Auditing, 12e (Arens)
Chapter 1 The Demand for an Auditing and Assurance Profession
1.1 Identify the components of an audit and explain why there is a demand for audits
1) Which of the following illustrates the definition of auditing with respect to the evidence
analysis process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) learning about different types of computing technology, such as mainframes
C) writing an operational audit report that is tailored to the client’s situation
D) making sure that the auditor is competent and understands evidence gathering
2) Auditing should be done by a qualified
A) chartered accountant.
B) certified management accountant.
C) competent and independent person.
D) professional accountant.
3) Which of the following illustrates the definition of auditing with respect to the reporting
process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) reporting on the degree of correspondence between financial statements and ASPE
C) writing an operational audit report that is tailored to the client’s situation
D) making sure that the auditor is competent and understands evidence gathering
4) In the audit of historical financial statements by PA firms, the criteria used are
A) generally accepted auditing standards.
B) generally accepted accounting principles.
C) regulations of the Canada Revenue Agency.
D) regulations of the provincial securities commissions.
5) 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.
6) The auditor and the entities should agree on the criteria to be used in the audit
A) before the audit starts.
B) after the audit planning has been done.
C) as they progress with the audit as they can determine which criteria is more suitable.
D) at the end of the audit.
7) George had a conversation with the accounting personnel and documented information about
how the accounting systems function. He has also placed copies of accounting forms in his files.
George is performing which task?
A) accounting procedures
B) evidence gathering
C) tax audit
D) audit report preparation
8) One of the reasons that an auditor must be competent is to be able to
A) understand the engagement risks and the criteria used by the client.
B) explain how the bookkeeping should be done to his staff.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
9) One of the reasons that an auditor must be competent is to be able to
A) select the type and amount of evidence to accumulate.
B) explain how the bookkeeping should be done to his staff.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
10) It is important for the auditor to be independent because
A) the auditor would not charge a fair rate to the client.
B) the auditor might not be as knowledgeable of the subject matter and the criteria.
C) this will prevent bias in accumulating and evaluating evidence.
D) the Canadian Tax Authorities require that the auditor be independent.
11) Because an external auditor is paid a fee by a client company, he or she
A) is absolutely independent and may conduct an audit.
B) may be sufficiently independent to conduct an audit.
C) is never considered to be independent.
D) must receive approval of the relevant provincial securities commission before conducting an
audit.
12) The independent auditor’s report is the
A) communication of the result of the audit to the users.
B) set of audited financial statements.
C) invoice of the auditor detailing the work they have performed.
D) report presented to management about the possible improvements.
13) 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.
14) In the audit of an individual’s tax return, the criteria used would be
A) an accounting framework.
B) the Income Tax Act.
C) the client’s policies for taxable income.
D) the auditor’s judgment.
15) In the audit of a corporate tax return, the report provided by the Canada Revenue Agency
auditor would describe
A) an opinion on the likelihood of tax return error.
B) the likely accounting errors that could contribute to tax errors.
C) management issues with respect to accurately reporting taxes.
D) corporate income tax overages or income tax under payments.
16) Joe is recording sales transactions in the accounting system so that they can be summarized
in a logical manner for the purpose of providing financial information for decision-making. Joe
is performing
A) accounting.
B) auditing.
C) review.
D) management consulting.
17) Which of the following is an example of accounting rather than auditing?
A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
18) In “auditing” accounting data, the concern is with
A) determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
B) determining if fraud has occurred.
C) determining if taxable income has been calculated correctly.
D) analyzing the financial information to be sure that it complies with government requirements.
19) Which of the following is an example of auditing rather than accounting?
A) recording purchase amounts in the expense accounts
B) posting the daily sales totals to the general ledger
C) recording cash received in the customer account files
D) evaluating whether accounts receivable are collectible
20) An accountant records information. When conducting an audit, the auditor must possess
A) an ability to interpret generally accepted accounting frameworks.
B) an education beyond the bachelor’s degree.
C) an ability to classify transactions by type.
D) an ability to organize and summarize economic events.
21) How does a financial statement audit affect a bank manager’s decision in providing loans to a
corporate client?
A) Information risk could be reduced, so the bank manager may lower the interest rate charged.
B) The bank manager will lower the risk-free interest rate that applies to the corporation.
C) The business risk for the client will be reduced, so the borrowing costs will decline.
