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.
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.
Which one of the following controls would be of concern to management, but not to the
auditor? Controls over the
A) collection of accounts receivable amounts.
B) entry of payroll wage rates into the computer systems.
C) distribution of promotional information to present and potential clients.
D) cost of inventory items as recorded in the perpetual inventory system.
There is a greater risk of defalcation for cash than for other types of assets because
A) it is easier to steal.
B) most other assets must be converted to cash to make them usable.
C) companies usually have weak internal controls surrounding cash.
D) most employees have access to cash.
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
A) Step one in the auditor’s study and evaluation of internal control is obtain
understanding of internal control for audit planning purposes. List each of the
remaining steps.
B) Once the auditor has an understanding of internal control, two assessments are made.
List each assessment that must be made prior to testing controls.
C) Describe five common procedures an auditor can use to obtain an understanding of
internal control design.
When verifying current-year additions to manufacturing equipment, the two major
objectives for this part of the audit are
A) accuracy and classification.
B) detail tie-in and cutoff.
C) disclosure and completeness.
D) rights and existence.
A) Describe the differences between positive and negative confirmations. Which type is
more reliable?
B) Discuss the advantages and disadvantages of using negative accounts receivable
confirmations rather than positive confirmations.
C) Discuss the circumstances in which it is acceptable to use negative confirmation
requests.
D) The auditor’s decision regarding the type of accounts receivable confirmation to use
involves a continuum, starting with using no confirmations in some circumstances, to
using only negatives, to using both positives and negatives, to using only positives.
Discuss the primary factors affecting this decision.
The auditor has elected to conduct the following audit tests: reperform addition of the
aged accounts receivable trial balance for the total column and for the columns
depicting the aging. Which audit objective is associated with these audit tests?
A) valuation
B) classification
C) accuracy
D) occurrence
“The detailed instructions for the collection of a particular type of audit evidence” that
is to be obtained at some time during the audit is the definition of a(n)
A) sampling plan.
B) audit procedure.
C) audit plan.
D) audit program.
Inspection of assets is not a sufficient form of evidence when the auditor wants to
determine the
A) existence of the asset.
B) quantity and description of the asset.
C) condition or quality of the asset.
D) ownership of the asset.
Flagpole Company Limited recently upgraded its accounting software due to changes in
the payroll income tax rates. Unfortunately, there was an error in the software, and
income tax was calculated incorrectly. The general transaction-related audit objective
affected by these errors is
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Which of the following matters would be addressed in a report on the results of
applying specified auditing procedures to financial information other than financial
statements?
A) An opinion with respect to the quality of the information examined
B) Explanations of the differences between audit, review and special engagements
C) The factual results of the procedures
D) Provision of negative assurance with respect to the accounts examined
According to CAS 700, the standard unqualified report’s title should be
A) Unqualified report of the auditor.
B) Audited financial statements.
C) Auditor’s report.
D) Independent auditor’s report.
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.
There are many elements of quality control at the firm level. Which element does “a
firm should establish a formal code of conduct that includes procedures for individuals
to disclose differences of opinion and any inappropriate conduct” belong to?
A) leadership and responsibilities within the firm
B) general ethical requirements
C) general human resource policies
D) engagement quality control review
You are the auditor of Jehello Incorporated, a public company with a December year
end. Your firm has audited Jehello for the past three years. The following issues were
documented in the working paper files for the prior year audit:
∙ The company had incurred expenditures of $400,000 related to the development of a
new music format for electronic media. The large majority of the costs were related to
development of software, hardware, and presentation of the results to customers who
participated in focus groups. Management had been optimistic that the new sound
system would work well, even though focus group results had been poor. These costs
had been fully capitalized.
∙ About 40% of the company’s revenues were from one customer. That contract had
been due for renewal on May 15, ten days after the audit report had been issued.
Documents on file indicated that the customer seemed likely to renew the contract,
although quality control disputes were escalating. On May 14, Jehello was informed
that the contract would not be renewed.
Jehello has defaulted on its bank loans and the bank is suing you, saying that the
financial statements presented last year were false and misleading.
Required:
A) Which defences should the auditor use?
B) Do you believe that the auditor will lose the suit? Why or why not?
Jibbery Company has numerous transactions with related parties. For example, it has
borrowed money from shareholders, purchases raw materials from a subsidiary
company, and sells finished goods to its parent company. Which of the following
describes one of the impacts upon risk assessment of these transactions?
A) inherent risk would be set as low
B) inherent risk would be set as high
C) control risk would be set as low
D) audit risk would be decreased
An underlying feature of the random-based selection of items is that each
A) stratum of the population be given equal representation in the sample.
B) each item in the population must be randomly ordered.
C) each item in the population should have an equal opportunity to be selected.
D) each item must be systematically selected using replacement.
