Which of the following lawsuits resulted in a decision that shareholders could not sue
the auditors for the loss in the value of their shares?
A) Haig V. Bamford et al (1976)
B) Hercules Management Ltd. V. Ernst & Young (1997)
C) Ultramers Corporation V. Touche (1931)
D) United States V. Anderson (2002)
During the course of an audit engagement an auditor prepares and accumulates audit
working papers. The primary purpose of the audit working papers is to
A) aid the auditor in adequately planning the work.
B) provide a point of reference for future audit engagements.
C) support the underlying concepts included in the preparation of the basic financial
statements.
D) support the auditor’s report.
As part of the audit program for the audit of sales, the auditor will “review sales
transactions for large and unusual amounts.” Which of the following types of sampling
would be suitable for this audit procedure?
A) systematic
B) attribute
C) block
D) directed
Porterville, Ontario, is the home of the largest leather tanning operation in Canada.
Hides from various animals are stretched and treated, then cut into shapes for shipment
to wholesalers.
Computer assisted operations are important in maintaining temperature, humidity, and
proper mix proportions in chemical solutions used for the tanning process. Computer
assistance has helped improve the quality of the tanning process, as well as provide a
safer environment for employees. Computer operations and backup is supported by the
warehouse manager, Joe.
Individual hides are tagged with a bar code and tracked for quality control purposes.
The HomeTown Tanning Company uses a centralized microcomputer based system for
its manufacturing and accounting operations. The two owners of the company are active
in the business, and approve all new hardware and software acquisitions.
The controller is responsible for network upgrades as well as maintaining passwords
and user identification codes on the network. Accounting transactions are entered by
accounting staff, although the controller has the ability to review and correct
transactions.
Required:
List the six categories of functions that need to be separated from each other. Does
HomeTown Tanning have these functions separated? For any functions that are not
separated, indicate the potential impact upon controls and upon the audit.
A communication addressed to the debtor requesting him or her to confirm whether the
balance as stated on the communication is correct or incorrect is a
A) legal confirmation.
B) negative confirmation.
C) positive confirmation.
D) bank confirmation.
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.
A) There are seven types of audit evidence: inspection, observation, inquiries of the
client, external confirmation, recalculation, reperformance, analytical procedures. For
each of the following types of audit tests, indicate the type(s) of evidence that can be
obtained through the test: (1) tests of controls, (2) analytical procedures, and (3) tests of
details of balances.
B) Contrast the circumstances in which the auditor would choose not to test controls
with those in which he or she would perform tests of controls.
C) Types of audit tests include tests of controls, analytical procedures, and tests of
details of balances. Please rank the preceding three types of tests from least costly to
most costly.
The audit objective to determine that notes payable in the schedule exist is verified by
the tests of balances procedure to
A) foot the notes payable list.
B) confirm notes payable.
C) recalculate interest expense.
D) examine the balance sheet for proper disclosure of noncurrent portions.
The auditor gives an audit opinion on the fair presentation of the financial statements
and associates his or her name with it when, on the basis of adequate evidence, the
auditor concludes that the financial statements are unlikely to mislead
A) a prudent user.
B) management.
C) the reader.
D) investors.
The working papers contain data useful for evaluating the adequacy of the audit scope
and the fairness of the financial statements. This data helps the auditor to conclude
whether
A) control risks were accurately identified and tested.
B) inherent risks were set as low as possible.
C) an unqualified audit report can be issued.
D) the current files properly contain copies of client contracts and agreements.
Formamould Inc. sells plastic moulds to a variety of companies. Some moulds are
custom made and cost thousands of dollars. To help customers finance these purchases,
Formamould uses a variety of methods, such as payment terms stretched over three
years, delayed payment, and pay-as-you-produce models tailored to the individual
customer’s needs. The outstanding balance is included in current accounts receivable.
The general balance-related audit objective affected by this activity is
A) completeness.
B) accuracy.
C) allocation to accounts.
D) existence.
Who do the external auditors and the internal auditors usually report to?
A) senior management
B) the audit committee
C) chief executive officer
D) director of internal audit
Joan has been the payroll supervisor at York Distribution Company (YDC) for ten
years. She has never missed a payroll and Farah, the owner of the company is delighted
with her conscientiousness and knowledge. This is particularly important, as Farah
spends a lot of time on the road drumming up new business, and needs competent
personnel back at the office.
