The information systems audit specialist on your audit team has indicated that the
general controls over program changes are inadequate for all application cycles. What
impact does this have upon your audit of sales invoice processing?
A) The auditor could potentially rely upon only manual controls.
B) Only interdependent controls should be considered for control testing.
C) It is likely that calculations, such as extensions, are performed consistently and
accurately throughout the year.
D) Unauthorized access to information recorded in the master files is likely.
Adequate technical training and proficiency in auditing is a requirement of which
category of generally accepted auditing standards?
A) General
B) Examination
C) Reporting
D) Quality control
When external users place heavy reliance on the financial statements it is appropriate
that
A) audit risk be increased.
B) inherent risk be decreased.
C) inherent risk be increased.
D) audit risk be decreased.
An agreement which commits the firm to a set of fixed conditions in the future
regardless of what happens to profits or the economy as a whole is a definition of a
A) contingent liability.
B) potentially hazardous agreement.
C) commitment.
D) conditional contract.
Which of the following internal control tests would help to assess whether payroll
transactions were recorded on the correct dates?
A) Compare cancelled cheques with payroll journal for name, amount, and date
B) Compare date on cheque with date the cheque cleared the bank
C) Compare cancelled cheques with personnel records
D) Recompute hours worked from pay records
When a compensating control exists, a weakness in the system
A) is no longer a concern because the potential for misstatement has been sufficiently
reduced.
B) is reduced but not removed; therefore, it is still of concern to the auditor.
C) could cause a material loss, so it must be tested using substantive procedures.
D) is magnified and must be removed from the sampling process and examined in its
entirety.
Which one of the following forms of evidence would be least persuasive in forming the
auditor’s opinion?
A) the auditor’s count of marketable securities
B) correspondence with a stockbroker regarding the quantity of client’s investments
held in street name by the broker
C) minutes of the board of directors authorizing the purchase of stock as an investment
D) responses to auditor’s questions by the president and controller regarding the
investments account
Which of the following best describes proper internal control over payroll? The
A) preparation of the payroll must be under the control of the personnel department.
B) confidentiality of employee payroll data should be carefully protected to prevent
fraud.
C) duties of hiring, payroll computation, and payment to employees should be
segregated.
D) payment by cheque to employees should be replaced with payment by automatic
deposits.
When a compilation engagement is performed, the report attached is called a
A) Compilation Report.
B) Notice to Reader.
C) No Assurance Report.
D) Auditor’s Report.
Pierre, a CA, was convicted of stealing money from his clients and for deliberately
preparing personal tax returns that were false. In addition, Pierre will likely
A) need to take additional training courses to upgrade his tax skills.
B) need to defend himself to prove non-negligent performance.
C) be charged with misconduct by his professional institute (or ordre).
D) have lack of privity with the federal and provincial tax authorities.
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.
The human resources and payroll cycle is the transaction cycle that begins with
A) processing the payment to the employees.
B) the creation of the employee profile in the payroll master file.
C) the employee performing work for the company.
D) hiring of personnel.
Where the auditor has decided to rely upon internal controls, he or she will then
A) eliminate the need to gather evidence in that area.
B) test the effectiveness of the controls in that area.
C) proceed to expand the sample sizes in that area.
D) negotiate with management to determine which controls will be tested in that area.
If the auditor assessed the detection risk as high, the extent of evidence the auditor
plans to accumulate is
A) low.
B) high.
C) medium.
D) need more information to conclude.
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.
Risks associated with specific industries may affect the auditor’s assessment of client
business risk and acceptable audit risk, and even influence client acceptance decisions.
Which of the following business would be the most risky for the auditor to accept as a
new client? A client that
A) is a small manufacturer of metal and plastic parts, with steady profits, in business for
15 years.
B) is developing a computer game, expected to be ready in three years, and has no other
products.
C) has fifteen retail outlets in the clothing industry, with mid-range pricing, appealing to
a large population sector.
D) consists of a partnership of ten lawyers, operating out of three different cities in one
province.
The auditor is tracing from the duplicate sales invoices to related shipping documents
with respect to the occurrence transaction-related audit objective. This type of evidence
is
A) independent.
B) relevant.
C) timely.
D) related to external documentation.
The auditor recomputed the dividend declaration amount by multiplying the declared
dividend per share by the number of shares outstanding. Which audit assertion is this
associated with?
A) completeness
B) accuracy
C) valuation
D) existence
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.
Prior to accepting an engagement to examine a financial forecast or projection included
in a prospectus or other public offering document, the public accountant should
A) obtain an understanding of the controls over preparation of internal forecasts such as
budgets.
B) increase the risk profile of the client with respect to management integrity.
C) ensure that management will provide sufficient evidence to conduct the engagement.
D) inform the client that the engagement may not detect errors in the client’s forecasts.
What audit objective is associated with the comparison of disbursement and receipt
information on a bank transfer schedule to the cash disbursements and cash receipts
journals?
A) Accuracy
B) Classification
C) Occurrence
D) Completeness
Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control
When the auditor examines the client’s documents and records to support recorded
transactions or amounts, it is commonly referred to as
A) inquiry.
B) confirmation.
C) vouching.
D) physical examination.
Analytical procedures are substantive tests and, if the results of the analytical
procedures are favourable, they will reduce
A) the extent of tests of details of balances.
B) the extent of tests of controls.
C) the analytical procedures.
D) all of the other tests.
Dussault & Montgomery, the auditors of Greenwich Corp., relied on Groves & Padden,
another PA firm, to audit the Quebec subsidiaries of Greenwich. The responsibility for
the opinion to issue on the financial statements is the responsibility of
A) Greenwich Corp.
B) Dussault & Montgomery.
C) Groves & Padden.
D) Dussault & Montgomery and Groves & Padden.
