During his examination of a January 19, 2013 cutoff bank statement, an auditor noticed
that the majority of cheques listed as outstanding at December 31, 2012 had not cleared
the bank. This would indicate
A) a high probability of lapping.
B) a high probability of kiting.
C) that the cash disbursements journal had been held open past December 31, 2012.
D) that the cash disbursements journal had been closed prior to December 31, 2012.
The principal issue to be resolved in cases involving alleged negligence is usually
A) the amount of the damages suffered by the plaintiff.
B) whether to impose punitive damages on the defendant.
C) the level of care required to be exercised.
D) whether the defendant was involved in fraud.
The overall objectives of the audit test must be stated in terms of the
A) anticipated results.
B) transaction cycle being tested.
C) risks addressed and the transaction cycle being tested.
D) risk addressed and the anticipated results.
A system of internal control consists of policies and procedures designed to provide
management with
A) reasonable assurance that the company achieves its objectives.
B) assurance that fraud will be prevented.
C) reasonable assurance that fraud will be detected.
D) assurance that the firm’s resources will be used in the optimal way.
Under what circumstances would an auditor prepare a proof of cash? When
A) the client has material internal control weaknesses in cash.
B) control risk is set at minimum.
C) inherent risk in cash is considered to be low.
D) an enterprise resource system is in use for processing of cash transactions.
For sales, the occurrence transaction-related audit objective affects the existence
balance-related audit objective. For cash receipts, the occurrence transaction-related
audit objective affects which balance-related audit objective?
A) existence
B) completeness
C) cut-off
D) valuation
Which of the following statements is a valid criticism of the use of non-statistical
sampling methods?
A) Many audit tests, such as footing of journals, must be performed outside a statistical
sampling context.
B) The cost of performing random selection or testing often exceeds the benefits.
C) Nonstatistical sampling does not differ substantially from statistical sampling
methods.
D) The difficulty of remaining unbiased in the selection of items.
To help with corporate governance and a positive “tone at the top,” the board of
directors and its committees, such as the audit committee, should
A) rubber stamp the financial statements once per year.
B) consist of all members of executive management.
C) follow the policies and procedures approved by management.
D) take an active role in overseeing the company.
Sandra is a new partner at a PA firm. Sandra recently signed a new contract with
Gretchen Fabrics to become its auditor. In the process of accepting the client and
planning the first year’s audit, Sandra did the following:
– Sandra contacted the previous auditor to enquire if there were any reasons not to
accept the audit of this client. Unfortunately, the previous auditor was on vacation and
did not respond to Sandra before she accepted the client.
– Upon his return, the previous auditor did communicate with Sandra and indicated that
the client had aggressive expense deferral policies that they disagreed on. Sandra asked
to review the working papers of the previous auditor with regards to these expenses and
found them to be right below the materiality threshold.
– Gretchen Fabrics imports most of its fabrics and has two production facilities in Asia.
The company therefore has a complex tax structure and many import duties. Since this
is not the area of expertise of Sandra, she asked another auditing firm to provide the
required audit procedures for the international taxes and duties expense. When selecting
the other audit firm, Sandra researched the firm on the internet. She also ensured that
they had their professional designation and enquired with the CICA and provincial
association if the firm had any complaints or litigation outstanding for malpractice.
– Since the bidding process took time, Sandra had to start the audit almost right after
learning she had the winning bid. She did not prepare an engagement letter before
starting the work. She does not see this as being a problem since waiting until the audit
has begun will provide her with a better idea of what work has to be done and what the
engagement letter should include.
Required:
Identify the good and bad steps that Sandra has undertaken in reducing her exposure to
legal liability.
The auditor has evaluated the effectiveness of the client’s procedures to count inventory,
and has provided constructive suggestions for improvement. However, the client has not
implemented the suggestions, so the auditor has concluded that the inventory
instructions do not provide adequate controls. This means that the auditor
A) must send a management letter informing management of the impact of these
weaknesses.
B) must spend more time ensuring that the physical count is accurate.
C) should use attribute sampling to select a smaller sampling for testing the physical
inventory.
D) increase the level of price and compilation tests to ensure better quality inventory
pricing data.
The most common type of audit report contains
A) an adverse opinion.
B) a disclaimer of opinion.
C) a qualified opinion.
D) an unqualified opinion.
When there are problems with program change procedures or with access controls the
auditor may choose to
A) rely less upon manual controls since control risk has been increased.
B) not rely on programmed or interdependent application controls.
C) reduce control risk, which reduces the level of substantive testing.
D) use an information technology audit specialist to assess programmed application
controls.
Which one of the following procedures would most likely be conducted by an
accountant during a compilation engagement?
A) Enquire of management with respect to the purpose of new capital assets.
B) Compare gross profit on a year-by-year basis over the last five years.
