Richard is performing a compilation engagement. Richard is concerned that the
information is
A) arithmetically correct.
B) accurate.
C) complete.
D) in accordance with ASPE.
Which of the following situations best describes a familiarity threat?
A) Design and implementation of a new payroll system
B) Preparation and entry of bookkeeping transactions
C) Completion of corporate transactions for subsidiary companies
D) PA has been working with this client for ten years, first as a manager, now as a
partner
Payroll and personnel costs at ABC Manufacturing are a major expense. This means
that improper allocation or misclassification of labour costs could result in
A) a material misstatement of net income.
B) a net effect that is negligible when costing inventory.
C) quality control problems with respect to the production of finished products.
D) incorrect payment of payroll to employees.
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
There are a number of things that the practising auditor can do to reduce the liability in
lawsuits. One of them is to
A) lobby for changes in laws.
B) carry adequate insurance.
C) establish peer review requirements.
D) revise auditing standards to meet the changing needs of society.
The most important control in the payroll cycle is clear, properly documentation of the
employee’s job responsibilities and wages by the appropriate level of authority. This
control is associated with which audit objective?
A) completeness
B) classification
C) valuation
D) occurrence
As part of audit planning, you have calculated gross margin for the last five years, and
compared gross margin to industry averages. Your client’s gross margin has increased
by about 5% in the current year, while the industry gross average has declined. One
possible cause of this increased gross margin is
A) higher cost of goods sold.
B) increased bad debt expenses.
C) fictitious revenue.
D) fictitious expenses.
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
The audit objective which requires the auditor to determine that notes payable on the
notes payable schedule are properly classified can be tested with the following
procedure.
A) Review the notes to determine whether any are with related parties.
B) Confirm notes payable.
C) Examine corporate minutes for loan approval.
D) Examine notes, minutes, and bank confirmations for restrictions.
Attribute sampling would be an appropriate method to use on which one of the
following procedures in an audit program?
A) Review sales transactions for large and unreasonable amounts.
B) Observe whether the duties of the accounts receivable clerk are separate from
handling cash.
C) Examine a sample of duplicate sales invoices for credit approval by the credit
manager.
D) Review the aged schedule of accounts receivable to determine if amounts receivable
from officers are included.
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.
The requirement for an attitude of skepticism means that the auditor should
A) not be blind to evidence that suggests the documents, books or records have been
altered or are incorrect.
B) plan and conduct the audit with an attitude of distrust in management.
C) perform additional tests of controls to increase the probability of discovering fraud
or errors.
D) not consider management’s explanation as evidence on any subject.
To minimize the opportunity for fraud, unclaimed salary cheques should be
A) immediately returned for redeposit.
B) kept in the payroll department.
C) left with the employee’s supervisor.
D) held for the employee in the personnel department.
In a code of conduct, the advantage of general statements of ideal conduct, as opposed
to specific rules of behaviour, is
A) the emphasis on positive activities that encourage a high level of performance.
B) the ability to enforce the ideals.
C) the enforceability of minimum behaviour and performance standards.
D) the tendency to define the rules as maximum rather than minimum standards.
The primary objective of analytical procedures used in the final review stage of an audit
is to
A) obtain evidence from details tested to corroborate particular assertions.
B) identify areas that represent specific risks relevant to the audit.
C) assist the auditor in looking for potential material misstatements.
D) satisfy doubts when questions arise about a client’s ability to continue in existence.
If the public accountant negligently failed to properly prepare and file a client’s tax
return, the public accountant can be held liable for
A) the penalties which the client owes Canada Customs and Revenue Agency.
B) the penalties and interest which the client owes.
C) the penalties and interest, plus the tax preparation fee which the public accountant
charged.
D) the penalties and interest, the tax preparation fee, and the amount of tax which was
underpaid.
Which of the following audit tests pertains to the accuracy assertion?
A) prepare proof of cash
B) test a cut-off bank statement
C) examine minutes and loan agreements
D) read the notes to the financial statements
Leon Levy, a partner at the audit firm where you work, asked you to work on the audit
of the balance sheet of Geminy Corp. Geminy is not a public company and has not been
required to have audited financial statements in the past. This year, due to a new bank
loan, its bank requested that audited financial statements be provided. Who are the
primary users in this assurance engagement?
A) Leon Levy
B) The bank
C) Management of Geminy Corp
D) Shareholders of Geminy Corp
At a small practice where the bulk of the work is accounting, bookkeeping, and review
engagements, what is an important procedure that should be followed by the PA to help
ensure independence?
A) Management should be trained in accounting principles so that they can adequately
assess the PAs work.
