Which of the following illustrates the definition of auditing with respect to the evidence
analysis process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) learning about different types of computing technology, such as mainframes
C) writing an operational audit report that is tailored to the client’s situation
D) making sure that the auditor is competent and understands evidence gathering
In monetary-unit sampling, the values of the estimated likely maximum misstatements
are referred to as the
A) point estimates.
B) precision intervals.
C) confidence intervals.
D) misstatement bounds.
When the auditor goes through a population and selects items for the sample without
regard to their size, source, or other distinguishing characteristics, it is called
A) block selection.
B) haphazard selection.
C) systematic selection.
D) statistical selection.
For publicly held corporations, the verification of owners’ equity is more complex due
to the
A) fact that there are many more equity accounts to audit.
B) larger numbers of shareholders and frequent changes in the individuals holding the
shares.
C) problem of having to confirm shares held with many more different individuals.
D) need to consider that audit risk will be lower, and different shareholders have
different points of view with respect to materiality.
Jordan set up a nonprofit corporation several years ago to provide scholarships to poor
youth in his community. From a small start, Scholarships Get up and Go Foundation
now has assets of over $5 million, and provides about ten university scholarships every
year. Jordan is proud of the new doctors, dentists and other health care practitioners that
his Foundation has funded.
Jordan is thinking of starting another foundation in an old building that he has
purchased. It would be a youth drop in centre, with music lessons, art facilities,
basketball facilities in a gym, with linkages to local high schools so that there could be
a homework club to encourage good grades.
Required:
A) Why should Jordan have the financial statements of both of these foundations
audited?
B) Who would be the users of the financial statements of the foundations?
C) What other types of services could PAs provide to Jordan and the foundations?
What is the auditor required to do with respect to the financial reporting framework at a
client?
A) assess whether the framework selected by management is suitable
B) select an applicable framework for use with the financial statements
C) make sure that ASPE or ASNPO are in use for publicly listed companies
D) select the accounting principles to be used as part of the reporting framework
Control risk has been assessed at 100% for your client. What audit approach will you
follow?
A) combined approach.
B) substantive approach.
C) reliance on analytical review and tests of controls.
D) reliance on tests of controls and tests of details.
The objective of the audit of financial statements by the auditor is the expression of an
opinion on
A) the accuracy of the financial statements.
B) the balance sheet and income statement.
C) the fairness of the financial statements.
D) the annual report.
There are often a large number of immaterial errors discovered that do not require an
adjustment at the time they are found. How should these errors be dealt with by the
auditor?
A) Since these items are individually immaterial, the auditor would not recommend
adjusting entries to client.
B) Since there are a large number of these, the auditor would recommend adjusting
entries to the client.
C) The auditor must combine the individually immaterial errors and evaluate whether
the combined amount is material.
D) The auditor would never combine these individually immaterial amounts because
that would mix apples and oranges.
The auditor would like to conduct dual purpose tests verifying that the programs
performing the totaling and aging of accounts receivable are functioning correctly as
well as quantifying any error. Which of the following is a dual purpose test that the
auditor could use?
A) use analytical review and compare amounts from current to prior
B) inquire how the calculations are performed
C) use test data and observe how the invoice(s) of the test are aged
D) use generalized audit software to reperform the calculations
Disbursements on the bank transfer schedule should be correctly included in or
excluded from year-end bank reconciliations as outstanding cheques. Understating
outstanding cheques on the bank reconciliation indicates
A) the possibility of kiting.
B) a cut-off error in the bank account.
C) an understatement of the bank balance.
D) an increase in inherent risks associated with cash.
The tests of details of balances procedure which requires the auditor to trace the totals
of the notes payable list to the general ledger satisfies the objective of
A) existence.
B) completeness.
C) accuracy.
D) rights and obligations.
After testing the bank reconciliation and inspecting the cut-off bank statement received
from the bank, the auditor has determined that there are two outstanding cheques from
the list on the bank reconciliation that have still not cleared the bank. The auditor’s next
step should be to
A) trace the details of the two cheques to the cash disbursements journal.
B) trace the details of the two cheques to their associated expense accounts.
C) reperform the calculations in the bank reconciliation.
D) compare the total of the bank reconciliation to the bank confirmation.
When planning the audit, the auditor’s decision on the appropriate assessed level of
control risk to use is
A) an economic issue, trading off the costs of testing controls against the cost of testing
balances.
B) calculated by using the audit risk model.
C) calculated by using a standard formula.
D) determined by using actuarial tables.
Segregation of duties has an important role in providing for good quality internal
controls. Which of the following segregation of duties improve controls over the
inventory and distribution cycle?