What is the purpose of an extended test of the bank reconciliation? To
A) verify whether all transactions included in the journals for the last month of the year
were correctly allocated to the bank reconciliation.
B) compensate for material weaknesses in internal control with respect to segregation
of duties.
C) increase detection risk for the audit of cash.
D) verify whether specific transactions that flowed through the cash account were
correctly recorded.
In performing a review of his client’s cash disbursements, a public accountant uses
systematic sampling with a random start. The primary disadvantage of systematic
sampling is that population items
A) must be reordered in a systematic pattern before the sample can be drawn.
B) may occur in a systematic pattern, thus negating the randomness of the sample.
C) may occur twice in the sample.
D) must be replaced in the population after sampling to permit valid statistical
inference.
Which of the following components of an engagement letter would apply to both a
review engagement and a compilation engagement?
A) negative assurance will be provided, so there is no assurance that fraud will be
detected
B) no assurance will be provided, since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and
inquiry
D) a statement that each page of the statements should be clearly marked “unaudited”
Petty cash tests can ordinarily be performed at any time during the year, but as a matter
of convenience they are typically done
A) on the balance sheet date.
B) near the end of the field work.
C) at the same time as the observation of inventory, since both auditor and client must
be present at that time.
D) on any interim date.
A secondary objective of the auditor’s study and evaluation of internal control is that the
study and evaluation provide
A) a basis for constructive suggestions concerning improvements in internal control.
B) a basis for reliance on the accounting system.
C) an assurance that the records and documents have been maintained in accordance
with existing company policies and procedures.
D) an indication that management and employees are trustworthy.
After the supplier master file data has been entered, to best improve internal controls
the
A) supplier master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the supplier master file.
C) data entry should be independently verified.
D) accounting department should file the new supplier authorization form sequentially.
When does the auditor use simple random sampling?
A) when the auditor has a particular judgmental criteria that is used to select the sample
B) where the auditor wants numbers in sequence and would like to select the sample
rapidly
C) for testing of cut-off after the year end with respect to accounts payable
D) for populations where each item is considered to have the same characteristics for
audit purposes
Auditing standards regarding the detection of illegal acts clearly state that the auditor
provides
A) no assurance that they will be detected.
B) the same reasonable assurance provided for other items.
C) assurance that they will be detected, if material.
D) assurance that they will be detected, if highly material.
Because cash is the most desirable asset for people to steal, it has a higher
A) inherent risk.
B) control risk.
C) detection risk.
D) materiality.
In an effort to satisfy the completeness objective, the auditor could perform which of
the following test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding cheques to subsequent period bank statements.
C) Obtain and test a cut-off bank statement.
D) Review financial statements to make sure that material savings accounts and
certificates of deposit are disclosed separately.
The primary concern in measuring materiality when a client has failed to follow an
acceptable financial reporting framework is usually
A) the total dollar error in the accounts involved, compared with some acceptable base.
B) measurability of the dollar error.
C) the nature of the item in error.
D) whether it can materially affect some future period.
The emphasis in the audit of dividends is on
A) ending equity balance.
B) transactions.
C) opening dividends payable balance.
D) confirming the number of shares outstanding.
Carrie found an error in the sample she tested from the population of accounts
receivable that was over 90 days old. The error found by Carrie should be extrapolated
to the population of
A) all past due accounts receivable.
B) accounts receivable over 90 days.
C) all accounts receivable.
D) current accounts receivable.
Most accounting and auditing professionals agree that when an audit has failed to
uncover material misstatements, and the wrong type of audit opinion is issued, the audit
firm
A) has failed to follow generally accepted auditing standards (GAAS).
B) deserves to lose the lawsuit.
C) should be asked to defend the quality of the audit.
D) should not be held responsible for the financial loss suffered by others.
What rights do secondary investors (i.e. those who purchase shares after an initial
offering) have to sue an auditor?
A) since they are third-party claimants, they would be part of a limited class of known
users
B) they could claim contributory negligence, since they had prior information of
company results
C) they can sue under provincial legislation without the need to prove reliance
D) since there is absence of causal connection, they would not be able to sue the
auditors
Frank has come to you because he is worried about recovering the cost of his share of a
law firm partnership. His partner, Jennifer, is exercising the ‘shotgun” clause in their
partnership agreement, and wants to buy him out. Over the last two years, Frank and
Jennifer have had numerous battles over the way that Frank handles his accounts
receivable. Frank is lenient with his customers, and has converted many of his accounts
into long term notes extending two and three years into the future. He is confident that
these amounts are collectible, because every one of his clients continues to make small
monthly payments.
Frank thinks that Jennifer may have been hiding profits from him and collecting some
of her accounts in cash. He wants you to audit the books so that he can figure out what
the ‘true’ profits are and how much Jennifer should pay him for his share of the
partnership.
Required:
A) Explain to Frank what you would be able to do during the audit engagement.
B) List the management assertions that may have been violated. Justify your answer.