B) All transactions should be prepared and processed by client personnel.
C) Transactions and journal entries should be discussed with and approved by the
client.
D) The accountant should avoid doing bookkeeping for review engagements, and
restrict this to compilation engagements only.
Which of the following characteristics of samples would make the sample more
sufficient? Samples that contain
A) at least one of each type of transaction that is in the population, and have a high
number of sample items.
B) items with a high likelihood of error and have large dollar values, as well as being
representative of the population.
C) multiple items from different layers of the population (strata), as well as all items
that are above the materiality threshold.
D) items that have a high likelihood of error, as well as being related to the audit
assertions that are being tested.
Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces
keyboards and other types of computer hardware. Fractal is refusing to consolidate its
financial statements, as this would increase the debt to equity ratio to the point that
Fractal would violate its debt agreement, although it would benefit the current ratio
with a sizeable increase in inventory. Instead, Fractal would like to record the
investment in the Malaysian subsidiary at cost. What type of effect does the
non-consolidation have upon the financial statements?
A) Material and isolated
B) Material
C) Material and pervasive
D) Immaterial
An effective audit is one that
A) reduces the audit risk to the targeted level.
B) ensures that there are no errors contained in the financial statements.
C) does not contain errors of a dollar amount higher than 5% of the net income of the
company.
D) is completed on time and within budget.
There are many elements of quality control at the firm level. Which element does
“ongoing professional development of personnel should exist, with assignment to work
that matches employee competence, and performance evaluations related to audit
quality” belong to?
A) leadership and responsibilities within the firm
B) independence
C) general human resource policies
D) extent of professional development
A risk of material misstatement in accounts receivable associated with the allocation
balance-related audit objective is that “long term service revenue is recorded as current
revenue or in the wrong period, overstating revenue and accounts receivable.” Which of
the following tests of detail of balances would respond to this risk?
A) read customer contracts and audit the criteria used to allocate revenue to components
of the sales contract
B) check cash received after the year end and trace to accounts receivable master file
C) read the notes to the financial statements and compare to audited financial
information
D) inquire of management about the process used to make sure that revenue is recorded
in the correct period
Two of the audit objectives for notes payable are important because a misstatement
could be material even if one note is omitted or incorrect. Which assertions are they?
A) completeness and valuation
B) existence and completeness
C) accuracy and existence
D) completeness and accuracy
Black Rock Limited is a marble and tile outlet that has a large outdoor area as well as
an indoor showroom for a variety of rock, tile and marble. It is July and your firm has
just been appointed auditors for the September year end audit. The previous firm of
auditors had conducted review engagements. The company’s bank has asked for audited
financial statements for the current year end.
Required:
A) What is the purpose of obtaining knowledge of the client’s industry and business
environment? Identify at least three procedures that you could undertake in this area.
B) What is the purpose of obtaining knowledge of the client’s business? Identify at least
three procedures that you could undertake in this area.
As part of audit planning, you have calculated gross margin for the last five years, and
compared gross margin to industry averages. Your client’s gross margin has increased
by about 5% in the current year, while the industry gross average has declined. One
possible cause of this increased gross margin is
A) higher cost of goods sold.
B) increased bad debt expenses.
C) premature revenue recognition.
D) fictitious expenses.
A) Discuss what is meant by ‘sampling risk.”
B) Discuss what is meant by “nonsampling risk.”
C) Discuss two causes of nonsampling risk. Also discuss ways the auditor can control
nonsampling risk.
D) Discuss two ways the auditor can control sampling risk.
It is not practical for users to evaluate the quality of the performance of most
professional services because of their
A) complexity.
B) legal standing.
C) veracity.
D) salaries and working conditions.
A key difference between the PCAOB in the U.S. and CPAB in Canada is that
A) CPAB is involved in the development of auditing standards.
B) PCAOB is involved in the development of auditing standards.
C) PCAOB conducts practice inspections of public company auditors.
D) CPAB conducts practice inspections of public company auditors.
The reason auditors accumulate evidence is to
A) defend themselves in the event of a lawsuit.
B) justify the conclusions they have otherwise reached.
C) satisfy the requirements of the relevant provincial securities regulations.
D) enable them to reach conclusions about the fairness of the financial statements and
issue an appropriate audit report.
Before goods are shipped on account to a new customer, a properly authorized person
must
A) prepare the sales invoice.
B) approve the journal entry.
C) approve credit.
D) verify that the unit price is accurate.
Which one of the following is more difficult to evaluate objectively?
A) efficiency and effectiveness of operations
B) compliance with government regulations
C) presentation of financial statements in accordance with a generally accepted
accounting framework
D) internal controls in use at a small company.