C) Circularize negative accounts receivable confirmations.
D) Assemble and re-calculate the financial statement allocations.
When a physical count of inventory is permitted at an interim date, the auditor observes
it at that time, and also tests the perpetual inventory for transactions
A) throughout the year.
B) which are a representative sample of the period under audit.
C) from the date of the count to year-end.
D) from the date of the count to the end of the audit field work.
When considering pricing of inventory, three things are important. The first two are that
the method must be in accordance with an acceptable financial accounting framework,
and the application of the method must be consistent from year to year. What is the
third? The
A) input edits over the data entry of prices must be robust.
B) cut-off testing for the use of supplier invoices should be carefully done.
C) cost versus market value must be considered.
D) freight should always be included in the cost of the inventory.
A) Discuss what is meant by the term “control environment” and identify four control
environment subcomponents that the auditor should consider.
B) List the steps that management follows in assessing risks relevant to the preparation
of financial statements in conformity with an applicable financial reporting framework.
C) How does the auditor obtain knowledge about management’s risk assessment
process?
D) Explain how management’s risk assessment process differs from the auditor’s risk
assessment process.
E) What is the relationship between management’s risk assessment process and audit
evidence?
A major consideration in the audit of the general cash balance is the possibility of fraud.
The auditor must extend his or her procedures in the audit of year-end cash to determine
the possibility of a material fraud when there are
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) material internal control weaknesses.
If the auditor sets a low dollar amount as materiality,
A) more evidence is required than for a high amount.
B) less evidence is required than for a high amount.
C) the same amount of evidence is required as for a high dollar amount.
D) it has no effect on the amount of evidence required.
The phrase “in our opinion” indicates that
A) the auditor performed the audit on a test basis.
B) the auditor’s judgment can be relied upon.
C) the auditor relied on their knowledge to perform the audit.
D) there may be some information risk associated with the financial statements.
The sole shareholder of Jade Company had a contractor pave the parking lot at the
company building, and also pave the driveway of his home. Both paving jobs were
billed to the company on a single invoice. The general balance-related audit objective
affected by this activity is
A) existence.
B) allocation.
C) completeness.
D) rights and obligations.
PA recently finished the audit of a family-owned business. Now, she is working on a
large client with about 50 times the assets and 30 times total revenue. For the larger
client, PA will likely have
A) no effect on the audit risk model.
B) higher control risk.
C) higher audit risk.
D) lower audit risk.
To determine that sales are accurately charged, the unit prices on the duplicate sales
invoices are normally compared with
A) the original invoices.
B) the amounts recorded in the sales journal for that transaction.
C) the amounts posted to the customer’s account in the accounts receivable master file.
D) an approved item master file.
Which of the following type of test is most important for the audit of payroll?
A) Internal control
B) Test of detail
C) Analytical review
D) Substantive test
Ethical dilemmas occur when
A) you know what you want to do but the rules say otherwise.
B) businesses disregard the laws and engage in illegal behaviour.
C) a person chooses to act in his/her own interest.
D) a choice must be taken about appropriate behaviour.
To ensure that employees remain independent, an audit firm should
A) ask employees to sign a form confirming that they do not have an investment in a
company that they are auditing.
B) prohibit an employee from the Toronto office to have an investment in a company
audited by the Hong Kong branch of the PA firm.
C) include a section in the code of conduct indicating that the employees should not
invite their client to dinner.
D) refuse an audit mandate where the cousin of a staff member works in the marketing
department.
Inquiries of management are used to help identify subsequent events. To help obtain
meaningful answers
A) the standard firm checklist should be followed.
B) these inquiries must be conducted with the proper client personnel.
C) the inquiries should be conducted by senior audit personnel.
D) they should be asked after the effective date of the audit report.
Observation is an important audit technique where the auditor can use sight, hearing,
touch, and smell. Observation needs to be used together with other audit techniques
because
A) employees will often perform their procedures consistently over time.
B) it is a high cost technique that is rarely used by auditors.
C) it is a point in time technique limited to the time of the observation.
D) auditors may not accurately observe and interpret what is happening.
The court ruled that Jones did not rely on the financial statements in his decision to
purchase shares of Manumite Limited. Instead, Jones relied upon his discussions with
the owners and with financial analysts. This result illustrates
A) absence of negligence.
B) lack of privity.
C) contributory negligence.
D) absence of causal connection.
Which of the following describes the class of transactions associated with payroll?
A) Posting costs of purchasing inventory
B) Payment of employee services
C) Payment of withholding taxes and benefits
D) Write-off of damaged inventory dropped by employees
The audit procedure that requires the auditor to examine notes, minutes, and bank
confirmations for restrictions is performed to satisfy the audit objective of
A) existence.
B) completeness.
C) accuracy.
D) presentation and disclosure.