Your client has experienced a major data breach with lawsuits and fines pending of
significant and uncertain amounts. These events are disclosed in the client financial
statements and clearly explained in the notes. How do these events affect the
independent auditors report? The auditor would use
A) a standard unqualified auditor’s report.
B) an emphasis of matter paragraph titled “Data Breach” to highlight the events.
C) an other matters paragraph titled “Data Breach” to highlight the amounts.
D) a qualified audit opinion due to the size of the uncertainty.
The following are two unrelated situations. For each situation outline possible
deviations (if any) from a standard auditor’s report that may be necessary, and give
reasons. State your assumptions.
A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under
the percentage of completion method for long-term construction contracts. Your review
of this year’s contracts indicates that several projects look as if they will be high in
revenue for the first two years, and then have negligible earnings for the next three
years.
B) Maple Manufacturing Limited constructs furniture out of maple wood. The furniture
is prized for its durability and craftsmanship. Last year, the company received a letter
from a governmental agency advising that it had been found that the factory was
located on contaminated land that leached hazardous chemicals into the air. This was a
preliminary letter stating that a full investigation into the health effects was underway.
Management stated that everything is OK – the investigation was terminated. However,
the lawyer refused to sign the legal letter with respect to several lawsuits with respect to
employee claims for long term disability due to a nervous disorder that affected
employees’ ability to work. Neither the investigation nor the lawsuits are disclosed in
the notes to the financial statements.
An intimidation threat occurs when
A) it is difficult to believe the actions of management because there is a suspicion of
irregular activity with respect to the recording of transaction activity.
B) the auditor suspects that fraud has occurred at the middle management level of the
organization.
C) the auditor has been working on a client engagement for many years and has trouble
believing that management would deceive the auditors.
D) a client threatens the firm or its staff with respect to the content of the financial
statements or with respect to the conduct of the audit.
Which of the following situations would indicate a susceptibility at the client to the
potential of fraud that pertains to theft of cash?
A) lack of segregation of duties between the handling of cash and the recording of cash
B) cash disbursements cheques requiring only one authorizing signature
C) payroll rates being approved by the corporate controller
D) customer master file changes being handled by the controller’s executive assistant
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 standard of due care to which the auditor is expected to be held is referred to as the
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) reckless regard doctrine.
Big Bank had a program failure occur on Sunday night due to a maintenance program
error. Transaction posting was interrupted, with several errors occurring in posting to
the master files. Although sales had been posted to the general ledger, individual
accounts were not recorded until subsequent days. The general transaction-related audit
objective affected by this activity is
A) timing.
B) accuracy.
C) occurrence.
D) classification.
The overall objective in the audit of the inventory and distribution cycle is to determine
that
A) costs of goods sold and gross profit are correctly stated on the income statement.
B) inventory items on the balance sheet are neither fraudulent nor materially in error.
C) gross profit and inventory are fairly presented on the financial statements.
D) inventory and cost of goods sold are fairly stated on the financial statements.
To test for recorded sales for which there were no actual shipments, the auditor traces
from the
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.
As part of the audit of valuation, the auditor is conducting pricing tests by comparison
to supplier invoices. The auditor is making sure that, for each item tested, sufficient
supplier invoices are examined to cover the quantity of inventory that was on hand
during the physical inventory count. What type of pricing error could this detect?
A) clients value their inventory on the basis of the most recent invoice only
B) the client has used the incorrect accounting method to value its inventory
C) extension errors could occur with numerous different inventory items
D) the wrong inventory count quantity could have been recorded on the count sheets
CAS 200 explains that the purpose of the financial statement audit is to express an
opinion on the financial statements. This opinion is an assessment of whether the
financial statements are presented fairly using
A) Canadian generally accepted accounting principles (GAAP) only.
B) an applicable financial reporting framework.
C) Management’s assertions.
D) Rules of professional 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
There is a direct relationship between the interest and dividend accounts and debt and
equity. This means that in the audit of interest-bearing debt, it is desirable to
simultaneously verify
A) the related dividends declared and dividends payable.
B) the related interest expense and interest payable.
C) contracts and commitments that are long-term.
D) details provided in the Board of Directors’ minutes.
As the quality of the enterprise risk management process declines, and the quality of
internal controls over all declines
A) risk of fraud decreases.
B) risk of fraud increases.
C) the extent of control testing increases.
D) the extent of substantive testing decreases.
The tolerable exception rate (TER) has a significant effect on sample size. The
relationship of TER to sample size is
A) direct (larger TER = larger sample).
B) inverse (larger TER = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.
PA is conducting the audit of Middi Furniture Company, a medium-sized company with
few effective controls and significant inherent risks. Management has decided that it is
not cost-effective to implement better internal controls. What audit strategy will PA
likely select for this client?
A) combined audit approach for all transaction cycles and accounts
B) substantive audit approach for all transaction cycles and accounts
C) combined audit approach for all cycles except cash and inventory
D) substantive audit approach for all cycles except sales and payroll
The board of directors is essential for effective corporate governance because it has
ultimate responsibility to
A) make sure management implements proper internal control and financial reporting
processes.
B) assist management in the preparation of the financial statements.
C) test internal controls and ensure they are working properly.
D) provide a report to the auditor confirming that internal controls are working
properly.
Auditors General are responsible for auditing which types of organizations?