A) purchasing department should not be responsible for updating the economic order
quantity
B) the accounting staff should not be responsible for the data entry of supplier invoice
detail
C) the inventory transaction processing systems should not be accessible to the
receiving department
D) purchasing department should not be responsible for authorizing the acquisition or
receiving the goods
You, PA, have been assigned as in charge auditor of a long-time audit client of your
firm, Mikla Tool Inc. (MTI). MTI is owned by George Mikla, an experienced
machinist. George established the business over 20 years ago, and it has grown into a
$10 million a year business, with an excellent reputation for high quality machined
parts. MTI has regular clients in the automobile parts sector and in the health care
sector. The company has recently begun producing parts for environmentally friendly
products, such as recycling containers. This is due to the business’ versatility in dealing
with a variety of metals as well as plastics using both manually controlled and machine
controlled (computerized) equipment. The following description is based upon your
review of prior files, and planning discussions with personnel at MTI.
Equipment suppliers have helped MTI develop efficient operations, by providing
sample programs for standard operations and by providing training to employees. One
of the suppliers unfortunately sent sample programs that had been infected by a virus.
George’s daughter, Tiffany, had to cleanse the servers and each of the machines using
her copy of the anti-virus software. When contacted, the supplier did not know that the
software was infected, and apologized profusely!
The company’s four CAD/CAM terminals and printers are connected to the company’s
central local area network. The local area network is maintained by Toni Lee, the owner
of a computer shop conveniently located three blocks away. All computer equipment,
software and supplies are now purchased from Mr. Lee, who is responsible for attaching
and maintaining equipment, upgrading software, and maintaining user profiles on the
network. To reduce the amount of Mr. Lee’s work as network administrator, he has set
up passwords by function.
There is one user identification code (userid) and password for accounting (shared by
Tiffany, George and the accounting clerk, Isabel). The plant supervisors share another
userid that is used for production control and to initiate the timekeeping system every
morning. A separate userid and password allowing for only enquiry into the job costing
system has also been set up, and can be used by all employees.
A standard routine has been set up to back up the accounting systems. Either Tiffany or
the accounting clerk inserts one of seven tape cartridges into the system at the end of
the day (they are labelled with the day of the week), so that the company has a full set
of accounting
backups for the week. Tiffany keeps these in her office. These are particularly
important, since during the last office move, two years ago, the original software for the
accounting system was misplaced.
The network has two central servers, eleven user stations, and five printers. The user
stations are set up as follows: four CAD/CAM, two time keeping, two production
planning and control, two accounting and one for George.
A good working relationship is extremely important for satisfying some of the
company’s larger customers. MTI has paid for computer equipment for each of the
supervisors, so that they have fully functioning computers at home. If a rush job
requires weekend work, then these senior personnel can work at home to get the
necessary quoting or design work completed. Since the ‘at home’ systems are identical
to the office systems Mr. Lee simply copied across the MTI systems to the home
computers. Files can be easily taken home and then brought back to the office using
thumb drives. It is understood that when times are slower, a day off can be taken to
compensate for this weekend work.
It is almost ten years ago that Tiffany arranged for the implementation of the network,
and the purchase of the standard integrated accounting packages (general ledger, order
entry/accounts receivable, purchases/payable and payroll), and for the purchase of the
job costing and time keeping systems. A variety of reports are printed daily, weekly, or
monthly from the job costing system which are used for monitoring employee hours,
the status of the jobs, the costs accumulated for particular jobs, and the work in progress
inventory.
The weekly report of hours from the job costing system is approved by the production
supervisors, and is used as an input source for hours worked into the payroll system.
The accounting clerk enters the hours into the accounting system, so that weekly
payroll cheques and reports can be produced. The accounting clerk handles most data
entry.
Tiffany is really pleased with their accounting clerk, Isabel, who has been with the
company for three years. She insists that fate had a hand in getting Isabel working for
MTI. Isabel had been ‘pounding the pavement,’ having recently immigrated, and had no
Canadian business experience. Her accounting skills were rudimentary, but she quickly
learned the accounting software, and has reorganized the filing systems. Tiffany
considers her as indispensable. When Isabel goes on holiday, many things just don’t get
done! Tiffany can do the payroll in a pinch, but accounts payable and cash
disbursements are always done by Isabel. If she’s away, suppliers are simply told to
wait, or Tiffany issues a manual cheque for recording later. Isabel is very good at
clearing queries from suppliers, and ensuring that new suppliers are set up properly. The
purchasing supervisor and his staff rely on Isabel, for she checks the account allocation
of purchases and makes any necessary corrections.
Tiffany or George are signing officers, although Tiffany realizes that she checks
supporting materials more thoroughly than George, who usually just queries Isabel
verbally about larger purchases.
In the past, MTI’s audit has been entirely substantive. However, your partner has
decided that with MTI’s growth, it is time for the company to consider adding additional
internal controls. Accordingly, he has asked you to draft a management letter, to be
addressed to George and Tiffany.
