The transfer agent confirmed to the auditor that the company had 2,500,000 shares
outstanding at December 31, 2010. To have assurance over the accuracy of the dividend
payable, the auditor would multiply 2,500,000 by the
A) dividend per share declared.
B) dividend per share paid during the year.
C) dividend per share as per the articles of incorporation, even if it was not declared
during the year.
D) average dividend for the industry.
An example of an audit failure is that the
A) auditor issues an erroneous audit opinion as the result of a failure to comply with the
requirements of GAAS.
B) audit opinion is qualified.
C) company files for bankruptcy less than 12 months after receiving an unqualified
opinion.
D) auditor issues an erroneous audit opinion as the result of an undiscovered fraud that
took place in the period being audited.
For each of the following independent situations, state whether the PA would be
considered to have a fiduciary duty. Justify your response.
A) Juan is conducting a review engagement for the fifth year for Mini Market
Greenwood Limited.
B) Lisa is working as a temporary controller at Middle Manufacturing Co. while the
controller recovers from surgery.
C) Mark is managing the assets of a ten year old buy whose parents were killed in a car
accident. Mark has signing authority on cheques and makes investment decisions.
The standard letter of confirmation from client’s legal counsel should ask for
information about the period of time
A) covered by client’s financial statements.
B) covered by client’s financial statements plus the preceding year.
C) covered by client’s financial statements plus the succeeding year.
D) approximately up to the date of the auditor’s report.
Greenvale Construction Limited was started by four brothers who lived in the Toronto
area. Over time, the brothers have moved to different parts of the country. They decided
it was a good idea to keep the company, and organize their work as separate divisions as
part of the same company. There are now three divisions, one for each of the brothers
who are actively involved in construction. The fourth brother, Ted, is responsible for
accounting and record keeping. Ted went back to school and completed an accounting
designation, and now has three employees in the accounting area.
Each of the brothers has moved on to specialize in a different kind of construction
work. In Toronto, it is mainly new home construction. In Edmonton, the work is
primarily renovations of large homes and small commercial enterprises, while in
Halifax, the work is completely commercial on mid-to-large projects. All of the brothers
prefer to subcontract their work rather than hiring full time construction employees,
although some of the subcontract relationships have lasted over fifteen years now.
Required:
Explain what you would do to document your understanding of internal control for
Greenvale. Identify potential risk areas where you would need to focus additional
attention.
Frontenac Construction, your audit client, is a construction company. In the initial
planning phase of the audit, you identified that it has many contracts with severe
non-performance clauses if any of the current constructions are not completed on the
dates set in the contracts over the next three years. As the auditor, you would set the
inherent risk for sales and penalties as
A) high.
B) moderate.
C) low.
D) cannot be determined until more procedures are performed.
An advantage of using statistical over nonstatistical sampling methods in tests of
controls is that the statistical methods
A) afford greater assurance and clarity than a nonstatistical sample of equal size.
B) provide an objective basis for quantitatively evaluating sample risks.
C) can more easily convert the sample into a dual-purpose test useful for substantive
testing.
D) eliminate the need to use judgment in determining appropriate sample sizes.
The starting point for the verification of current-year acquisitions of manufacturing
equipment is normally
A) the manufacturing equipment account in the general ledger.
B) the acquisitions journal.
C) the purchase requisitions file.
D) a client schedule of all acquisitions recorded during the year.
Which of the following auditing procedures is ordinarily performed last?
A) Reading of the minutes of the directors’ meetings
B) Confirming accounts payable
C) Obtaining a client representation letter
D) Testing of the purchasing function
CAS 330, the auditor’s response to assessed risks, explains that the auditor needs to link
completed audit work to the assessed risks at the assertion level and
A) document the conclusions and results of the audit procedures.
B) perform substantive procedures in areas where there is a high risk of fraud.
C) have the reviewing partner sign off on the assessed risk.
D) ensure that they test the entire population for areas that are considered to have a high
risk of errors.
Cash receipts from sales on account have been misappropriated. Which of the following
acts would conceal this defalcation and be least likely to be detected by an auditor?
A) postponing recording of cash receipt entries
B) overstating the accounts receivable control account
C) overstating the accounts receivable subsidiary ledger
D) recording cash receipt entries early
As part of the audit testing, the auditor is conducting substantive analytical review over
time (trend analysis) of bad debts to evaluate the quality of the accounts receivable.
Which audit assertion is this associated with?
A) valuation
B) classification
C) rights and obligations
D) occurrence
A client has a calendar year-end. Listed below are four events that occurred after
December 31. Which one of these subsequent events might result in adjustment of the
December 31 financial statements?
A) adoption of accelerated depreciation methods
B) write-off of a substantial portion of inventory as obsolete
C) collection of 90% of the accounts receivable existing at December 31
D) sale of a major subsidiary
Gary West is a sole practitioner. He has conducted the audit of Reggie’s Farm for the
past 12 years. In the current year, Reggie’s Farm expanded by acquiring two other
farms, installed a new accounting system and also started to export to the United States.