D) The business risk for the client will be increased, so the borrowing costs will be lowered.
22) What is the most appropriate method for an organization to lower information risk related to
its financial statements? To have
A) good bookkeeping work completed on the accounts.
B) a high quality software package keep track of information.
C) an independent financial statement audit conducted.
D) an independent operational audit conducted on effectiveness.
23) Discuss the differences and similarities between the roles of accountants and auditors. What
additional expertise must an auditor possess beyond that of an accountant?
24) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank
will make a loan to Frost Corp, a snow removal company. Further, Frederic has to decide how
much they will lend to Frost and at what rate.
Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest?
What factors are impacted by auditing and how?
1.2 Link the nature of assurance services to examples of actual services provided
1) The No-Name Advertising Rating Agency conducts independent surveys to determine the
sources of purchases by consumers (e.g. newspaper ad, magazine ad, television ad). This
information is then used by those media (i.e. newspapers, magazines, and television
broadcasters) to indicate to purchasers of advertising the breadth of coverage that they have. For
example, Small Local Newspaper can say that 10% of the purchasers of soap products made their
decisions based upon their ads. This helps in selling advertising. What type of service is No-
Name providing?
A) Assurance
B) Attest
C) Review
D) Compilation
2) Which of the following is an example of an attestation engagement?
A) Accounting and bookkeeping services for the accounts
B) An audit of internal controls over financial reporting
C) Preparation of the annual financial statements, with notes
D) Completion of provincial and federal tax returns
3) For how many years will assurance engagements be required by individuals or organizations?
A) usually only when organizations obtain debt or other loans
B) for five years from the start of an organization until debt is retired
C) only when historical such as financial information needs to be audited
D) on an ongoing basis, as organizations and society’s needs evolve
4) What impact is the presence of factors such as real-time information (such as via the Internet)
expected to have upon the demand for assurance services? Demand is expected to
A) decline, due to the lack of adequate resources.
B) grow, due to the increase in large corporations.
C) grow, due to the need for forward-looking information.
D) decline, as small businesses use the Internet more.
5) A major type of assurance service performed by large public accounting firms is
A) audit.
B) review.
C) compilation.
D) management consulting.
6) In Canada, publicly traded companies are
A) required to have audits.
B) strongly encouraged to have audits.
C) not required to have an audit if they have a review.
D) not required to have an audit.
7) A shareholder of a public Canadian firm can have access to the audited financial statements
A) on the internet.
B) by calling the accounting department of the company.
C) requesting a copy from the auditors.
D) if he holds more than 1% of the shares of the company.
8) 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.
9) A reason for a not-for-profit organization to be audited is
A) complying with the laws requiring them to be audited.
B) meeting requirements of lenders or funding sources.
C) having a professional accountant perform their bookkeeping.
D) ensuring that their financial statement do not contain errors.
10) Which of the following services provides a moderate level of assurance about the client’s
financial statements?
A) Forecasts and projections
B) Compliance
C) Review
D) Audit
11) Which of the following is an advantage of a review engagement as compared to an audit
engagement? For the review engagement
A) information risk is reduced more than for an audit.
B) the documentation to be provided by the client is greater.
C) the financial statements assessed will have more detail.
D) it requires considerably less work, so is less costly.
12) 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.
13) The reasoning behind the requirements of the Sarbanes Oxley Act’s section 404 (attestation
on internal control over financial reporting) is that
A) effective controls result in greater profits to organizations, reducing business failures.
B) effective controls reduce the likelihood of future misstatements in the financial statements.
C) better internal controls can be implemented at lower cost, improving product quality.
D) automated controls improve customer service, resulting in higher product sales.
14) There is an increasing demand for assurance about computer controls surrounding financial
information transacted electronically and the security of the information related to the
transaction. This is in large part due to
A) the increasing presence of internet sales in many businesses.
B) the use of computer assisted auditing tools.
C) the many transactions and information shared online and in real time by companies.
D) client’s uncertainty about the proper functioning of their computer system.
15) The purpose of a WebTrust service is to assure the user that
A) criteria related to business practices, transaction integrity, and information processes have
been met.
B) information systems are reliable in areas such as security, data integrity, and program quality.
C) controls over information systems implemented by the company are used consistently and
reliably.
D) there will not be any unauthorized access to the web site or other systems used by the client
organization.