Required:
A) Prepare a draft management letter, clearly identifying the weaknesses (W), impact or
implications of the weaknesses (I), and recommendations for improvement (R).
[The following is a theory question that does not require examples from the case,
although examples could be used.]
B) Explain how the control environment and general IT (information technology)
controls are related. Describe the impact of the control environment and of general IT
controls upon different types of application controls and upon the audit process.
The working papers prepared during the engagement are the property of the
A) auditor, but do not include the working papers prepared by the client for the auditor.
B) auditor, even including those prepared by the client for the auditor.
C) client, who will provide copies to the auditor.
D) auditor and client jointly.
Recomputing hours worked from time records provides evidence that
A) internal controls relating to payroll disbursements were operating effectively.
B) payroll cheques were signed by an appropriate officer independent of the payroll
preparation process.
C) only bona fide employees worked and their pay was properly computed.
D) employees worked the number of hours for which their pay was computed.
XYZ Company uses standard costs for allocating costs to work-in-process and finished
goods inventory. What internal control is required with respect to these costs to ensure
proper valuation of inventory?
A) procedures must be designed to keep the standards updated for changes in
production processes and costs
B) computer software should be used to make sure that the standard costs are properly
updated into the inventory item master file
C) input edit routines should be used to help detect input data entry errors for the entry
of the standard costs
D) standard costs should be used to provide a value for inventory every month by
calculating cost times quantity on hand
A bank sues an auditor after having lost a significant amount of money from a loan
granted to a client based on the financial statements that contained a material error. The
source of the legal liability is
A) known third party liability.
B) client liability.
C) liability under provincial securities law.
D) criminal liability.
When the auditor identifies an area of the accounting system with missing controls (i.e.,
a weakness or deviation), this would lead to a modification of the audit program in that
area that would
A) increase the amount of tests of controls.
B) increase the reliance on tests of controls.
C) cause the issuance of a qualified or adverse opinion.
D) eliminate the need for a test of controls.
The accuracy of the results of the accounting system (account balances) is heavily
dependent upon the
A) knowledge and skills of the auditor.
B) adequacy of the entity level controls.
C) accuracy of the inputs and processing (transactions).
D) training provided to the personnel.
Which of the following is an example of auditing rather than accounting?
A) recording purchase amounts in the expense accounts
B) posting the daily sales totals to the general ledger
C) recording cash received in the customer account files
D) evaluating whether accounts receivable are collectible
When assessing the plausibility of the financial statements for a review engagement, the
auditor will use which of the following criteria for auditing a small, privately held
company?
A) standards of efficiency and effectiveness
B) the audit objectives associated with the audit of financial statements
C) an acceptable reporting framework such as ASPE
D) an enterprise risk management framework, to help detect fraud
A) Describe three types of sample selection methods commonly associated with
statistical audit sampling.
B) Explain the difference between sampling with replacement and without replacement.
Which method is more common in audit practice?
C) Describe the steps involved in systematic sampling.
An act of two or more employees to work together to misstate records is called
A) malfeasance.
B) collusion.
C) defalcation.
D) felony.
Which of the following situations would indicate increased inherent risk in the accounts
payable and acquisition cycle?
A) good quality internal controls for cash handling
B) the use of packaged software for accounting (including accounts payable)
C) the use of clear, standard terms when negotiating supplier discounts
D) significant related party transactions
The working papers contain data useful for evaluating the adequacy of the audit scope
and the fairness of the financial statements. This data helps the auditor to conclude
whether
A) control risks were accurately identified and tested.
B) inherent risks were set as low as possible.
C) an unqualified audit report can be issued.
D) the current files properly contain copies of client contracts and agreements.
Beem & Lord, a PA firm, audited the financial statements of Frazer Inc. Since this was a
first time audit, Beem & Lord did not audit the comparative financial statements, as this
was done by the previous auditor. Beem & Lord should expand their report to include
an explanation in
A) the scope paragraph.
B) the management responsibility paragraph.
C) the opinion paragraph.
D) a paragraph following the opinion paragraph.
Internal controls which are likely to prevent the client from including as a business
expense those transactions that primarily benefit management or other employees rather
than the entity being audited satisfy the control objective that
A) recorded acquisitions are for goods and services received.
B) existing acquisitions are recorded.
C) acquisitions are correctly valued.
D) acquisitions are correctly classified.
Which of the following control weaknesses could result in problems with collectability
of accounts receivable?
A) Unauthorized individuals can establish or change credit limits.
B) Matching shipping documents to sales records is done weekly.
C) When there is one error in a batch of transactions, the whole batch is rejected.
D) Cash receipts are matched to the customer accounts rather than against specific
invoices.
Which of the following controls will help to detect unauthorized changes to payroll
master files, and help to detect whether terminated employees are still being paid?
