If the auditor were responsible for making certain that all the assertions of management
in the statements were correct,
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically feasible.
Which one of the following is an example of a general authorization?
A) The highest credit limit allowed for accounts receivable is $50,000.
B) ABC Company has a credit limit of $25,000.
C) Each supervisory wage rate must be approved by the executive manager.
D) Grocery supervisors approve each transaction reversal over five dollars.
Which one of the following would the auditor consider to be an incompatible operation
if the cashier receives remittances from the mailroom? The cashier
A) prepares the daily deposit.
B) makes the daily deposit at a local bank.
C) records the receipts to the customer files.
D) endorses the cheques with the company endorsement stamp.
Tests of details of balances are specific procedures intended to
A) identify the details of internal controls.
B) prove that the accounts with material balances are classified correctly.
C) test for monetary errors in the financial statements.
D) prove that the trial balance is in balance.
Dimple Leather is a chain of retail stores that sells leather clothing and accessories
across Canada. Each store has point of sale equipment that is linked to a local server. At
night, local accounting information is transmitted to the head office computer and any
updates to prices or other adjustments are transferred to the local office.
Required:
Define the control environment. List the components of the control environment. For
each component, provide an example of a control that might exist at Dimple Leather.
The Rules of Professional Conduct require a successor auditor to communicate with the
previous auditor. The primary concern in this communication is
A) to acquire information which will help the successor auditor determine whether the
client management has integrity.
B) to learn about the client by examining the predecessor’s working papers.
C) to enable the successor to perform a more efficient audit.
D) to save the successor auditor time and money in gathering data.
The auditor would like to design a test of control to test the following key control:
‘statements are mailed to all customers each month.” Which of the following typical
tests of controls would be suitable?
A) inquire about who is responsible for mailing the statements
B) find out whether customers pay by statement or by invoice
C) reconcile subsequent payments to particular invoices
D) match remittance advices from customers to customer statements
Farah is currently auditing Software Synx, a public company. After a long day of work,
Farah goes for a drink with her friend John who mentions that he owns shares of
Software Synx. Farah indicates that John should hold on to his shares as they will go up
next week when the financial statements are released and show an increase of 12% for
revenues. Which element of quality control is compromised by Farah?
A) General ethical requirements
B) Independence
C) General human resource policies
D) Engagement performance
A common use of block testing is testing
A) cut-off.
B) existense.
C) authorization.
D) valuation.
Lauralye Leasing Limited (LLL) provides lease financing to companies and individuals
for equipment other than automobiles. Leases on commercial signs make up 50% of
total leases, computer and telecommunications equipment are 30% and restaurant
equipment makes up most of the remainder. LLL’s customers arrange to buy new
equipment from equipment dealers, then contact LLL to arrange lease financing.
LLL was founded over thirty years ago by Laura and Al Ye. It is now run by Mr. and
Mrs. Ye’s daughter, Betsy, who is the President of LLL. LLL owns a small building
downtown, where the offices of the business are located. Unused office space is rented
out to other commercial tenants.
Betsy was a classmate of yours at York University, and you have kept loosely in touch
over the years. This year, she moved the audit to your firm (a local firm with five
partners), deciding that the firm her parents had hired many years ago did not really
understand her business’ needs.
LLL has a small loan that is used to cover blips in working capital. The company has
two salespeople. Most loans are received from stores throughout the city, with whom
LLL has standing agreements. If customers require financing, they fill in an application
at the store, which is faxed to LLL for approval. LLL will reply within two business
days.
The company has been profitable for many years. There are no extraordinary items in
the current year’s financial statements.
Selected financial information is as follows:
Current assets $9,910,000
Long term assets $46,500,000
Short term liabilities $30,700,000
Shareholders’ equity $25,710,000
Revenue $10,200,000
Expenses $5,600,000
Income before tax $4,600,000
(and before bonus)
Required:
A) Which base would you use to calculate materiality? Why?
B) Calculate materiality. Choose a specific number, and explain why you chose that
amount.
A form issued for each employee summarizing the earnings record for the calendar year
is the
A) rate authorization form.
B) summary payroll report.
C) payroll master file.
D) T-4 form.
The audit report date is important to users because it indicates the last day
A) of the fiscal period.
B) on which the financial statements may be filed with the provincial securities
commission.
C) on which users may institute a lawsuit against either client or auditor.
D) of the auditor’s responsibility for the review of significant events that occurred after
the date of the financial statements.
The most important objectives for amortization expense are valuation and
A) accuracy.
B) classification.
C) cutoff.
D) understandability.
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.
The auditor has determined that the inventory procedures are highly automated, with
limited use of a paper or physical trail. Rather than having people count inventory
(since all inventory has RFID tags attached), inventory is being read using the wireless
mesh network. To provide assurance with respect to ending inventory, the auditor
should
A) bring in additional audit staff, and conduct a high level of test counts, matching
these counts to the automated systems.
B) use dollar unit sampling to identify all high dollar inventory items, and ask the client
to physically count these items using count teams.
C) test the quality of the controls over the programs in use, and over tagging inventory
items.
D) request that the client implement manual rotating counts to test the quality of the
automated systems.
There are a number of things that the CICA, representing the profession as a whole, can
do to reduce the practitioner’s exposure to lawsuits. One of them is to
A) sanction members for improper conduct and performance.
B) deal only with clients possessing integrity.
