The auditor obtains corroborating audit evidence for accounts receivable by using
positive or negative confirmation requests. Under which of the following circumstances
might the negative form of the accounts receivable confirmation be useful?
A) A substantial number of accounts are in dispute.
B) Internal control over accounts receivable is ineffective.
C) Client records include a large number of relatively small balances.
D) The auditor believes that recipients of the requests are unlikely to give them
consideration.
If actual interest expense is materially larger than the auditor’s independent estimate,
one possible cause could be
A) interest payments on unrecorded notes payable.
B) omitted payments of interest (i.e. underpayments).
C) interest payments recorded at the wrong lower interest rate.
D) notes payable that were set up incorrectly as short term notes.
The risk response phases of conducting the financial statement audit using a risk
assessment approach includes
A) conducting an independence threat analysis to evaluate independence.
B) preparation of the final auditor’s report in response to audit findings.
C) identification of risks of material misstatement at the client.
D) gathering evidence to assess the likelihood of material misstatement.
An example of an audit procedure that relates to the auditor’s understanding of internal
control is
A) count petty cash at all locations.
B) use test data to verify functioning of data entry controls.
C) observe entity activities and operations.
D) trace all large fixed asset purchases to supporting invoices.
The initial review of the working papers prepared by any given auditor is normally
done by the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
Publicly listed organizations and those using IFRS (International Financial Reporting
Standards) must have audit reports that use the comparative financial statements
approach. This means that the auditor reports on
A) the current year’s financial statements.
B) both periods under audit, the current and prior year.
C) three years, the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
Which one of the following would be a signal as to possible problems with
management integrity?
A) reliance on debt rather than equity for financing permanent assets
B) rotation of holidays in the supervisory area over a period of months
C) rapidly declining profits or increasing losses over a period of years
D) frequent disagreements with regulators and the Canada Revenue Agency
The Sarbanes-Oxley Act requires the auditor to attest to the
A) accuracy of the financial statements.
B) efficiency of the internal controls in financial reporting.
C) effectiveness of internal controls.
D) compliance of the company with the generally accepted accounting framework.
If the purchase of a long-term note receivable is included as cost of goods sold, there is
a violation of the
A) existence objective.
B) completeness objective.
C) classification objective.
D) timing objective.
In addition to direct impacts upon the financial statements, the auditor also needs to
consider indirect effects. An assessment of client objectives and strategies can reveal
issues that could lower income or cause contingent liabilities. Which of the following
could cause lost sales, increases in warranty expenses and product liability claims?
A) poor product quality
B) excessive advertising
C) ineffective projections
D) inaccurate budgets
Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a
security tag system to reduce the losses related to stolen goods at their store. The system
Carrie is looking at currently costs $60,000 and is expected to be effective for 5 years.
In order to justify the implementation of the security tag system, average theft per year
should be at least
A) $1,000.
B) $12,000.
C) $60,000.
D) theft should be prevented at all costs.
A PA firm can experience high levels of business risk if the audit firm
A) does a poor job on preparing client risk profiles.
B) pays its employees wages that are not in line with the market.
C) has clients that do not pay their bills, or experiences significant litigation.
D) has a generous vacation policy for its staff.
Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control
When public accountants are able to maintain an independent attitude in fulfilling their
responsibility, it is referred to as independence in
A) fact.
B) appearance.
C) conduct.
D) total.
An agreement which commits the firm to a set of fixed conditions in the future
regardless of what happens to profits or the economy as a whole is a definition of a
A) contingent liability.
B) potentially hazardous agreement.
C) commitment.
D) conditional contract.
What is one of the advantages of converting procedures from a design to a performance
format?
A) Obtain audit evidence of better quality
B) Help the auditor select the procedures to be performed
C) Eliminate duplicate procedures
D) Ensure compliance with Canadian Auditing Standards
At the first day of work at a PA firm, staff are given their own laptop computer for use
in working with clients and other data.
Required:
A) What is the typical structure of client working paper files?
B) How is client data protected from unauthorized change?
When a material uncertainty exists, the auditor must
A) disclose it in the audit report.
B) first determine the materiality of the item and whether adequate disclosure is
included in the financial statements.
C) issue a disclaimer of opinion.
D) issue a qualified opinion.
The disadvantage of general statements in codesofprofessional conductis
A) the emphasis on positive activities.
B) that they identify ideal conduct.
C) the difficulty of enforcing general ideals without minimum standards of behaviour.
D) that there are too many to remember.
Which of the following is an essential internal control in the cash cycle?
