Management assesses risks as a part of designing and operating internal controls to
minimize fraud and errors. Auditors assess risks to
A) decide the evidence needed in the audit.
B) fully implement the audit risk model.
C) enable them to assess the completeness of internal controls.
D) make sure that the company will continue to operate over the next year.
You are the auditor for GreenAcres, a non-profit home for homeless elderly.
GreenAcres has a December 31 year end. It receives government funding, and also
relies upon donations for revenue. GreenAcres has a major funding drive in November,
when it collects pledges by means of activities at a garage sale, a walkathon, and fall
bake sale events in the community.
During late February you had a meeting with Ellen Famous, the President of
GreenAcres, at the organization’s premises. Ellen reviews and approves bank statements
and is the second and final cheque signer. Two other accounting staff have the following
responsibilities:
– Paul approves pledge write-offs (which normally average about 15%), opens the mail,
endorses cheques received in the mail, prepares and delivers bank deposits, and posts
transactions into the accounting system.
– Diana, a retired bookkeeper, volunteers about 10 hours per week to reconcile the bank
account, review journal entries posted to the general ledger, and prepare payroll and
accounts payable transactions for processing.
Ellen normally reviews pledge write-offs, but was very busy in February, so she took a
look while you were there. To her surprise, she found that about 40% of the pledges had
been written off. She asked Diana to investigate, and Diana found that most of the
write-offs had actually been paid.
Required:
A) What are possible causes of the inconsistency with the pledge write-offs?
B) What are the weaknesses in internal control that could allow the excess write-offs to
occur? Provide recommendations for improvement.
C) Identify audit procedures that you would complete to quantify any potential
misstatement with respect to the pledges receivable balance as at December 31.
When should a PA assess the five threats to independence with respect to an audit
engagement?
A) When deciding to accept a client or whether to continue an existing engagement
B) After signing the engagement letter and before commencing field work
C) After the completion of this year’s audit, before starting the next engagement
D) After a discussion with the Board of Directors
Master file data is the semi-permanent data in an employee’s file. Changes to master file
changes
A) should be adequately supported.
B) should be checked by the originator.
C) would be entered only once per month.
D) would be implemented on an annual basis.
Which of the following actions is more likely to be a result of error rather than fraud?
A) consignment sales are knowingly recorded as revenue
B) orders are shipped to a customer with a bad credit rating
C) fictitious revenue transactions are recorded and reported
D) subsequent period revenue is deliberately recorded in the current period
XYZ Company uses standard costs for allocating costs to work-in-process and finished
goods inventory. For the last few months, there have been high variances between total
standard costs and actual costs. What is one of the likely reasons for this variance?
A) the accounting department has been developing the costs
B) production quantities are different than expected
C) there is an increase in inventory quantities on hand
D) receiving department has been stockpiling raw materials
The auditor would like to design a test of control to test the following key control:
‘shipping documents are issued in numerical order by the computer and are accounted
for weekly.” Which of the following typical tests of controls would be suitable?
A) trace sales documents issued to the sales journal and trace the daily total to the
general ledger
B) ask the shipping department about the process that they use to issue shipping
documents, paying particular attention to continuity of numerical sequence
C) use computer assisted audit testing to determine whether there are any numbers in
the sequence missing (gap detection)
D) match shipments to the associated sales invoice
The factor which distinguishes an error from fraud and other irregularity is
A) materiality.
B) intent.
C) whether it is a dollar amount or a process.
D) whether it is a caused by the auditor or the client.
How is use of an applicable accounting framework enforced via legislation?
A) The Canada Business Corporations Act and many provincial incorporating acts
require that financial statements be prepared in accordance with the CICA Handbook.
B) PAs who do not prepare financial statements in accordance with such frameworks
are expelled from their professional association.
C) Tax authorities may sue corporations who do not prepare their financial statements
in accordance with such frameworks.
D) Financial executives may be sued if the financial statements prepared by their
company are not in conformance with such frameworks.
