A large PA firm has assessed evidence collected during an engagement. Criteria used to
assess the financial statements were International Financial Reporting Standards
(IFRS). A high level of assurance was obtained. The type of engagement conducted was
a(n)
A) audit.
B) review.
C) management consulting.
D) compilation.
If audit risk is increased, what happens to detection risk? It
A) stays the same.
B) increases.
C) changes based upon the audit procedures conducted.
D) decreases.
Your client is not using either ASPE or IFRS. Instead, it is using current value
accounting with no use of historical cost, because your client is in a country with about
50% inflation per year. Local legislation requires that all resident organizations use
current value accounting. How do these events affect the independent auditors report?
The auditor would
A) issue a standard unqualified auditor’s report.
B) use an Emphasis of Matter paragraph to explain that the financial statements are
prepared in accordance with local legislation.
C) use an Other Matter paragraph to explain that the financial statements are prepared
in accordance with local legislation.
D) state in the opinion paragraph that the financial statements were prepared in
accordance with the local legislation.
The auditor is going to select a sample of accounts receivable to circulate external
confirmations, and then estimate the total dollar value of the accounts receivable
balance. The auditor should use what type of sampling?
A) attribute sampling
B) discovery sampling
C) monetary unit sampling
D) variable estimation sampling
Petty cash tests can ordinarily be performed at any time during the year, but as a matter
of convenience they are typically done
A) on the balance sheet date.
B) near the end of the field work.
C) at the same time as the observation of inventory, since both auditor and client must
be present at that time.
D) on any interim date.
XYZ Company uses standard costs for allocating costs to work-in-process and finished
goods inventory. For the last few months, there have been high variances between total
standard costs and actual costs. What is one of the likely reasons for this variance?
A) the accounting department has been developing the costs
B) production quantities are different than expected
C) there is an increase in inventory quantities on hand
D) receiving department has been stockpiling raw materials
One of the reasons that the auditor reads debt agreements is to discover whether there
are any restrictions on the company, such as restrictions on the payment of dividends. It
is important for the auditor to identify such restrictions as
A) corroborative evidence can then be obtained from management.
B) the auditor can make sure that management is adhering to the restrictions.
C) the auditor can include the restrictions in the management representation letter.
D) they must be disclosed in the footnotes of the financial statements.
As part of the audit, the auditor may examine authorization procedures with respect to
the repurchase or redemption of capital stock. In particular, for a public company the
auditor would verify that which of the following details have been authorized?
A) general ledger accounts affected, dividends included, amount to be paid
B) type of stock, timing, amount to be paid
C) individuals from whom repurchase will be permitted, maximum amount
D) type of stock, amount to be paid, effect upon bond sinking funds
Stafford & Sandiford is a Public Accounting firm with 30 clients who are reporting
issuers. Stafford & Sandiford can expect to be inspected by the CPAB
A) once per year.
B) once every 3 years.
C) once every 5 years.
D) randomly.
Using the audit risk model, audit risk describes targeted assurance, while control risk
and inherent risk are assessed based upon a variety of factors. Of the components of the
audit risk model, which is most likely to be set to 100%?
A) audit risk
B) control risk
C) detection risk
D) inherent risk
The auditor’s tests of the adequacy of the physical controls over raw materials,
work-in-process, and finished goods are usually limited to
A) observation and inquiry.
B) inspection and observation.
C) inspection and confirmation.
D) inspection and inquiry.
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.
A familiarity threat at an audit engagement occurs when
A) the member has a financial interest in the client.
B) it is difficult to behave with professional skepticism.
C) PA promotes the client’s position to third parties.
D) the member discloses financial information about the client.
You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied that
“his practice consists of conducting real estate closings, and so he could not respond to
the letter.” What impact does this have on the financial statement audit?
A) there is no impact upon the financial statement audit
B) the audit opinion will need to be qualified
C) the auditor will need to provide a denial of opinion
D) additional information is needed by reference to legal invoices from this lawyer
Frank has discovered that his employer is part of a group of banks that is manipulating
interest rates. He would like to stop this practice at his employer, and is not sure how
best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach,
and thinks he may be able to use it successfully because his company has recently
implemented new initiatives to empower employees to speak of improvements to
business practices. Frank has crafted a useful, powerful response that he could use,
taking into account multiple options. He has conducted research to make him more
informed on the issue, and has consulted a friend who is expert in this area. What
should is the next thing he should do before talking to his boss?
A) review the values underpinning the different positions in the value conflict
B) further develop and practice his response (scripting) and get help (coaching)
C) review the different possibilities for action to make sure that he has considered
enough
D) check his stakeholder analysis to make sure that it is thorough and complete
Management furnishes the auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor’s primary means of initiating action
to corroborate such information? Request that client
A) lawyers undertake a reconsideration of matters of litigation, claims, and assessments
with which they were consulted during the period under examination.
