The existence of advanced automated systems affects the audit process. Which of the
following characteristics is an indicator of the presence of an advanced automated
information system?
A) use of data communications (such as the Internet) to transfer transaction data
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically-controlled equipment used in the manufacturing process
When considering the relationships between types of audit tests and evidence, which of
the following procedures are used for both obtaining an understanding of internal
control and for conducting tests of controls?
A) inspection, recalculation, observation, inquiry, and reperformance
B) inspection, recalculation, external confirmation, and reperformance
C) recalculation, observation, inquiry, analytical procedures and reperformance
D) analytical procedures, inspection, recalculation and reperformance
An effective board of directors helps ensure that the company takes only appropriate
risks. The audit committee can
A) reduce the likelihood of fraud and financial statement errors through oversight of the
entity level controls.
B) reduce the likelihood of financial statement errors by helping management of the
company with complex financial reporting issues.
C) reduce the likelihood of financial statement errors by helping management in the
preparation of the financial statements and related notes.
D) reduce the likelihood of overly aggressive accounting through oversight of financial
reporting.
Which of the following is the best example of an intimidation threat? Management
A) has decided to sue you because the audit fee was twice as high as they expected.
B) has changed auditors of all of its subsidiary companies as they can get the audit done
for a lower cost.
C) threatens to change auditors if you do not let them overstate accounts receivable by
$100,000 (the bad debt allowance is too low).
D) threatens to resign from the company if the board of directors does not give them a
15% raise.
A) State the five specific transaction-related audit objectives for sales and describe one
common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for
sales.
Joan talked to the owners of Fancy Clothing Limited before investing. She obtained a
copy of their financial statements and saw that profits were low, even considering the
fact that the owners did not take any money for themselves in the current year.
However, she decided to invest in the company because she believed her superior
knowledge of the clothing industry would turn the business around, resulting in enough
profits for all owners. Unfortunately, this did not occur and the company went bankrupt.
Joan is suing the auditors because she relied upon the financial statements during her
investment decision. What is the auditor’s best defence?
A) absence of misstatement
B) contributory negligence
C) non-negligent performance
D) duty of care
An inventory acquisition is received late in the afternoon of December 31 after the
physical inventory is completed. If the acquisition is included in accounts payable and
purchases, but excluded from inventory, the result
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) does not affect earnings.
D) is indeterminable from the information given.
Before performing a review of an entity’s financial statements, an accountant should
A) complete a series of inquiries concerning the entity’s procedures for recording,
classifying, and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material
modifications should be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of
the industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required
by generally accepted accounting principles.
The purpose of tests of controls is to provide reasonable assurance that the
A) accounting treatment of transactions and balances is valid and proper.
B) accounting control procedures are operating effectively.
C) entity has complied with disclosure requirements of generally accepted accounting
framework.
D) entity has complied with requirements of quality control.
The control environment consists of actions, policies and procedures that
A) reflect the overall attitudes of top management, the directors and the owners of an
entity about control and its importance.
B) govern access to particular applications, such as how employees use passwords to
change master file payroll rates.
C) are recorded on the web site, for example, access policies to data.
D) help implement the ethical attitudes at the organization, such as a computer usage
policy.
Most of the major lawsuits against public accounting firms have dealt with
A) audited or unaudited financial statements.
B) disputes over income tax preparation services.
C) disputes arising in the performance of management consulting services contracts.
D) unaudited financial statements.
Celebra sold some goods to Frankfurt Corp. Frankfurt sent a cheque to Celebra to pay
for the goods on December 24th. Celebra received the check on January 4th. At
December 31st, Celebra still showed an account receivable from Frankfurt while
Frankfurt no longer had an account payable to Celebra. This situation represents a
A) cut-off error.
B) timing difference.
C) error in presentation.
D) lack of communication between the two companies.
The audit risk model is
A) a planning, testing, and evaluation model.
B) useful in planning but of limited value in evaluating results.
C) useful in evaluating results but of limited use in planning.
D) useful when performing the tests of balances, but of little value in either the
planning or evaluation stages.
In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover the fraud is greater for
A) employee fraud because of the larger number of employees in the organization.
B) employee fraud because of the higher crime rate among blue collar workers.
C) management fraud because of management’s ability to override existing internal
controls.
D) management fraud because managers are inherently smarter than employees.