There are two accounting personnel at the office, a receptionist, five shipping and
receiving personnel, and thirty sales people employed by YDC. Office and
shipping/receiving personnel are paid a salary, while the sales people are paid a monthly
base salary plus a percentage of their sales, calculated quarterly. The base salary is low,
at $20,000, with a 2% commission, calculated based upon sales less any bad debts
written off related to their customers.
Joan prints off the sales by customer every month, and uses this information to calculate
commission. She then prepares the payroll cheques and gives them to Farah, who signs
them and gives them to the sales staff at the monthly sales meeting. The cheques are
written against a payroll imprest bank account, kept at a balance of $1,000. This
account is not reconciled, as the staff are very overworked with the increasing volume
of business handled by the company.
Required:
A) Identify control weaknesses and their impact, and provide recommendations for
improvement.
B) What is the impact of the control weaknesses upon your audit approach?
Society has attached a special meaning to the term professional. A professional is
A) someone who has passed a qualifying exam to enter the job market.
B) any person who receives pay for the services performed.
C) a person who is expected to conduct himself or herself at a higher level than the
requirements of society’s laws or regulations.
D) someone who has both an education in the trade and on-the-job experience received
under an experienced supervisor.
In May 2012, the firm of Chang and Crown (C&C) became the auditors of Laua
Limited (LL) for the fiscal year ended December 31, 2011. LL’s shareholders and Board
approved the change from its previous audit firm on the recommendation of LL’s senior
management. One of the new board members is a bit confused about management’s role
with respect to the financial statements and thought that Chang and Crown would be
preparing the financial statements. He was also glad that the auditors would be able to
help prevent illegal acts and fraud.
Required:
A) Distinguish between management’s responsibility and the auditor’s responsibility for
the financial statements under audit.
B) Explain to the board member why the auditor does NOT help prevent illegal acts and
fraud. What is the role of the auditor with respect to illegal acts and fraud?
When comparing the auditor’s responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering either one.
D) on the senior auditor for detecting errors and on the manager for detecting employee
fraud.
A public accountant has been engaged to conduct an examination of future-oriented
financial information. Which of the following procedures would be included in the
examination?
A) creation of assumptions that fit the projected information
B) developing the hypotheses with the assistance of management
C) assessment of internal controls over the development of internal future-oriented
information, such as budgets
D) assessing the plausibility of hypotheses
The auditor’s primary concern in testing payroll liabilities is to make sure that
A) expense has not been overstated, thus reducing profits.
B) there are no understated or omitted accruals.
C) employees’ T-4 slips are accurate.
D) salaries of officers have not been misclassified as wages.
A PA firm has an organizational structure that assures the technical review of every
engagement by a partner who has expertise in the client’s industry. This is an example
of good
A) entity level controls.
B) adherence to professional standards.
C) business risk management.
D) quality controls.
Winston Chang, PA conducted the audit of Manra Manufacturing Ltd., a small company
that produces a variety of machined parts for the automotive and computer industry.
The audit showed that the company produced a small profit after paying the owners of
the company a high salary. Manra was purchased by a competitor, Cheblay. Cheblay
had hoped to produce efficiencies by combining the two companies and was unable to
do so. Cheblay sued Chang because it relied upon the financial statements when
purchasing the company’s shares, claiming that the machines, which were about fifteen
years old, had been overvalued. The machines were recorded at cost, which was below
net realizable value. What is the auditor’s best defence?
A) contributory negligence
B) absence of negligence
C) duty of care
D) absence of liability
The existence of advanced automated systems affects the audit process. Which of the
following characteristics is an indicator of the presence of an advanced automated
information system?
A) custom-designed operational or strategic information systems
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically-controlled equipment used in the manufacturing process
The primary concern in measuring materiality when a client has failed to follow an
acceptable financial reporting framework is usually
A) the total dollar error in the accounts involved, compared with some acceptable base.
B) measurability of the dollar error.
C) the nature of the item in error.
D) whether it can materially affect some future period.
Which level of risk does the auditor normally assign to the presentation and
disclosure-related assertion of completeness for contingent liabilities and subsequent
events?