B) management send a letter of inquiry to those lawyers with whom management
consulted concerning litigation, claims, and assessments.
C) lawyers provide a legal opinion concerning the policies and procedures adopted by
management to identify, evaluate, and account for litigation, claims, and assessments.
D) management engage outside lawyers to suggest wording for the text of a footnote
explaining the nature and probable outcome of existing litigation, claims, and
assessments.
An inventory acquisition is received late in the afternoon of December 31 after the
physical inventory is completed. If the acquisition is included in accounts payable and
purchases, but excluded from inventory, the result
A) is an understatement of net earnings.
B) is an overstatement of net earnings.
C) does not affect earnings.
D) is indeterminable from the information given.
The inherent risks of data compromise (such as privacy violations) or data loss increase
when
A) documents are sent by regular mail to confirm contract details.
B) information is encrypted using public key technology.
C) organizations use web sites to process sales transactions.
D) packaged software is used to process sales transactions.
The reason for testing the client’s bank reconciliation is to verify whether the client’s
recorded bank balance is the same amount as the actual cash in the bank, except for
deposits in transit, cheques outstanding, and other reconciling items. The information
needed to complete the tests of the reconciliation are provided by the
A) journals and ledgers of client for the year under audit.
B) cutoff bank statement.
C) journals and ledgers of client for the subsequent year.
D) cancelled cheques for the year under audit.
An engagement for applying specified auditing procedures to financial information
other than financial statements provides no assurance. This results in
A) a report that can be readily tailored to any type of engagement.
B) a broad set of audit procedures being conducted for specific information.
C) frequent disagreement between auditor and client with respect to results.
D) distribution of the report normally being restricted.
Estimated unpaid obligations for services or benefits that have been received prior to
the balance sheet date are classified as
A) accounts payable.
B) accrued liabilities.
C) miscellaneous assets.
D) unearned revenues.
A well-designed organizational structure at an entity
A) has operations and programming personnel tasks combined.
B) clearly defines authority and responsibility assignments.
C) requires that wage rates are recorded and tracked by the human resources
department.
D) has the internal audit department report to the Chief Financial Officer.
A) State the five specific transaction-related audit objectives for sales and describe one
common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for
sales.
Which one of the following forms of evidence would be least reliable?
A) monthly bank statement
B) positive confirmation of customer’s balance
C) a letter from client’s lawyer stating that there are no known lawsuits pending against
client
D) client’s file copy of a purchase requisition
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.
To ensure that all the population items will be properly subjected to the sample
selection process, the auditor should
A) use a random number generator for sample selection.
B) use monetary unit sample selection methods.
C) document the range of document numbers in use by the client.
D) test the population for completeness.
A) State five specific balance-related audit objectives for inventory pricing and
compilation and, for each objective, describe one common test of details of balances
related to that objective.
B) Explain why the audit of work-in-process and finished goods inventory is generally
more complex than the audit of purchased inventory.
Ethical behaviour is considered to be a cornerstone for trust in everyday life as well as
in business practices. Ethics are
A) beliefs that we have about our own behaviour.
B) a set of moral principles or values.
C) rules in society that help us to do the right thing.
D) laws that govern how businesses should behave.
Which of the following controls prevents error and helps to ensure that only authorized
wages are paid by the payroll service provider?
A) duplicate signatures required on payments to the Receiver General
B) use of an imprest payroll account for the payment of all payroll payments
C) independent approval of the payroll journal prior to payroll payment release
D) reconciliation of the payroll imprest bank account on a timely basis
In performing a review of his client’s cash disbursements, a public accountant uses
systematic sampling with a random start. The primary disadvantage of systematic
sampling is that population items
A) must be reordered in a systematic pattern before the sample can be drawn.
B) may occur in a systematic pattern, thus negating the randomness of the sample.
C) may occur twice in the sample.
D) must be replaced in the population after sampling to permit valid statistical
inference.
ZyCo has recently converted to a new online accounts payable system. To test that all
vendor balances have been converted to the vendor master file (completeness), the
auditor would
A) conduct cut-off tests, for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online)
system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system
to the new (online) system.
D) conduct tests of programs, to verify that programs in the new systems are
functioning as designed.
The Bank of New Haven relies heavily on computers to calculate the settlements of
amounts due to other banks. Given that the process is highly automated, the auditor
would not be able to obtain sufficient evidence with substantive procedures. The
auditors of the Bank of New Haven should
A) design and perform tests of controls.
B) qualify the opinion for the section on settlements.
C) hire a specialist to give an opinion on the proper functioning of the system.
D) perform a walkthrough of the system.
One of the purposes of a client representation letter is to
A) reduce the amount of audit procedures performed by the auditor.
B) document the responses from management to inquiries about various aspects of the
audit.
C) serve as audit evidence for the accuracy of the contingent liabilities.
D) reduce the detection risk.