The document that is used to prepare and reconcile the deposit of cash and improve the
control over the custody of assets (cash) is the
A) sales invoice.
B) credit memo.
C) remittance advice.
D) cash receipts journal.
A risk of material misstatement in accounts receivable associated with the rights and
obligations balance-related audit objective is that “consignment goods are recorded as
revenue, overstating both revenue and accounts receivable. Which of the following tests
of detail of balances would respond to this risk?
A) include confirmation of terms of sale with accounts receivable confirmations
B) check cash received after the year end and trace to accounts receivable master file
C) read the notes to the financial statements and compare to audited financial
information
D) compare accounts receivable balances by customer last year end to this year
With respect to clients, business risk increases when conditions, events, circumstances
or inactions
A) adversely affect the entity’s ability to achieve its objectives.
B) cause employees to not do their job properly.
C) result in the company continuing profitable operations.
D) result in an assessment of poor internal controls.
Musical Productions Limited has had declining sales as more and more media are being
presented online rather than on CD or DVD. It diversified its business by moving into
backup systems, but are still having trouble boosting income.
The audit team was led by Theresa Sanford, who obtained her CA last year. Theresa had
two assistants, Marv and Uhta, who did the work in the accounts receivable and
inventory area. Theresa felt that they did not require supervision, as they had been with
the firm for two years, and were expected to do well on their professional exams this
year. Marv found that the accounts receivable had many old accounts, and customers
were tough to get hold of. Accordingly, he decided to accept management’s
representations with respect to the balances. Similarly, Uhta noted that there were still
many CDs in inventory that had been there for over three years. Management insisted
on recording these at cost. Uhta accepted managements’ valuation.
Two months after the audit report was issued, Musical Productions Limited went
bankrupt. It was found that many accounts receivable were for fictitious customers, and
the receiver was only able to obtain five cents on the dollar for the inventory, which was
sold as scrap.
The bank is suing the auditors to recover its bank loan, which had been renegotiated
based upon the results of the financial statements.
Required:
Will the bank be successful in its suit? Why or why not?
For the conduct of an assurance engagement, the practitioner is required to identify or
develop criteria to evaluate the subject matter. Identify some characteristics of suitable
criteria.
A) relevance, reliability, neutrality, understandability, completeness
B) reliability, accuracy, neutrality, timeliness
C) understandability, completeness, timeliness, free from bias
D) completeness, timeliness, free from bias, competent
The existence of an adequate storeroom with a competent custodian in charge results in
the orderly storage of inventory. It can protect inventory from theft and misuse. How
would the auditor assess these controls? Using
A) observation during the audit and inquiry of the accounting staff.
B) inquiry of the accounting staff and inspection of theft statistics.
C) observation during the inventory count and inquiry of inventory personnel.
D) inspection of inventory damage statistics and inquiry of inventory personnel.
An inherent risk (IR) of 40% and a control risk (CR) of 60% affect detection risk and
planned evidence differently than an
A) IR of 60% and CR of 40%.
B) IR of 100% and CR of 24%.
C) IR of 80% and CR of 30%.
D) IR of 70% and CR of 30%.
In third party suits, when there is a misstatement in the financial statements, which of
the auditor’s defences usually means non-reliance on the financial statements by the
user?
A) lack of duty
B) non-negligent performance
C) contributory negligence
D) absence of causal connections
Which of the following audits can be regarded as being solely “compliance” audits?
A) Canada Revenue Agency’s examinations of the returns of taxpayers
B) the Auditor General’s evaluation of the computer operations of governmental units
C) an internal auditor’s review of his employer’s payroll authorization procedures
D) a public accounting firm’s audit of the local school district
Double dating a report is done when
A) the parent company and their subsidiaries have different year ends.
B) the auditor finishes his work later than planned.
C) a material event occurs after the date of the auditor’s report and affects the period
that was audited
D) a material event occurs after the date of the auditor’s report and before the date the
report is issued.
The analytical procedure which requires the auditor to “inspect the list of accounts
payable for unusual or non-vendor payables” would have the best chance of discovering
which possible error?
A) Misstatement of accounts payable and expenses
B) Classification error for non-trade liabilities
C) Unrecorded accounts or misstatements
D) Invalid accounts or misstatements
A common test of details of balances procedure for notes payable is “examine duplicate
copies of notes to determine whether notes were dated on or before the balance sheet
date.” Which audit assertion is this test of detail associated with?
A) allocation (accuracy)
B) allocation (cut-off)
C) existence
D) completeness
How does a financial statement audit affect a bank manager’s decision in providing
loans to a corporate client?
A) Information risk could be reduced, so the bank manager may lower the interest rate
charged.
B) The bank manager will lower the risk-free interest rate that applies to the
corporation.
C) The business risk for the client will be reduced, so the borrowing costs will decline.
D) The business risk for the client will be increased, so the borrowing costs will be
lowered.
Electronic data interchange (EDI) represents the electronic transfer of
A) funds.
B) business documents.
C) data between accounting systems of the company’s entities.
D) information between the bank and the company.
When statistical sampling is used, the sample selected must be a probabilistic one. In
addition, the auditor should
A) use the haphazard selection method to make sure that the sample is properly
selected.
B) use appropriate statistical evaluation methods of non-sampling risk computations.
C) request the client to review the sample and approve all items that are selected.
D) use appropriate statistical evaluation methods of sampling risk computations.
Stafford & Sandiford is a Public Accounting firm with 30 clients who are reporting
issuers. Stafford & Sandiford can expect to be inspected by the CPAB
A) once per year.
B) once every 3 years.
C) once every 5 years.
D) randomly.
