ABC Company is considering three different alternatives with respect to expansion. To
assist with the decision process, the company has requested PA to perform simulations
and prepare prospective financial information using several sets of assumptions. Some
of these assumptions are likely, while others are less likely. What type of information is
being prepared? A(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
The materiality for Holloy Company is $75,000. There are carryforward misstatements
of $25,000 from the previous year. Current year anticipated misstatements are $15,000,
with anticipated corrections of $10,000. What is the performance materiality?
A) $45,000
B) $50,000
C) $55,000
D) $90,000
The purpose of allocating planning materiality to balance sheet accounts is to
A) assess the appropriate evidence to accumulate for each account on the balance sheet.
B) assess the appropriate evidence to accumulate for each account on both the balance
sheet and income statement.
C) reduce the amount of procedures done in the course of the audit.
D) increase the possibility that fraud or illegal activities would be detected by audit
procedures.
Certain types of misstatements that affect cash may be detected in the audit of tests of
controls. Which of the following misstatements would be detected in the audit of the
sales and collection cycle?
A) A defalcation of cash hidden by an unauthorized write off of a bad debt
B) Accidental duplicate payment of a vendor’s invoice
C) Payment for raw materials that were not received
D) Payment to an employee at an incorrect wage rate
Segregation of duties between production, inventory control, and accounting are
important controls in the inventory and distribution cycle. How would the auditor test
these controls? Using
A) inquiry and reperformance.
B) observation and inquiry.
C) observation and reperformance.
D) discussion with managment.
The dollar amount of some misstatements cannot be accurately measured. If, for
example, the client was unwilling to disclose an existing lawsuit, the materiality
question the auditor must evaluate in such a situation is
A) what effect will it have on net income.
B) how will it affect management’s future decisions.
C) does it increase the auditor’s exposure to lawsuits.
D) what effect will it have on statement users.
In the context of an audit of financial statements, substantive tests are audit procedures
that
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) may be either direct tests of financial balances, or analytical tests.
D) will increase proportionately with the auditor’s reliance on internal control.
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
The reasoning behind the requirements of the Sarbanes Oxley Act’s section 404
(attestation on internal control over financial reporting) is that
A) effective controls result in greater profits to organizations, reducing business
failures.
B) effective controls reduce the likelihood of future misstatements in the financial
statements.
C) better internal controls can be implemented at lower cost, improving product quality.
D) automated controls improve customer service, resulting in higher product sales.
There are many types of analytical procedures that the auditor can conduct during the
planning stage of the financial statement audit. What is the purpose of calculating key
ratios for the client’s business and comparing them with industry averages?
A) understand the client’s industry and business
B) assess going concern
C) indicate possible misstatements
D) reduce detailed tests
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
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.
In the audit of an individual’s tax return, the criteria used would be
A) an accounting framework.
B) the Income Tax Act.
C) the client’s policies for taxable income.
D) the auditor’s judgment.
During which phases of the financial statement audit does the auditor “conduct quality
control” when conducting the financial statement audit using a risk assessment
approach? During
A) the risk assessments.
B) the risk responses.
C) the reporting process.
D) risk assessment, risk response and reporting phases.
The purpose of the audit procedure to “examine underlying documentation for
subsequent cash disbursements” is to
A) uncover liabilities on the balance sheet which should not have been recorded until a
subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period that represent liabilities
at the balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period which
should be recorded in that period.
The operational responsibility and the recording of transactions are normally kept
separate
A) to centralize activities in order to be more cost efficient.
B) to ensure unbiased information is recorded.
C) because operational personnel rarely has the necessary accounting skills to record
transactions.
D) to avoid confusion of responsibilities and duplication of efforts.
When does the auditor normally conduct tests of controls?
A) prior to the completion of the tests of details
B) after the completion of all analytical review
C) prior to the preparation of the client risk analysis
D) prior to the finalization of the audit risk model
Which of the following audit procedures assists the auditor with testing for
completeness?
A) Analyze interest expense to uncover a payment to a creditor who is not included in
the notes payable schedule
B) examine note to determine whether the company has obligations for payment
C) examine duplicate copies of notes to determine whether notes were dated on or
before the balance sheet date
D) examine the dates on duplicate copies of notes to determine whether all or part of
the notes are a non-current liability
When would the public accountant conduct audit procedures during a review
engagement? When
A) junior staff are assigned to the engagement.
B) required to assess plausibility.
C) it is a first time review engagement.
D) a higher level of assurance is required for the bank.
Trade accounts receivable should exclude
A) accounts receivables denominated in foreign currencies.
B) past-due accounts receivable.
C) related party accounts receivable.
D) accounts receivable of clients entitled to receive discounts.
Before a new supplier is added into the supplier master file (or the purchasing master
file), the company should
A) conduct a credit check on the new supplier.
B) have the supplier detail matched against the invoice detail.
C) ask the purchasing manager to verify the authenticity of the supplier.
D) have the accounting department enter the necessary detail about the supplier.