A) Public companies with shares issued to investors
B) Private companies that have loans outstanding to banks or other creditors
C) Ministries, departments, agencies, and crown corporations
D) Any organization that submits tax returns to the tax authorities
“Recorded payroll payments are for work actually performed by existing employees” is
the control objective of
A) authorization.
B) completeness.
C) occurrence.
D) accuracy.
Why is it important to separate systems development (or acquisition) and program
maintenance activities from accounting?
A) Accounting personnel have the expertise to evaluate program changes that have been
implemented.
B) Custody of media is important to help ensure ongoing operations.
C) This allows accounting to reconcile transaction totals to transaction details.
D) Lack of separation could result in unauthorized changes to programs and systems.
What type of information is available from www.sedar.com (System for Electronic
Document Analysis and Retrieval)? Documents such as
A) minutes of shareholders and directors meetings.
B) transaction reports from major credit card companies.
C) annual reports and management discussion and analysis.
D) listings of all of the shareholders on record.
A) There are several internal controls in the human resources and personnel function
that are important from an audit perspective. For example, there should be an adequate
investigation of the competence and trustworthiness of new employees. Discuss other
internal controls in the personnel and employment function that are important from an
audit perspective.
B) There are several key internal controls over the timekeeping and payroll preparation
function that should be present. For example, adequate control over the time on
employees’ time records includes the use of a time clock or other method of making
certain that employees are paid for the number of hours they worked. Discuss other key
internal controls over the timekeeping and payroll preparation function.
C) There are several key internal controls over the payment of payroll function that
should be present. For example, the payroll should be distributed by someone who is
not involved in the other payroll functions. Discuss other key internal controls over the
payment of payroll function.
A primary concern in determining whether retained earnings is correctly disclosed on
the balance sheet is
A) correct calculation of the net income or loss for the year.
B) correct calculation of dividend payments for the year.
C) whether adjustments to retained earnings have been made correctly.
D) whether there are any restrictions on the payment of dividends.
Which of the following rights is in the CBCA (Canada Business Corporations Act) and
is necessary for the completion of the audit? The right to
A) obtain copies of all documentation needed to conduct the audit.
B) advise management regarding how it should set up its records.
C) publish information when management engages in fraud.
D) have access to the necessary records, information and explanations.
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.
Camilla is preparing the audit program for the inventory of Summers, a large
department store. Camilla listed ‘select a sample of invoices from suppliers to verify
that the risks and rewards of the inventory were transferred to Summers”. Camilla is
concerned that some of the inventory in the store might be on consignment. The
account balance related objective that Camilla is concerned about is
A) rights and obligation (ownership).
B) accuracy.
C) valuation.
D) existence.
One of the reasons that the auditor considers the type of information systems and its
functions is to
A) assess whether hardware functioning affects applications.
B) evaluate design effectiveness of internal controls.
C) complete risk assessment by audit assertion for cycles.
D) assess whether programmed controls can be relied upon.
The most common fraud in the acquisitions area is for the perpetrator to
A) alter the cheque payment file before it is printed so that the payee name is changed.
B) issue payments to fictitious vendors and deposit the cheques to a fictitious account.
C) change the optical characters at the bottom of a cheque to alter the account to be
credited.
D) issue duplicate payments for invoices and then pocket the second cheque.
Beltrand, PA, is auditing the financial statements of a small rural municipality. The
receivable balances represent residents’ delinquent property taxes or receivables over
the due date. The internal controls at the municipality are weak. To determine the
existence of the accounts receivable balances at the balance sheet date, Beltrand would
most likely
A) send positive confirmation requests.
B) send negative confirmation request.
C) examine evidence of subsequent cash receipts.
D) inspect the internal records such as copies of the tax invoices that were mailed to the
residents.
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 attribute sampling, an advance estimate of the expected population exception rate is
necessary to plan the appropriate sample size. The relationship of expected population
exception rate (EPER) to sample size is
A) direct (small EPER = small sample).
B) inverse (small EPER = large sample).
C) a variable (sometimes small, sometimes large) dependent on other factors present.
D) indeterminate.
The CAS require the auditor to review the other information in the annual report to
ascertain its consistency with the financial statements. If there is a material
inconsistency, the client should be requested to change the information. If the client
refuses, the auditor should
A) issue an adverse opinion.
B) issue a qualified opinion.
C) consider what further action is warranted, including making contact with the audit
committee.
D) issue an unqualified opinion, bill the client, and withdraw from any future
engagements.
There are two important assumptions that underly the auditor’s use of external
confirmations. The first is that the person returning the confirmation is independent of
the company and so will provide an unbiased response. The second is that
A) only authorized employees of the company have prepared the response.
B) the person completing the response has carefully checked the data being confirmed.
C) the respondent has not been coerced or bribed to respond to the confirmation.
D) adequate controls exist at the client company to prevent unauthorized responses.
What is the purpose of an auditor reporting on the effectiveness of internal control over
financial reporting? To
A) attest to the effectiveness and efficiency of internal controls at an organization.
B) state an opinion on management’s assessment of the effectiveness of internal
controls.
C) provide an alternative to the operational audits conducted by internal auditors.
D) state that the controls are in conformity with standards with respect to internal
controls.
One of the key internal controls to prevent transactions in the sales and collection cycle
to fictitious customers is to
A) have the bank reconciliation done by someone who is independent of the treasury
function.
B) account for the integrity of the numerical sequence of sales orders.
C) compare customer numbers entered to the customer master file.
D) include the sales price list of all products in the computer files.