A) Use of two signatures on payroll cheques and payables cheques
B) Independent receipt of the bank statement from the bank
C) Careful accounting of the continuity of cheques returned from the bank
D) Independent preparation of bank reconciliations
A document sent to each customer showing his or her beginning accounts receivable
balance and the amount and date of each sale, cash payment received, credit memo
issued, and the ending balance is the
A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.
What is one of the ways that high-profile business failures such as Enron, WorldCom
and Nortel have affected the auditing profession?
A) raised the cost of hiring accounting firm professionals
B) resulted in a need for decreased paperwork on audits
C) lowered the number of professionals working on an audit engagement
D) created an increasing focus on standards and high-quality audits
The auditor may identify some risks that cannot be effectively tested by substantive
tests alone, for example, when there are paperless transactions (perhaps using EDI –
electronic data interchange). Then the auditor is required, to address those risks, to
A) assess the design effectiveness of relevant controls, and test them
B) obtain an understanding of the controls and test them if reliance is intended
C) obtain an understanding of the controls and assess their design effectiveness
D) test the controls that address the paperless aspects of the transactions
Which of the following is a required condition for a contingent liability to exist?
A) There is a potential liability to an employee of the client.
B) The amount of the future payment is known.
C) The liability resulted from known events.
D) The outcome has been resolved by a current event.
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.
When a compensating control exists, a weakness in the system
A) is no longer a concern because the potential for misstatement has been sufficiently
reduced.
B) is reduced but not removed; therefore, it is still of concern to the auditor.
C) could cause a material loss, so it must be tested using substantive procedures.
D) is magnified and must be removed from the sampling process and examined in its
entirety.
The normal audit approach for the audit of bonds issued is to
A) examine transactions that occurred near the year end date only.
B) verify each transaction taking place in the cycle for the entire year.
C) select a statistical sample of transactions throughout the year.
D) rely upon controls rather than conducting substantive tests.
Glee Inc. is a manufacturer of musical instruments and its year end is September 30th.
Copa Loca, a local music school, has purchased some instruments from Glee, but was
not satisfied with the quality and returned the goods to Glee during the last week of
September. Being very busy with year end, Glee received the goods from Copa Loca on
September 30th, but only processed the returned merchandised and issued a credit note
in October. This represents a
A) cut-off (allocation) misstatement.
B) understandability misstatement.
C) significant misstatement.
D) classification misstatement.
In the audit of an individual’s tax return, the auditor should demonstrate competence in
the use of
A) external databases that contain economic statistics.
B) standard personal and corporate tax preparation software.
C) the Income Tax Act and accompanying regulations.
D) database management software for the use of client based research.
IFRS uses specific terminology to refer to the likelihood of the occurrence of an
organizational event. Which of the following would need to provide for the (i.e. the
financial statements adjusted)?
A) outflow of resources is required, but cannot be reliably estimated
B) possibility that an outflow of resources is required
C) likelihood is remote
D) amount is yet to be confirmed
Which of the following is an example of a data entry input edit that could be used to
improve the accuracy of online data entry of sales orders?
A) matching of customer number to master file
B) automatic posting of sales to the general ledger account
C) reconciliation of the customer master file to accounts receivable
D) daily point-of-sales control totals matched to cash receipts
An example of general computer control systems that provide reasonable assurance of
authorization of application systems is
A) operations and information systems support.
B) systems, acquisition, development and maintenance controls.
C) organization and management controls.
D) application system control procedures.
Mafah Distribution Limited has requested that the audited financial statements be
completed by January 5, five days after the December 31 year end. This means that the
auditor will be unable to verify subsequent payments on accounts receivable and will be
unable to determine whether accounts payable have been set up correctly. What type of
audit report should Mafah receive if the auditor is unable to use alternative procedures
for these two audit areas?
A) Disclaimer
B) Adverse
C) Qualified
D) Unqualified
As part of the audit testing, the auditor is conducting substantive analytical review over
time (trend analysis) of bad debts to evaluate the quality of the accounts receivable.
Which audit assertion is this associated with?
A) valuation
B) classification
C) rights and obligations
D) occurrence
As part of the audit of sales, the auditor has used attribute sampling to select a sample
of sales invoices. The auditor has examined the duplicate sales invoice to determine
whether it was approved for credit. The client has a December year end. In October, the
auditor conducted the interim audit and drew a sample of 40 items that covered the
period from January to September. In order to be able to generalize to the sales
population, the auditor should also
A) select sample items from the rest of the year.
B) increase the sample size in proportion to the total population size.
C) use statistical methods to calculate sampling risk.
D) use statistical methods to calculate non-sampling risk.