Sandra is analyzing the cash cycle of her audit client. Which of the following indicator
could lead to a liquidity problem?
A) Obsolete inventory
B) High level of inventory
C) Inventory on consignment
D) Backordered inventory
Canadian GAAS (Generally Accepted Auditing Standards) are best described as
A) the CICA Handbook, plus published research and public accounting firm practices in
auditing.
B) Canadian generally accepted auditing practices developed by public accounting
firms.
C) material that is fully codified in the CICA Handbook developed in Canada.
D) the existing research that has been published about auditing that is used by firms.
Positive accounts receivable confirmations were circularized, and there were many
differences where the client stated that the goods had not been received as of the date of
the confirmation. In addition to the possibility that the goods were not received by the
client, this type of reported difference could be an indication of
A) a cutoff misstatement.
B) timing differences with respect to recording sales returns.
C) improper recording of sales allowances.
D) theft of cash or lapping.
The appropriate date for the audit report for a public company is the one on which the
A) client’s fiscal year ended.
B) auditor and client entered into a contract.
C) board of directors approved the financial statements.
D) auditor prepares and delivers the report to the client.
There are many elements of quality control at the firm level. Which element does
“adequate processes and procedures should be in place to ensure that the audit or review
is conducted in accordance with GAAS, that quality control procedures are followed for
each engagement, and that the audit is appropriately documented” belong to?
A) leadership and responsibilities within the firm
B) general human resource policies
C) extent of professional development
D) engagement performance
Chong Manufacturing Limited (CML) is a small manufacturer that supplies parts to the
automotive industry. CML deals primarily with second tier companies, and does not
deal with the car manufacturers directly. Last year, CML was required to implement
EDI (electronic data interchange), otherwise two of its major customers would have
taken their business elsewhere.
The installation was provided by Simon’s Computer Company, a local computer store
with expertise in EDI. One of CML’s customers, Delta Parts Limited, also sent a
purchasing agent to CML to help train staff at CML in the use of EDI and to walk
through the first few transactions with CML accounting personnel to ensure that they
could use the system effectively.
A typical EDI sale is processed as follows:
Delta sends a purchase order to CML, which is received via the internet into an EDI
in-basket. CML empties the EDI in-basket using its EDI software every hour, and the
EDI software edits the purchase order for completeness and obvious errors. If there are
no problems, then the purchase order is printed out and used by CML to process the
order.
Once the order has been processed, CML prepares its shipping documentation and
invoice using its normal packaged accounting software. The shipping document and the
electronic invoice are transferred to the EDI software and placed in an EDI out-basket.
Accounting staff transmit the contents of the EDI out-basket to their customer (e.g.
Delta).
Once Delta receives the electronic shipping documents and electronic invoices, it will
transfer the funds electronically to CML’s bank account to pay for the goods delivered.
This means that CML receives payment much faster than when invoices were mailed to
customers.
Required:
A) What is the impact of the new EDI system on the audit engagement?
B) List some controls that should be included in the new EDI system.
When the auditor attempts to determine the operation of the accounting system by
tracing one or a few transactions through the accounting system, this is referred to as
A) tracing.
B) vouching.
C) tests of controls.
D) a walk-through.
Which one of the following is more difficult to evaluate objectively?
A) efficiency and effectiveness of operations
B) compliance with government regulations
C) presentation of financial statements in accordance with a generally accepted
accounting framework
D) internal controls in use at a small company.
Big Bank requires, as part of its loan agreement, that only accounts receivable less than
60 days old be used as collateral. An auditor has been engaged to provide assurance that
the accounts receivable on the list provided to the bank are indeed less than 60 days old.
What type of engagement is the auditor conducting?
A) financial statement
B) compliance
C) operational
D) review
Controls which provide a means of ensuring that the physical counts are properly
summarized, priced at the same amount as the unit records, correctly extended and
totalled, and included in the general ledger at the proper amount are known as
A) standard cost records.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
The assessment against a defendant of that portion of the damage caused by the
defendant’s negligence is called
A) separate and proportionate liability.
B) joint and several liability.
C) shared liability.
D) unitary liability.
On the last day of the fiscal year, the cash disbursements clerk drew a company cheque
on bank A and deposited the cheque in the company account in bank B to cover a
previous theft of cash. The disbursement had not been recorded. The auditor will best
detect this form of kiting by
A) comparing the detail of cash receipts as shown by the cash receipts records with the
detail on the confirmed duplicate deposit tickets for three days prior to and subsequent
to year-end.
B) preparing from the cash disbursements book a summary of bank transfers for one
week prior to and subsequent to year-end.
C) examining the composition of deposits in both bank A and B subsequent to year-end.
D) examining paid cheques returned with the bank statement of the next account period
after year-end.
Payroll and personnel costs at ABC Manufacturing are a major expense. This means
that improper allocation or misclassification of labour costs could result in
A) a material misstatement of net income.
B) a net effect that is negligible when costing inventory.
C) quality control problems with respect to the production of finished products.
D) incorrect payment of payroll to employees.