C) hire qualified auditors and train and supervise them.
D) perform quality audits.
The risk that an auditor’s procedures will lead to the conclusion that a material error
does not exist in an account balance when, in fact, such error does exist is referred to as
A) audit risk.
B) inherent risk.
C) control risk.
D) planned detection risk.
A document identifying the description, supplier, quantity, and related information for
goods and services the company intends to purchase is the
A) purchases catalogue.
B) purchase requisition.
C) receiving report.
D) purchase order.
Cost accounting controls are those related to the physical inventory and the consequent
costs from the point at which
A) materials are ordered for purchase until the finished product is sold.
B) raw materials are requisitioned until the finished product is sent to storage.
C) raw materials are requisitioned until the finished product is completely
manufactured.
D) the customer’s order is received until the finished product is shipped.
The WhirlyGig Factory Ltd. manufactures WhirlyGigs of many different sizes and
types. The company employs 55 employees, all paid on an hourly basis.
Employees fill in time sheets and hand them in every Monday to the payroll clerk,
Pamela. For factory employees, the time sheet shows the hours worked by product job
number, and indicates if the job has been completed. The payroll clerk tracks the hours
worked by job, and when a job is complete, compares the totals to the estimate made by
the owner, Faruq. A bonus is paid for actual hours paid less than the estimated amount.
Every Wednesday, Pamela prepares the cheques and gives them to Faruq for signing.
Pamela then staples the cheques to the payroll stubs. Pamela hands out the office
cheques and gives the other cheques to the factory supervisor for distribution.
Required:
A) Identify control weaknesses and their impact, and provide recommendations for
improvement.
B) What is the impact of the control weaknesses upon your audit approach?
The auditor of ABC Ltd. has concluded that there are significant risks of misstatement
of revenue at the company, with potential overstatement of revenue. Which of the
following audit tests should the auditor conduct to address this significant risk?
A) control tests of authorization, to ensure that credit limits for sales are all approved by
the sales manager
B) analytical review of sales, comparing sales trends over the last five years by division
and to the industry
C) examination of sales after the year end to quantify potential cut-off errors (income
from the subsequent period included in the current year)
D) risk assessment procedures, looking carefully at inherent risks associated with the
handling of cash in the sales cycle
The first step for management in the risk assessment process is to identify factors that
may increase risk, for example failure to meet prior objectives. Then, management will
A) assess the likelihood of the risk occurring.
B) make sure that procedures are developed to eliminate the risk.
C) estimate the significance of that risk.
D) develop specific actions to reduce the risk to an acceptable level.
In addition to the financial statements, MD&A (management discussion and analysis)
are appended to the financial statements to inform users of management’s expectations
for the foreseeable future, as well as to provide management’s assessment of the
financial results. MD&A is prepared primarily because it is
A) an additional piece of evidence used by auditors to assess the financial statements.
B) generally required by securities regulators in Canada.
C) an unbiased view of the prospective future results of the company.
D) required so that the company can borrow more funds or sell more shares to the
public.
When processing and recording cash disbursements, it is important to have a method of
cancelling the supporting documents to prevent their reuse as support for another
cheque at a later time. A common method is to
A) shred the documents so they can’t be reused.
B) transfer possession of the documents to a bank vault such as a safety deposit box.
C) move the documents to a permanent off-site facility such as a warehouse.
D) write the cheque number and payment date on the supporting documents.
The auditor has decided to audit all accounts receivable amounts that are over 120 days
old and over $5,000. What type of sample selection method is the auditor using?
A) haphazard
B) systematic
C) directed
D) block
Establishing the tolerable exception rate (TER) requires
A) statistical frequency probability tables.
B) random number tables.
C) a computer program.
D) professional judgment.
The level of assurance that is provided by the public accountant on a compilation report
is
A) none.
B) low.
C) medium.
D) high.
CAS 320 (Materiality in planning and performing an audit) defines materiality in terms
of three key concepts. The first and second concepts are that a material misstatement
should be considered in the context of knowledgeable users and the effect on decision
making and that material is relative to circumstances surrounding the decision and
nature of the information. The third concept is
A) that the auditor should consider users of financial statements as a group.
B) that the auditor should consider users of financial statements individually.
C) that the users should be informed and approve of the materiality used by the auditor.
D) that the auditor should be conservative in setting the materiality level.
If a company employs a capital stock registrar and/or transfer agent, the registrar or
agent, or both, should be requested to confirm directly to the auditor the number of
shares of each class of stock
A) surrendered and cancelled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) authorized, issued, and outstanding during the year.
As part of the review for subsequent events, the auditor will review financial statements
prepared after the balance sheet date. The purpose of this review is to examine changes
after year end and to look for
A) errors in capital versus maintenance charge allocations that occurred after the year
end.
B) subsequent payments to accounts payable and long term debt.
C) subsequent receipts in accounts receivable, especially for the larger customers.
D) changes in the business relative to results for the same period in the year under audit.
Some independence rules apply to all assurance engagements, while others apply only
to a listed entity. For the purposes of assessing the independence rules, a listed entity is
defined as
A) an organization with share capital exceeding $10 million that has public
accountability.
B) an entity whose debt or shares is listed on a stock exchange, with market
capitalization and total assets greater than $10 million.
C) any organization that has shares or debt listed on a stock exchange.
D) an organization that has shares or debt listed on a stock exchange, and that has
redeemed shares.
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.