When the auditor examines the minutes of board of directors’ meetings for the amount
of the dividend per share and the dividend date, the auditor is checking for
A) completeness.
B) valuation.
C) understandability.
D) existence.
The “unqualified report with explanatory paragraph” or the “unqualified report with
modified wording”
A) arise as a result of an incomplete audit.
B) arise when the financial statements are not quite “presented fairly.”
C) meet the criteria of a complete audit with satisfactory results but further explanation
is required.
D) meet the criteria of a complete audit but with unsatisfactory results.
An important benefit of industry comparisons is as
A) an aid to understanding the client’s performance.
B) an indicator of errors.
C) an indicator of irregularities.
D) a least-cost indicator for audit procedures.
Comparison of individual notes payable outstanding with the prior year could detect
what type of possible misstatement?
A) Misstatement of interest expense or accrued interest, or omission of a note payable
B) Omission or misstatement of a note payable
C) Misclassification of a note payable as long term rather than current
D) Misstatement of notes payable, interest expense or accrued interest
Cimco Forest is a client of your PA firm that has requested that the audit of its financial
statements be completed 25 days after its year end. Given the time constraint, the
auditor
A) should not accept Cimco as a client.
B) should increase the size of the audit team.
C) can perform audit procedures at an interim date and roll forward the interim balances
to year end.
D) should change the audit program to include more tests of controls and less tests of
details as they are more time consuming.
The auditor is determining which specific inventory items should be selected for pricing
tests. The auditor has selected a representative sample, and those items that have a large
dollar amount. In addition, the auditor should select those items that
A) are prone to breakage or theft.
B) have wide fluctuations in price.
C) are stored in multiple locations.
D) are likely to have been miscounted during the inventory count.
When conducting a review engagement, how is materiality calculated?
A) materiality is not calculated as a lower level of assurance is being provided
B) the concept of significance is used, rather than the concept of materiality
C) always as a percentage of net income before income taxes
D) in the same manner as an audit engagement
For some audit objectives and in some circumstances, analytical procedures may be the
most effective procedure to apply. The objectives that most likely would benefit from
the use of analytical review with respect to the allowance for uncollectible accounts
would be
A) validity of sales transactions recorded for individual customer accounts.
B) classification and completeness of transactions, accuracy of judgments and
estimates.
C) collectability of individual customer account balances.
D) allocation of transactions to the proper accounting period.
Comparison of individual customer balances with previous years will detect what type
of possible misstatement?
A) misstatement in gross profit and bad debt expense
B) overstatement or understatement of bad debt expense
C) overstatement or understatement of allowance for uncollectible accounts
D) misstatements in accounts receivable and related income statement accounts
Following are three different situations with respect to the audit of accounts receivable
and sales. For each, specify the evidence mix that you would use (tests of control,
substantive tests, type of confirmation/timing), and explain why.
A) The client is in a volatile industry, selling products that can quickly become
technically obsolete. Total accounts receivable is $65 million, with a bad debt
allowance of $7 million. The company has recently laid off three accounting staff to
save money.
B) A small company has 45 different customers, with balances ranging from $500 to
$25,000 per customer. There is one accountant on staff, and a professional accountant
comes in once per week for three hours to review the work and prepare journal entries.
Bad debts are rare, as the owner is actively involved in accounts receivable collection.
C) Big Department Store Finance Corporation has fifty staff in the accounting
department, a sophisticated software package, and about $250 million in accounts
receivable. The corporation manages the department store credit cards. About 100,000
credit card customers have balances less than $300 on their accounts, while the
balances for the remaining customers range up to a maximum of $5,000.
Jessica is a summer junior at Branes & Castle, a PA firm. Jessica has only completed 3
accounting courses in university and has not yet taken her auditing class. A team of
auditors from Branes & Castle are starting the audit and Jessica was sent to help them.
Jessica
A) can perform work for the audit engagement as long as she is supervised and proper
review of her work is performed.
B) should not perform any work pertaining to the audit engagement since she doesn’t
have sufficient knowledge.
C) should be limited to assisting the audit team with support functions such as
photocopies and file assembly.
