Which of the following would you expect to find in a corporation’s bylaws? The
A) kinds and amounts of capital stock authorized.
B) date of incorporation.
C) rules and procedures adopted by the shareholders of the corporation.
D) types of business activities that the corporation is authorized to conduct.
There are many elements of quality control at the firm level. Which element does
“processes should exist for following up internal and external complaints” belong to?
A) engagement performance
B) engagement quality control review
C) documentation
D) general human resource policies
PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review
engagement. The financial statements are used primarily by the shareholders,
management, and by the bank. Recently, an employee was fired for stealing computer
parts, primarily chips and boards that could easily be placed in a pocket. MDL is suing
PA because they believed that audit procedures, such as counting inventory, would have
detected this fraud. What is PA’s best defence?
A) absence of causal connection
B) lack of negligence
C) contributory negligence
D) lack of duty to perform
A) There are four important purposes of analytical procedures. Identify each of these
four purposes and, for each purpose, give a specific example of an analytical procedure
that an auditor might perform.
B) Identify each of the five major types of analytical procedures and give an example of
each.
C) One purpose of performing analytical procedures in the planning phase of an audit is
to assess the client’s financial condition. Explain how the assessment of a client’s
financial condition can affect the auditor’s decisions concerning evidence accumulation
in later phases of the audit.
A normal audit procedure is to analyze the current year’s repairs and maintenance
accounts to provide evidence in support of the audit proposition that
A) expenditures for capital assets have been recorded in the proper period.
B) capital expenditures have been properly authorized.
C) non-capitalizable expenditures have been properly expensed.
D) expenditures for capital assets have been capitalized.
National accounting firms in 2012 are those with
A) offices in most major cities and revenues over $100 million.
B) international representation in most cities around the world.
C) offices in all major cities in Canada and revenues over $75 million.
D) national and international affiliations providing services in all major centres.
The use of the negative (as opposed to the positive) form of receivables confirmation is
indicated when
A) internal control surrounding accounts receivable is considered to be ineffective.
B) there is reason to believe that a substantial number of accounts may be in dispute.
C) a large number of small balances are involved.
D) accounts receivable consists of current balances only.
A key difference between the PCAOB in the U.S. and CPAB in Canada is that
A) CPAB is involved in the development of auditing standards.
B) PCAOB is involved in the development of auditing standards.
C) PCAOB conducts practice inspections of public company auditors.
D) CPAB conducts practice inspections of public company auditors.
Greenvale Construction Limited was started by four brothers who lived in the Toronto
area. Over time, the brothers have moved to different parts of the country. They decided
it was a good idea to keep the company, and organize their work as separate divisions as
part of the same company. There are now three divisions, one for each of the brothers
who are actively involved in construction. The fourth brother, Ted, is responsible for
accounting and record keeping. Ted went back to school and completed an accounting
designation, and now has three employees in the accounting area.
Each of the brothers has moved on to specialize in a different kind of construction
work. In Toronto, it is mainly new home construction. In Edmonton, the work is
primarily renovations of large homes and small commercial enterprises, while in
Halifax, the work is completely commercial on mid-to-large projects. All of the brothers
prefer to subcontract their work rather than hiring full time construction employees,
although some of the subcontract relationships have lasted over fifteen years now.
Required:
Explain what you would do to document your understanding of internal control for
Greenvale. Identify potential risk areas where you would need to focus additional
attention.
For cash receipts, the occurrence transaction-related audit objective affects the
completeness balance-related audit objective of accounts receivable. Which accounts
receivable balance-related audit objective does the cash receipts transaction-related
audit objective of completeness affect?
A) allocation
B) completeness
C) rights and obligations
D) existence
Whenever subsequent events are used to evaluate the amounts included in the
statements, care must be taken to distinguish between conditions that existed at the
balance sheet date and those that come into being after the end of the year. The
subsequent information should not be incorporated directly into the statements if the
conditions causing the change in valuation
A) did not take place until after year-end.
B) did take place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.
PA has set audit risk at 2% and determined that inherent risk is 60%. What is the level
of targeted audit assurance?
A) 2%
B) 40%
C) 98%
D) 60%
What impact is the presence of factors such as real-time information (such as via the
Internet) expected to have upon the demand for assurance services? Demand is
expected to
A) decline, due to the lack of adequate resources.
B) grow, due to the increase in large corporations.
C) grow, due to the need for forward-looking information.
D) decline, as small businesses use the Internet more.
Brandon is working on the audit of Michum Inc. In accordance with CAS 550 (related
parties), Brandon had obtained a management confirmation of all related-party
transactions. When auditing the purchasing cycle of Michum, Brandon found that the
company had purchased over $500,000 of merchandise from Elite Crust Inc., a
company that is owned by the CEO’s brother. The $500,000 purchase is a material
amount and it was not included in the confirmation provided by Michum. Brandon
should
A) inform the audit committee.
B) qualify the audit report.
C) discuss this issue with the management of Michum.
D) reduce materiality to increase the likelihood of discovering other undisclosed related
party transactions.