The inherent risk of programming errors (and thus processing errors for the affected
application systems) increases when
A) programs are customized by an external software house.
B) the company uses an internet-based applications service provider.
C) standard software packages are used for processing transactions.
D) programs are customized by an understaffed information system group.
Management furnishes the auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor’s primary means of initiating action
to corroborate such information? Request that client
A) lawyers undertake a reconsideration of matters of litigation, claims, and assessments
with which they were consulted during the period under examination.
B) management send a letter of inquiry to those lawyers with whom management
consulted concerning litigation, claims, and assessments.
C) lawyers provide a legal opinion concerning the policies and procedures adopted by
management to identify, evaluate, and account for litigation, claims, and assessments.
D) management engage outside lawyers to suggest wording for the text of a footnote
explaining the nature and probable outcome of existing litigation, claims, and
assessments.
When determining whether an exception is highly material, the extent to which the
exception affects different parts of the financial statements must be considered. This is
referred to as
A) materiality.
B) pervasiveness.
C) financial analysis.
D) ratio analysis.
What is the most appropriate method for an organization to lower information risk
related to its financial statements? To have
A) good bookkeeping work completed on the accounts.
B) a high quality software package keep track of information.
C) an independent financial statement audit conducted.
D) an independent operational audit conducted on effectiveness.
Which of the following types of misstatements has the highest level of certainty?
A) identified misstatements
B) likely misstatements
C) likely aggregate misstatements
D) further possible misstatements
As part of the audit of dividends, the auditor would verify whether the payment was
made to the shareholders who owned the stock at the dividend record date. Which of the
following audit tests assists with this objective?
A) examine the minutes of board of directors’ meetings for the amount of the dividend
per share and the dividend date
B) review the permanent audit working paper file to determine if there are restrictions
on the payment of dividends
C) recomputed the amount of dividends declared by multiplying the dividend amount
per share by the number of shares outstanding
D) select a sample of recorded dividend payments and trace the payee’s name on the
cancelled cheque to the dividend records
The auditor uses a proof of cash to determine whether
A) internal controls over cash have been functioning effectively in the period under
audit.
B) all recorded cash receipts were deposited and whether all recorded cash
disbursements were paid by the bank.
C) accounts receivable was properly recorded and whether cash receipts transactions
were properly recorded.
D) accounts payable was properly recorded and whether cash disbursement transactions
were properly recorded.
The form used to request the purchasing department to place orders for inventory items
is the
A) purchase order.
B) purchase requisition.
C) materials requisition.
D) bill of lading.
A strategic and risk-based audit approach means that the client must be assessed in the
context of the business environment, including which of the following?
A) ensuring that accounting complies with IFRS or ASPE
B) completion of an independence threat analysis with supporting documentation
C) corporate governance process and quality of internal controls
D) talking to those audit committee members who are also part of management
Which of the following techniques would be conducted by a practitioner when
conducting a review of compliance with agreements and regulations?
A) use of a specialist to ensure that the terms of the agreement are complied with
B) inquire about how the client monitors its compliance with the provisions
C) testing control procedures throughout the year that pertain to the provisions of the
agreement
D) discussions with client’s legal counsel to identify any legal liabilities with respect to
potential violations of the agreements
There are three main types of revenue manipulations. Which of the following revenue
manipulations affects the cutoff objective?
A) avoiding recording of returns and allowances for the year
B) recording subsequent period sales as current period sales
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue
Which of the following is an essential internal control in the cash cycle?
A) Use of two signatures on payroll cheques and payables cheques
B) Independent receipt of the bank statement from the bank
C) Careful accounting of the continuity of cheques returned from the bank
D) Independent preparation of bank reconciliations
There are many elements of quality control at the firm level. Which element does
“employees should be adequately trained in the skills needed to conduct audits and
reviews” belong to?
A) leadership and responsibilities within the firm
B) independence
C) general human resource policies
D) extent of professional development
The auditor’s primary concern in testing payroll liabilities is to make sure that
A) expense has not been overstated, thus reducing profits.
B) there are no understated or omitted accruals.
C) employees’ T-4 slips are accurate.
D) salaries of officers have not been misclassified as wages.
In the audit of the transactions and amounts in the capital acquisitions and repayments
cycle, the auditor must ensure that significant legal requirements affecting the financial
statements have been properly fulfilled and
A) any violations are reported to the relevant provincial securities commissions.
B) any departures from the agreements are made with management’s knowledge and
consent.
C) are adequately disclosed in the financial statements.
D) must issue a disclaimer if they haven’t been fulfilled.
Under the Canadian Auditing Standards, the introductory paragraph of the independent
auditor’s report indicates that the auditor has audited the balance sheet, the income
statement, the cash flow, a summary of accounting policies and notes and
A) the statements of retained earnings.
B) the statement of changes in equity.
C) management’s discussion and analysis letter.
D) the internal controls of the company.
If a PA firm provided corporate finance services to a company during the year, which of
the following engagements could the PA firm accept to provide to the same company?
A) Non-assurance services
B) Audit of listed entity
C) Audit of non-listed entity
D) Other assurance engagement
Larger audits may have established procedures that utilize an audit committee whenever
there is a dispute between management and the auditors. What is the purpose of such
procedures?
A) make sure that the auditor understands management’s point of view
B) improves the competence of the financial statement auditors
C) facilitate the auditors’ independence from management
D) helps make sure the audit is conducted following GAAS
When automatic purchase orders are generated, to help make sure that goods are
ordered for products that the company still needs, the company should
A) have all purchase orders approved by the purchasing manager.
B) have suppliers automatically replenish the shelves.
C) ensure that re-order points are monitored.
D) have receiving reports matched to the purchase order amounts.