A) use of authorized change forms
B) periodic review of master files
C) use of master files to print T4’s
D) use of master files to print payroll cheques
The most important test of details of balances to determine the existence of recorded
accounts receivable is
A) tracing sales entries to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) sending external confirmations of customers’ balances.
Describe the audit procedures and related audit assertions for the audit of dividends.
Your client, Huge Telephone Company (HTC), has encountered troubled times, due to
deregulation. There is competition for local telephone business and long distance
telephone business. The high speed lines for internet access provided via the telephone
network have not been selling as well as expected. A new quirk is that many large cities
are going to provide free wireless services by installing wireless transmitters on
telephone poles, and is only offering to pay a pittance for the use of the telephone poles.
HTC has been able to retain reasonable profits by cutting staff to a bare minimum and
outsourcing many services.
However, due to several labour contracts and federal legislation that will increase
services, you have doubts about the ability of the company to renew a major bond issue
this coming year.
Required:
How does the above information affect the audit report?
Discuss the audit tests the auditor would use to audit capital assets acquired in prior
years.
Describe the risks of error and fraud in the debt or equity accounts.
You have been working on the audit of Ballistic Defence Company for several years
now. There are about 15,000 employees working at the company in various positions.
Recently, the company contracted for a new customized payroll system, which is to be
implemented next month. You have been asked to assess the acceptance testing plan
that is being prepared by accounting staff. In particular, they want you to help assess
controls that will improve the accuracy of information entered into the new computer
system.
The company uses mainframe computing systems. You need to assume that the typical
payroll information is available on computer files, i.e. employee number, employee
name, social insurance number, department code, payment type code (salaried or
hourly), time worked, wage rate, gross pay, deductions (by type), net pay, and cheque
number.
Required:
Identify the tests that should be conducted by the company’s accounting staff with
respect to accuracy before accepting the software.
Outline the key areas that the auditor would review as part of general controls.
State each of the five specific transaction-related audit objectives for acquisitions and,
for each objective, describe one common test of transactions.
The generally accepted auditing standards can be divided into three categories of
standards. List the three categories and provide an example of each.
The CICA is the professional accounting organization for Chartered Accountants (CAs).
Describe the role and responsibilities of the organization in serving its members.
Describe the three objectives of the auditor’s examination of owners’ equity.
State each of the seven specific balance-related audit objectives for manufacturing
equipment additions and, for each objective, describe one common test of details of
balances.
You have just been assigned to manage the audit for a new large client of your firm,
Cheap Music Downloads Inc. (CMD). CMD is a subsidiary of a client of your firm that
manufactures audio and video equipment for international distribution. CMD has been
in operation for two years, when its custom information systems were established.
CMD runs a web site that allows customers to order songs using their credit card only.
There are tens of thousands of small transactions daily. Once the credit card has been
authorized by the credit card processing intermediary, CMD’s web sales system
generates a 16 digit sequential code that the customer uses to access the song via the
web site. CMD will then record both the sale and the royalty for the song.
Quarterly, CMD remits royalties to artists based upon the number of copies of the song
that has sold, if the accumulated royalty exceeds $25.00 for that artist. Artist royalties
that do not exceed $25.00 will be paid every two years if there has not been a payment
during that time.
All contracted royalty rates, artist names and song titles are recorded in CMD’s database
tables.
Required:
Describe three internal controls that should exist over sales or royalty transactions or
over the database tables. For each control:
(i) State the control
(ii) Describe (not just state) the audit assertion associated with the control
(or state the purpose of the control)
(iii) Provide an audit test that you could use to test the control
Discuss the internal controls related to owners’ equity that are of concern to the auditor.
Kimora is a senior manager at a public accounting firm. Kimora was assigned to the
audit of Toble Corp. Upon arriving at the client, Kimora met with the controller, Brad,
who was a classmate in college, 20 years ago. She had not been in contact with Brad
since college, but they realized that they still had many friends in common. Brad invited
Kimora to go to the company box to watch a hockey game and catch up.
Discuss the issue of independence between Kimora and Toble Corp.
Big Box Distribution Company has an in-house information systems department of 50
people. The company generally does its own programming, although some software
was acquired as a software package.
In addition, a software package was purchased for customer relationship management,
which will be modified by the programming staff.
Procedures for implementing programs vary by department. All major changes are
approved by the Management Information Systems steering committee. The committee
is also given a list of the maintenance changes that are planned in the coming year.
Some departments request that the data processing department handle testing, while
other users are rather picky and want to do their own testing.
Requirements are generally prepared in writing, although small maintenance changes
may be handled verbally.
Required:
Assess inherent risk associated with program changes at Big Box.
State the two primary types of subsequent events that require consideration by
management and evaluation by the auditor, and give two examples of each type.