Small Town Lumberyard Limited (STLL) needed an additional loan from its bank to
finance its operations. To make its financial statements look better, the company
overstated its inventory and overstated its accounts payable. The auditors did not detect
this deliberate misstatement because they conducted limited tests of inventory and did
not confirm accounts payable. Other auditors agreed that the procedures conducted
during this audit were inadequate. The auditors of STLL would likely be considered to
be
A) guilty of fraud.
B) negligent.
C) contributorily negligent with STLL.
D) guilty of constructive fraud.
A code of ethics is an important document for organizational conduct. In response to the
Sarbanes-Oxley Act in the U.S., the SEC requires which of the following actions for
organizations that have not adopted a code of ethics?
A) explanation of why it has not done so
B) disclosure of actions undertaken to prevent and detect fraud
C) disclosure of all related parties in management and discussion documents
D) a cost-benefit analysis for immediate implementation of one
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.
Performing inquiry, analytical procedures and discussion with the limited objective of
assessing whether the information being reported on is plausible within the framework
of appropriate criteria, is the definition of a(n)
A) compilation.
B) review.
C) audit.
D) examination.
Nonsampling errors occur when audit tests do not uncover existing exceptions in the
A) population.
B) sample.
C) planning stage.
D) financial statements.
When a misstatement in the financial statements would affect a user’s decision but the
overall statements are still fairly stated, it would be appropriate to issue
A) an unqualified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
According to the profession’s ethical standards, an auditor would be considered
independent in which of the following instances? The
A) auditor’s chequing account, which is fully insured by CDIC, is held at a client
financial institution.
B) client comprises 75% of the auditor’s fees.
C) auditor does not have enough employees to meet the client’s reporting deadline.
D) client owes the auditor fees for two consecutive annual audits.
Risks associated with specific industries may affect the auditor’s assessment of client
business risk and acceptable audit risk, and even influence client acceptance decisions.
Which of the following business would be the most risky for the auditor to accept as a
new client? A client that
A) is a small manufacturer of metal and plastic parts, with steady profits, in business for
15 years.
B) is developing a computer game, expected to be ready in three years, and has no other
products.
C) has fifteen retail outlets in the clothing industry, with mid-range pricing, appealing to
a large population sector.
D) consists of a partnership of ten lawyers, operating out of three different cities in one
province.
Risk in auditing means that the auditor accepts some level of uncertainty in performing
the audit function. An effective auditor will
A) take any means available to reduce the risk to the lowest possible level.
B) set the risk level between 5% and 10%.
C) perform the audit procedures first and quantitatively set the risk level before forming
an opinion and writing the report.
D) recognize that risks exist and deal with those risks in an appropriate manner.
Otto decided to outsource the payroll function to Magna Plus. The controller of Otto
should still
A) recalculate the payroll and its remittance to ensure accuracy.
B) review and authorize each individual payments to employees.
C) review the payroll journal and compare the total hours worked with the payroll time
records.
D) inquire with the manager of Magna Plus if they suspect any unusual transaction.
Performance of tests of controls provide evidence in support of the specific controls that
contribute to the auditor’s assessed control risk (where it is reduced below 100%). Also,
when dual-purpose tests are used, evidence is also obtained in support of
A) the nature of illegal acts that occurred.
B) the quantitative effects of fraud risks.
C) statistical ratios to assist analytical review.
D) monetary correctness of transactions.
Audit evidence can come in different forms with different degrees of persuasiveness.
Which of the following is the least persuasive type of evidence?
A) bank statement obtained from the client
B) computations made by the auditor
C) prenumbered client sales invoices
D) vendor’s invoice
Special use prospective financial statements are intended for
A) internal management only.
B) any third party.
C) third parties with whom negotiations are being conducted directly by the responsible
party.
D) the relevant provincial securities commissions.
The accountant is working on an engagement with respect to the client’s financial
statements. Which of the following engagements would omit an assessment of the
client’s accounting policies’ compliance with GAAP?
A) Review
B) Compilation
C) Audit
D) Attestation
Which of the following services provides a moderate level of assurance about the
client’s financial statements?
A) Forecasts and projections
B) Compliance
C) Review
D) Audit
The auditor’s responsibility with regards to contingent liabilities is to
A) identify the appropriate accounting treatment.
B) decide on the appropriate accounting treatment.
C) prepare note disclosure.
D) evaluate the accounting treatment of known contingent liabilities.
A method of sampling in which all the items in the population are divided into two or
more subpopulations is
A) variables sampling.
B) attribute sampling.
C) stratified sampling.
D) divisible sampling.
The audit risk model is
A) a planning, testing, and evaluation model.
B) useful in planning but of limited value in evaluating results.
C) useful in evaluating results but of limited use in planning.
D) useful when performing the tests of balances, but of little value in either the
planning or evaluation stages.
It is management’s responsibility to select the accounting policies that are used in the
preparation of the financial statements. What is the auditor’s responsibility with respect
to these accounting policies?
A) approve the accounting policies that are used, so that an opinion can be stated on the
fairness of the financial statements
B) evaluate the appropriateness of the accounting policies that are used and of the
associated estimates made
C) tell management which accounting policies should be selected, so that accurate
estimates can be made for year end adjustments
D) recalculate the estimates that are used for the accounting policies (such as bad debt
allowance and warranty expenses)