The use of the term “reasonable assurance” is intended to indicate that an audit cannot
be expected to
A) completely eliminate the possibility that a material error or fraud exists.
B) consider or search for minor errors.
C) be compliant with the generally accepted accounting principles for every account.
D) provide assurance of no material errors or irregularities to investors who are using
the financial statements for investment decisions.
Renaldo compared shipping reports to sales documents, checking to see that the sales
invoice date matched the shipping date, and that quantities invoiced matched quantities
shipped. On his working paper, he said that he vouched invoices. What else should his
working paper include with respect to the audit procedure conducted?
A) details of tests conducted, with results
B) results of analytical review procedures on the aging of accounts receivable
C) employee number and wage rate of the employees he spoke to
D) a statement that the information will be held confidential
When an acquisition is on an FOB (freight on board) origin basis, the inventory and
related accounts payable must be recorded in the current period if the goods were
A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for.
A thorough understanding of the client’s business and industry and knowledge about the
company’s operations are essential for doing an adequate audit. Why do auditors need
greater knowledge about major customers and suppliers and related risks?
A) information technology connects these organizations, so that they affect each other
B) information technology provides rapid information about organizations
C) there is increased importance of human capital and other intangible assets
D) joint ventures and strategic alliances affect client business risks
The auditor has set materiality at XYZ Company of $50,000 based upon a percentage of
net assets. The company currently has a small profit (only $3,500). Which of the
following items would the auditor most likely consider to be material and request an
account balance adjustment?
A) a misclassification between accounts receivable and accounts payable of $10,000
B) incorrect allocation of a note payable to current rather than long term
C) poor wording in a note to the financial statements, making it a bit difficult to
understand
D) an understatement of depreciation expense, which would increase depreciation by
$5,000
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.
After the bank confirmation has been received by the auditor, the auditor should
A) recalculate the bank reconciliation in its entirety.
B) verify that cash cutoff was correct for that bank account.
C) trace the general ledger cash account balance to the amount confirmed.
D) trace the bank reconciliation cash amount to the amount confirmed.
Which of the following would be required in a compilation?
A) An understanding between the client and the accountant for the services to be
provided
B) A formal engagement letter signed by the client
C) Management’s acknowledgements for its responsibility with regards to the financial
statements
D) A confirmation of the auditor’s independence
Which of the following is an example of a financial statement audit?
A) determining whether ABC’s financial statements overall do not violate any debt
covenants
B) determining whether ABC’s overall financial statements are stated in conformity
with IFRS
C) evaluating the effectiveness and efficiency of internal controls used to create account
balance
D) evaluating the effectiveness and efficiency of internal controls used to record
transactions
Sample size in physical observation of inventory is
A) determined using attributes sampling.
B) determined using variables sampling.
C) determined using dollar-unit sampling.
D) difficult to specify because the emphasis is on observing client’s procedures.
Which one of the following is a professional standard that must be followed by an
accountant when conducting a compilation engagement?
A) work being adequately planned and properly executed
B) having adequate technical training and proficiency in auditing
C) obtaining an adequate understanding of the business and its industry
D) documenting the processes used to compile and record transactions
You are conducting the audit of a medium-sized company that has a chief accountant
and three employees. Segregation of duties is excellent, with jobs allocated to provide
maximum levels of controls. Segregation is supported by accounting software with user
identification and password that limits functions to the appropriate job.
Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a
job sharing basis so that all employees did some of every task to keep the work more
interesting? Why?
Testing to ensure that bank transfers are recorded in both the receiving and disbursing
banks helps to detect evidence
A) that would reduce inherent risk to a minimum.
B) associated with an attempt to conceal a theft of cash.
C) that increases reliability with respect to the accuracy of the transfer schedule.
D) that would warrant decreasing control risk to a minimum.
Blader Ng. Inc. has recently placed into production new air-cleaning systems in their
smoke-stacks to meet clean-air quality regulations. PA has been engaged to assess air
quality and compare results to legislated requirements. What type of audit or
engagement is PA conducting?
A) financial statement
B) compliance
C) operational
D) review
From which of the following evidence-gathering audit procedures would an auditor
obtain most assurance concerning the existence of inventories?
A) observation of physical inventory counts
B) written inventory representations from management
C) confirmation of inventories in a public warehouse
D) auditor’s recomputation of inventory extensions
Risks of fraud are assessed at which level(s) of the audit?