A) low risk for inherent risks that required information may not be disclosed in the
notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high that all required information may not be disclosed in the notes
Your firm has been appointed as the auditor of Bush Mining Inc. (BMI), a company that
runs small mining operations in remote areas of northern Canada, primarily in surface
mines. You have been assigned the job of audit senior for BMI.
BMI’s operations are subject to provincial and federal laws and regulations. These laws
and regulations have become stricter in recent years and some of BMI’s older mines
may be in violation of environmental laws.
Surface mining produces tailings (toxic wastes that are dangerous to animal and plant
life). These tailings are either further processed and buried or retained in tailings ponds.
BMI is required to restore the mining property to a safe condition after a mine is
exhausted. BMI has programs in place to monitor and control pollutants that are
released to the air and to local waterways.
Required:
A) What factors would affect the client business risk of BMI? Based upon your
assessment of BMI’s client business risk, would you adjust audit risk? Why or why not?
B) What is your preliminary assessment of audit risk? Justify your answer.
Why is it important for the review engagement report to state that the review is not an
audit?
A) to make sure that the public accountant is not sued
B) to clarify that only review engagement procedures were used during the engagement
C) to make users aware that a review provides a lower level of assurance
D) so that the user does not ask any unnecessary questions about the engagement
After considering a client’s internal controls, an auditor has concluded that it is well
designed and is functioning as intended. Under these circumstances, the auditor would
most likely
A) perform tests of controls to the extent outlined in the audit program.
B) determine the control procedures that should prevent or detect errors and
irregularities.
C) use a combined audit approach that includes tests of controls and substantive tests.
D) determine whether transactions are recorded to permit preparation of financial
statements in accordance with generally accepted accounting principles.
General qualifications and conduct standards indicate that performance of all aspects of
auditing should be performed with due care. This means that the auditor must fulfill
his/her duties
A) in accordance with the CAS.
B) carefully and in a timely manner.
C) to the satisfaction of the client.
D) diligently and carefully.
“Use of comparisons and relationships to determine whether account balances or other
data appear reasonable” is a definition of
A) auditing.
B) tests of balances.
C) tests of controls.
D) analytical procedures.
The official record of the meetings of the board of directors and shareholders is
contained in the corporate
A) bylaws.
B) charter.
C) minutes.
D) license.
A planned approach to the conduct of audit testing, taking into account assessed risks, is
called an
A) audit approach.
B) audit plan.
C) audit program.
D) audit strategy.
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.
Jordan set up a nonprofit corporation several years ago to provide scholarships to poor
youth in his community. From a small start, Scholarships Get up and Go Foundation
now has assets of over $5 million, and provides about ten university scholarships every
year. Jordan is proud of the new doctors, dentists and other health care practitioners that
his Foundation has funded.
Jordan is thinking of starting another foundation in an old building that he has
purchased. It would be a youth drop in centre, with music lessons, art facilities,
basketball facilities in a gym, with linkages to local high schools so that there could be
a homework club to encourage good grades.
Required:
A) Why should Jordan have the financial statements of both of these foundations
audited?
B) Who would be the users of the financial statements of the foundations?
C) What other types of services could PAs provide to Jordan and the foundations?
When does the auditor use simple random sampling?
A) when the auditor has a particular judgmental criteria that is used to select the sample
B) where the auditor wants numbers in sequence and would like to select the sample
rapidly
C) for testing of cut-off after the year end with respect to accounts payable
D) for populations where each item is considered to have the same characteristics for
audit purposes
The proper recognition of accounts payable liabilities are crucial to ensure fair
statement of the ending accounts payable balance. What documents are required to
adequately support accounts payable?
A) receiving reports and bill of lading documents that indicate dates shipped
B) bill of lading documents matched to the internal purchase requisition
C) purchase requisition (authorized) matched with the purchase order to the supplier
D) supplier invoices matched to receiving reports and authorized purchase documents
Which one of the following procedures would most likely be conducted by an
accountant during a compilation engagement?
A) Enquire of management with respect to the purpose of new capital assets.
B) Compare gross profit on a year-by-year basis over the last five years.
C) Circularize negative accounts receivable confirmations.
D) Assemble and re-calculate the financial statement allocations.