D) can perform work for the audit engagement on cycles where risk was assessed as
low.
Notes payable which have been repaid in full should be
A) destroyed so that they will not be paid again inadvertently.
B) cancelled and destroyed.
C) cancelled and returned to the creditor.
D) cancelled and retained by an authorized company official.
To comply with the second examination standard, the auditor need not be concerned
with all areas of internal control that apply to management. The auditor’s primary
concerns are with the system’s ability to
A) maintain reliable control systems pertaining to financial transactions.
B) promote efficiency and encourage adherence to policy.
C) prevent and detect financial statement fraud and error.
D) provide reliable data and safeguard assets.
“An engagement where the practitioner expresses a conclusion on a written assertion
about a subject prepared by a party accountable for the assertion, such as management”
is the definition of a(n)
A) audit engagement.
B) attestation engagement.
C) review engagement.
D) assurance engagement.
The test of details of balances procedure which requires the auditor to recalculate
accrued interest will satisfy the audit objective of
A) existence.
B) completeness.
C) classification.
D) accuracy
A set of records for each piece of equipment that includes descriptive information, date
of acquisition, original cost, current year amortization, and accumulated amortization is
the
A) capital asset master file.
B) file of purchase requisitions.
C) amortization schedule.
D) acquisitions journal.
When the proper disclosure in the financial statements of material contingencies is
through footnotes, the footnote should describe the nature of the contingency to the
extent it is known and
A) the auditor’s opinion as to the expected outcome.
B) the opinion of legal counsel or management as to the expected outcome.
C) an estimate of the amount or a statement that the amount cannot be estimated.
D) the steps client has taken to ensure that it doesn’t recur.
In addition to the possibility of kiting, inaccurate handling of bank transfers could result
in
A) a misclassification between cash and accounts receivable.
B) an incorrect balance in the accounts receivable account.
C) a misclassification between cash and accounts payable.
D) an incorrect balance in the bank loan account.
What is one of the ways that high-profile business failures such as Enron, WorldCom
and Nortel have affected the auditing profession?
A) raised the cost of hiring accounting firm professionals
B) resulted in a need for decreased paperwork on audits
C) lowered the number of professionals working on an audit engagement
D) created an increasing focus on standards and high-quality audits
The auditor has sent inquiry letters to all of the client’s law firms. Two law firms stated
that the client was unlikely to win the lawsuits in question, whereas the client had said
the opposite. What action should the auditor take?
A) ask management for invoices supporting the omitted lawsuits
B) request a meeting with management and the respective law firms
C) ask the law firms to provide additional details with respect to the lawsuits
D) change control risk to maximum and increase substantive testing
If a potential loss on a contingent liability is unlikely and the event will not likely have
a significant adverse financial effect, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes, but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor’s report but not disclosed on the financial statements.
The risk response phases of conducting the financial statement audit using a risk
assessment approach includes
A) conducting an independence threat analysis to evaluate independence.
B) preparation of the final auditor’s report in response to audit findings.
C) identification of risks of material misstatement at the client.
D) gathering evidence to assess the likelihood of material misstatement.
Each key control that the auditor intends to rely on must be supported by sufficient
A) tests of details of balances.
B) tests of controls.
C) analytical review procedures.
D) reperformance procedures.
To facilitate the working paper preparation process, defaults can be established to
automatically insert client name, period covered, and preparer. This can best be done
using
A) the junior staff assigned to the engagement.
B) an old-fashioned rubber stamp on each printed page.
C) cut and paste from word processing or spreadsheet software.
D) automated working paper software.
Notes payable are easy for companies to correctly value and include in the financial
statements. This means that with respect to notes payable, inherent risk is
A) low.
B) medium.
C) high.
D) not assessed.
Ordinarily, it is unnecessary to test the valuation of capital assets recorded in prior
periods because
A) it will not affect the current valuations.
B) they were verified in previous audits.
C) the related amortization calculations for the current period are more important.
D) the emphasis of the audit is on the income statement items, not the balance sheet
items.