Gary accepted the audit of Reggie’s Farm for the upcoming year even though he has no
experience with exports to the US or companies of the size of Reggie’s Farm. Which
element of quality control is compromised for Gary’s firm?
A) Independence
B) Client acceptance or continuance
C) Extent of professional development
D) General ethical requirements
Georgina was working as the part time accountant for three small businesses. Whenever
she could, she pocketed cash and neglected to record the sale in the sales system. The
general transaction-related audit objective affected by her actions is
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
The auditor should review the preparation of at least one of each type of payroll tax
form the client is responsible for filing, as a part of the auditor’s responsibility for
A) understanding internal controls.
B) doing tests of controls.
C) doing analytical procedures.
D) doing tests of balances.
Gina is performing the audit of the payables section of Reno Inc. She wants to confirm
the payables from an independent source. Which of the following sources would
represent an independent provider?
A) Confirm an interco payable with the CEO of the US branch of Reno Inc.
B) Confirm the account payable with Clarkson Corp. The CFO of Clarkson is the wife
of the controller of Reno.
C) Confirm the line of credit balance with Citizen Bank. Reno does all its banking with
Citizen and it also has a long-term loan there.
D) Confirm the account payable to Suco Inc. The CEO of Reno owns 30% of the
outstanding shares of Suco.
The most common organizational form used by public accounting firms is
A) sole proprietorship or partnership.
B) professional corporation.
C) corporation.
D) co-operative.
A well-designed computerized system of perpetual inventory data files includes
information about the
A) units of inventory purchased, sold, and on hand.
B) unit costs of inventory purchased, sold, and on hand.
C) units and unit costs of inventory purchased, sold, and on hand.
D) units of raw materials, work-in-process, and finished goods.
Which one of the following is an example of a specific authorization?
A) The computer systems automatically reorder inventory when quantities fall below
the economic order quantity.
B) The highest credit limit allowed for accounts receivable customers is $100,000.
C) Each sales transaction that exceeds the credit limit of a customer must be approved
by the controller.
D) Grocery sales clerks may approve returns of goods less than ten dollars in value.
The disadvantage of general statements in codesofprofessional conductis
A) the emphasis on positive activities.
B) that they identify ideal conduct.
C) the difficulty of enforcing general ideals without minimum standards of behaviour.
D) that there are too many to remember.
Which of the following services provides no assurance about the client’s financial
statements?
A) compilation
B) review
C) audit
D) SysTrust
Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and
noticed it is usually empty. When you came in to do the audit, you were surprised to see
that they had a large cash balance and high sales. Toasted Tomato might
A) have a going concern issue.
B) be engaging in money laundering.
C) have lower business risk than initially anticipated.
D) have weak internal controls.
There are many elements of quality control at the firm level. Which element does
“management within a firm should ensure that qualified personnel monitor and address
non-compliance with quality control procedures” belong to?
A) leadership and responsibilities within the firm
B) general ethical requirements
C) general human resource policies
D) engagement quality control review
You have just finished documenting your understanding of cycle controls at an audit
engagement.
Required:
A) Explain how you will identify the controls that will be tested.
B) What process will you follow for weakness in internal controls?
The auditor gives an audit opinion on the fair presentation of the financial statements
and associates his or her name with it when, on the basis of adequate evidence, the
auditor concludes that the financial statements are unlikely to mislead
A) a prudent user.
B) management.
C) the reader.
D) investors.
Whenever subsequent events are used to evaluate the amounts included in the
statements, care must be taken to distinguish between conditions that existed at the
balance sheet date and those that come into being after the end of the year. The
subsequent information should not be incorporated directly into the statements if the
conditions causing the change in valuation
A) did not take place until after year-end.
B) did take place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.
The procedures to test effectiveness of control policies and procedures in support of a
reduced assessed control risk are called
A) tests of details of balances.
B) tests of controls.
C) analytical procedures.
D) a walk-through.
Which of the following key controls helps ensure that sales transactions are classified to
the correct account?
A) Computer checks for gaps in shipping document numbers.
B) Invoices are prepared using prices and terms from the customer master file.
C) Management reviews sales reports regularly for reasonableness.
D) Posting is done automatically to the sales account based upon periodic totals.
One of the ways to reduce sampling risk is to
A) use an appropriate method of selecting sample items from the population.
B) carefully design the audit procedures to be used.
C) provide proper supervision and instruction of the audit team.
D) use variables sampling rather than attribute sampling.
When a misstatement in the financial statements would affect a user’s decision but the
overall statements are still fairly stated, it would be appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
For income statement accounts, evidence is more persuasive if there is a sample from
A) the entire period under audit.
B) the period closest to the end of the fiscal period.
C) at least three months of the fiscal year.
D) December, since this would include large holiday sales.
Negative confirmations of accounts receivable is less effective than positive
confirmations of accounts receivable because
A) a majority of recipients usually lack the willingness to respond objectively.
B) some recipients may report incorrect balances that require extensive follow-up.
C) the auditor cannot infer that all nonrespondents have verified their account
information.
D) negative confirmations do not produce evidential matter that is statistically
quantifiable.