The audit process has three categories of audit phases: risk assessment, risk response
and reporting. Which of the following are the phases that are part of the risk assessment
process?
A) preplanning, design further audit procedures, tests of control
B) client risk profile, plan the audit, design further audit procedures
C) preplanning, client risk profile, plan the audit
D) preplanning, plan the audit, design further audit procedures
Which of the following is a factor that relates to “attitudes or rationalization” to commit
fraudulent financial reporting?
A) Significant accounting estimates involving subjective judgments
B) Excessive pressure for management to meet debt repayment requirements
C) Management’s practice of making overly aggressive forecasts
D) High turnover of accounting, internal audit and information technology staff
Amin is distraught. There is a big box stereo store that opened just down the block from
his independent stereo and music business six months ago, and he is unable to continue
operating his business. Only eight months ago, you issued an unqualified audit opinion
on his financial statements, which showed the financial results of a well run, profitable
store. Amin’s business is experiencing
A) customer expectation gap.
B) audit failure.
C) fiduciary duty.
D) business failure.
A) Many auditors prove the subsequent period bank statement if a cutoff statement is
not received directly from the bank. Discuss the purpose of proving the subsequent
period statement, and explain the audit procedures performed during the proof of cash.
B) Discuss the circumstances in which an auditor would prepare a proof of cash.
When auditing merchandise inventory at year-end, the auditor performs a purchase
cutoff test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory
count.
B) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
Which of the following is a common analytical procedure that may detect
misstatements in cash?
A) Calculation of inventory turnover and gross profit
B) Review of amounts included in the earnings per share calculations
C) Comparison of outstanding cheques and deposits in transit with the prior year bank
reconciliation
D) Comparison of gross sales on a month by month basis with the prior year
A common way for a public accounting firm to demonstrate its defence of a lack of
duty to perform is by use of a(n)
A) engagement letter.
B) letter of representation.
C) confirmation letter.
D) expert witness.
Recalculation of an approximate interest expense using the basis of average interests
rates and overall monthly notes payable 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) Misclassification of notes payable, interest expense or accrued interest
The controls over purchase requisitions and the related purchase orders are evaluated
and tested as part of the
A) inventory and distribution cycle.
B) acquisitions and payments cycle.
C) human resources and payroll cycle.
D) capital acquisitions cycle.
An example of an internal document is
A) a cancelled cheque.
B) a bank statement.
C) a bill of lading for purchases.
D) employees’ time reports.
Your audit client has many different types of accounts receivable: Canadian, American,
and other international accounts, short term and long-term. There are also some sales on
consignment. The company has used forward exchange contracts to reduce its exposure
due to foreign exchange fluctuations. How will this affect the audit engagement?
A) control risk will increase
B) inherent risks of error will decrease
C) risk of material misstatement increases
D) audit risk will be increased
The following events all occurred after the balance sheet date (6/30/12) but prior to the
auditor’s report (9/10/12). Which one would require an adjustment to the account
balances as of 6/30/12?
A) Client will market a new series of equity securities ($2 million of preferred stock) on
8/1/12.
B) Unused equipment on the books at 6/30/12 for $100,000 was disposed of 7/31/12 for
$60,000.
C) Securities costing $30,000 held for temporary investment on 6/30/12 declined in
value by one-third when the market took a plunge on 8/15/12.
D) Inventory valued at $100,000 on 6/30/12 was destroyed in a fire on 8/1/12.
The test of transactions which requires “the recomputing of cash discounts” satisfies the
objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Most companies recognize sales when
A) a customer order is received.
B) the merchandise is shipped.
C) the merchandise is received by the customer.
D) cash is received on account.
Which one of the following forms of advertisement would violate solicitation rules? PA
A) placed an advertisement in a newspaper indicating the opening of a new office.
B) conducted a cold-calling campaign where companies were asked if they would like
to change PA firms.
C) placed a media advertisement listing the different types of expertise available at the
firm’s major office locations.
D) conducted a survey asking companies about the types of services that are provided
by their accounting firms.
The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and
determined a detection risk of 10%. If control risk had been 80%, detection risk would
be about
A) 16%.
B) 10%.
C) 6%.
D) 5%.
The human resources department would likely provide which of the following internal
controls for the human resources and payroll cycle?
A) recalculation of net pay for every pay
B) independent verification of wage rate
C) account for the continuity of employee numbers
D) account for the continuity of payroll check numbers