A) overall audit, transaction-related audit objectives
B) balance-related audit objectives only
C) overall audit, cycle and account
D) cycle, account and transaction-related audit objectives
Ideally, tests of controls should be applied to controls
A) at the balance sheet date.
B) at each quarterly interim period.
C) for the entire period under audit.
D) at the beginning of the fiscal period.
A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.
Access rights management is important because it is the organizations method of
A) establishing data tables usage.
B) identifying master file data.
C) identifying transaction file data.
D) enforcing segregation of duties.
Heavy Manufacturing Company is in the business of making steel plates, forming
heavy metal slabs and drilling and scoring metals. Recently, it upgraded many of its
forming machines. Fortunately, the company was able to sell its old equipment at a
reasonable price. The effect was that sales for the quarter are substantially improved
over the same period in the prior year. The general transaction-related audit objective
affected by this activity is
A) timing.
B) accuracy.
C) occurrence.
D) classification.
Which one of the following engagements would most likely be a compilation
engagement? An engagement with respect to financial statements
A) attached to a personal tax return.
B) for a large public company.
C) for a company that has a large bank loan.
D) that accompany future oriented information to obtain financing.
Which of the following is an example of a direct-effect illegal act that could be
performed by a client? Violation of
A) environmental protection laws for the production facility.
B) insider securities trading regulations by senior management.
C) employment equity laws for a large group of non-unionized employees.
D) income tax laws and incorrect calculation of income taxes payable.
Who do the external auditors and the internal auditors usually report to?
A) senior management
B) the audit committee
C) chief executive officer
D) director of internal audit
The King Surety Company wrote a general fidelity bond covering defalcations by the
employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled
$17,200 of company funds. When the activities were discovered, King paid Wilson the
full amount in accordance with the terms of the fidelity bond, and then sought recovery
against Wilson’s auditors, Lynch & Merritt, public accountants. Which of the following
would be Lynch & Merritt’s best defence?
A) King is not in privity of contract.
B) The shortages were the result of clever forgeries and collusive fraud which would
not be detected by an examination made in accordance with generally accepted auditing
standards.
C) Lynch & Merritt were not guilty either of negligence or fraud.
D) Lynch & Merritt were not aware of the King-Wilson surety relationship.
A) Describe the three broad objectives of management when designing an effective
system of internal control.
B) Describe the aspect of internal control with which auditors are primarily concerned
with for a financial statement audit.
A misstatement in the financial statements can be considered material if
A) it overshadows the financial statements as a whole.
B) knowledge of the misstatement would affect the decision of a reasonable user of the
statements.
C) it affects more than one account on the statements.
D) it affects only one account on the statements.
Which of the following best describes the inherent limitations that should be recognized
by an auditor when considering the potential effectiveness of an accounting system?
A) Procedures whose effectiveness depends on segregation of duties can be
circumvented by collusion.
B) The competence and integrity of client personnel provides an environment
conducive to accounting control and provides assurance that effective control will be
achieved.
C) Procedures designed to assure the execution and recording of transactions in
accordance with proper authorizations are effective against irregularities perpetrated by
management.
D) The benefits expected to be derived from effective accounting system usually do not
exceed the costs of such control.
“Recorded payroll transactions are for the amount of time actually worked and at the
proper pay rate; withholdings are properly calculated” relates to which control
objective?
A) Authorization
B) Completeness
C) Existence
D) Accuracy
A deviation from the standard unqualified report will cause knowledgeable users of
financial statements to recognize that the
A) auditor intends to communicate additional or limiting information.
B) financial statements contain a material error.
C) financial statements contain an error.
D) Canadian Auditing Standards were not followed.
A significant part of the total audit, that relates to cash , is the audit of
A) physical inventory on hand using an inventory count.
B) assessment of the accounting policies in use.
C) substantive testing of the ending accounts payable balance.
D) sales and collections, payables payments and payroll payments.
Each working paper should include enough information to fulfill the objectives for
which it was designed. For example, if a working paper is designed to list the detail and
show the verification of support of a balance sheet account such as prepaid insurance, it
is essential that the detail on the working paper
A) reconcile the change in costs from last year to this year.
B) use analytical review to consider the reasonableness of the account.
C) reconcile with the associated general ledger account.
D) use observation to identify controls in place over the transactions.