to be used
in the computer store. This was great, because CF also sold MP3 players and supplies
such as CDs and DVDs.
At dinner that night, the junior staff told their family that it would probably be a great
idea to hold off on any computer supplies or equipment purchases that they needed,
since CF would likely hold a sale in the next month or two to improve cash flow.
Required:
Identify and discuss the violations in the rules of conduct with respect to CF.
The auditor’s decisions regarding evidence accumulation can be broken into five
subdecisions. One decision relates to determining the nature of the audit procedure to
be used to collect the evidence; i.e., “which audit procedures to use.” Identify and
discuss the remaining four audit evidence decisions that the auditor makes.
Yvan is preparing the audit plan for Share the Wealth, a non-profit organization. Share
the Wealth is a large Montreal based organization and receives corporate donations and
also has many stores that collect and re-sell costume jewelry and clothing. The purpose
of the organization is to build recreation areas for children in less fortunate areas of the
city.
Share the Wealth was started by two sisters. One of the sisters is still actively involved
in the organization, but the other sister has been devoting less time to the organization
since she has had triplets.
Share the Wealth has a total of 8 stores in the city where individuals can drop off
donations and where customers can also purchase the second hand clothing and
costume jewelry. Share the Wealth has a total of 12 employees who work in the
different stores across the city. Depending on the schedule and availability, the
employees will randomly be assigned to a store for the week.
Required:
Provide three procedures that Yvan should consider when performing the review
engagement of Share the Wealth?
One of the lessons learnt from accounting scandals such as Enron is that generally
accepted accounting principles (now under an acceptable financial reporting
framework) cannot be relied upon exclusively in deciding whether financial statements
are fairly presented. Why is this the case?
You are the senior in charge of the accounts receivable section of the audit of a large
clothing manufacturer downtown in the clothing district. The client sells to local
clothing stores as well as to other retailers in the province.
Accounts receivables seem to be deteriorating, with many more accounts in the over 90
days column than in the past. You sent out twenty accounts receivable confirmations,
but only six were returned. Of these six, only three confirmed the balance as in
agreement with the client, while the others indicated that they kept their records on an
open item basis (rather than a balance forward basis) and were unable to respond to the
confirmation request. When you looked at the prior year’s file, it seemed that the same
thing had happened last year.
When you phoned the supervisor in charge of the audit engagement, she told you to not
bother with follow up, as the engagement was already over budget and costs need to be
kept down. You were concerned that you would be unable to state a conclusion with
respect to the fairness of the accounts receivable balance and she was really angry with
you, saying that she would have to sign off for you then.
Required:
Discuss the ethical and quality issues raised by this audit engagement.
Discuss three examples of analytical procedures an auditor might perform while
auditing the sales and collection cycle. Also discuss the potential misstatement(s) that
may be revealed by each analytical procedure.
Note: students could also be asked to separately discuss ratios for planning and ratios as
substantive tests.
What are the three main factors that influence the organizational structure of all Public
Accounting firms?
Below are 12 audit procedures. Classify each procedure according to the following
types of audit evidence: (1) inspection, (2) external confirmation, (3) recalculation, (4)
observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure.
Discuss the methodology for designing tests of details of balances for inventory.