External auditor Mary Smith may not rely on the work of internal auditor Ray Jones
unless
A) Jones is certified (CA, CGA or CMA).
B) Jones is independent of the client.
C) Jones is supervised by Smith.
D) Smith obtains evidence that supports the competence, integrity, and objectivity of
Jones.
What situation represents a contingent liability for a company?
A) A candy company’s monthly production requires 1,000 kg of chocolate. The
company entered into a contract with a chocolate producer to purchase 6,000 kg of
chocolate over the next six months at the market price.
B) A bike company learned that a racer using its bike was seriously injured in an
accident on December 30th, 2012, as the front wheel of the bike was released in a curb
as a result of a manufacturing defect. The company has not received a claim at
December 31st, 2012 but management expects to receive a claim.
C) A restaurant received a $10,000 claim from a customer for emotional damages as a
result of poor service. The legal counsel of the restaurant indicated that the claim was
not supported and there was less than a 5% chance that the restaurant would have to
pay.
D) A hotel chain was found guilty by a judge for not refunding customers with on-line
reservations. The hotel chain will have to pay $50,000 to various customers in the
following year.
At the completion of the audit, management is asked to make a written statement that it
is not aware of any undisclosed contingent liabilities. This statement would appear in
the
A) management letter.
B) representation letter.
C) engagement letter.
D) letters testamentary.
Publicly listed organizations and those using IFRS (International Financial Reporting
Standards) must have audit reports that use the comparative financial statements
approach. This means that the auditor reports on
A) the current year’s financial statements.
B) both periods under audit, the current and prior year.
C) three years, the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from the improper write-off of a trade account
receivable? Write-offs must be
A) approved by a responsible officer after review of credit department
recommendations and supporting evidence.
B) supported by an aging schedule showing that only receivables overdue several
months have been written off.
C) approved by the cashier who is in a position to know if the accounts receivable have,
in fact, been collected.
D) authorized by company field sales employees who are in a position to determine the
financial standing of the customers.
The auditor will obtain a copy of the client’s articles of incorporation (if applicable) and
retain a copy in the permanent file. Important information in the articles of
incorporation includes
A) the interest rates currently being paid for bonds that have been issued.
B) voting rights of each class of shares issued by the company.
C) which shares have been redeemed by the company in the current year.
D) the interest rates that are being received on long term notes invested.
In addition to representing an assessment of whether a client’s internal control is
effective for preventing or detecting misstatements, control risk also represents the
A) reliability of management in preventing or detecting fraud.
B) auditor’s intention to rely on internal controls.
C) likelihood that the auditor will detect illegal acts.
D) possibility of collusion occurring between two employees.
When reading the corporate minutes, the auditor obtained information regarding the
loans that were authorized for borrowing. What audit step would the auditor likely
conduct with this information?
A) trace the authorized amounts to the bank statements
B) verify that notes payable have been recorded
C) calculate interest payable as of the end of the year
D) contact a credit rating agency to determine the rating of the lender
During your lunch, your audit team went to a local mall, in the food court, since they
needed to be quick today. You dropped off a photofinishing film at a film developer,
saying that you would pick it up after work that day. After telling you that she preferred
using her digital camera to using regular film, your supervisor said,
“Next week, you are going to be working at a client that just happens to be a group of
photography stores. Tell me, what controls do you think should be programmed into the
cash register to help ensure that sales transactions are accurate and complete?”
Required:
Answer your supervisor’s question.
Discuss three audit procedures commonly used to search for contingent liabilities.
Gonzo is an on-line dating agency. Gonzo has been in business for 5 years and has been
able to reach revenues of $1 million last year. Given its recent expansion, Gonzo’s
shareholders have required that the company’s financial statements be audited for the
first time this year. You have been assigned to the audit team for this mandate.
The senior manager asked you to review the process description for the sales of Gonzo.
The manager asked you to identify the controls in place that could be tested and used
for the audit and also, any controls that might be missing. Briefly explain the impact on
the audit.
Gonzo’s CEO provided you with the following description of their processes and
activities for the past year:
Sales
Gonzo’s web-site is operational 24 hours per day. All of the sales for Gonzo are done
on-line when the customer opens a profile. A customer will pay $50 to open a profile
and will then pay $10 per month to keep his profile active. Most customers pay on-line
with their credit cards and the sale is automatically recorded in the sales ledger of
Gonzo at the time of payment.
Gonzo also had a promotion for the last 3 months of the year. If the customer wanted to
subscribe for one year, they could pay $100 upfront to keep their profile active for the
full year instead of paying $10 each month for 12 months. This proved to be a popular
sales tactic as customers enjoyed the $20 savings.
Web-Site Security
In the past year, one hacker managed to intrude the web-site and steal the credit card
information of 25 Gonzo customers. To ensure quality of customer service, Gonzo
reimbursed a total of $10,000 to the customers to compensate them for the amounts that
were stolen as a result of the intrusion on their web-site. Since then, Gonzo hired a third
party, Mindster Box, to update the security features of their web-site. Mindster Box
performs monthly updates to the security features and monitors any intrusion attempt.
Gonzo did not have a problem since.
Collection and Reconciliation
As most of the sales are done by credit card, Gonzo receives the money from large
credit card companies on a by-weekly basis.
When the money is received from the credit card company, Jo-Ann, the accounting
manager of Gonzo, reconciles the detail of the payments received by the credit card
company to the sales ledger of Gonzo. Jo-Ann has often complained that this is nearly
impossible to do since the accounting system of Gonzo keeps track of the payment by
the on-line user name which is often very different from the actual name of the person
as stated on the detailed report provided by the credit card company.
Jo-Ann therefore mostly relies on the statement of the credit card company to record
and adjust revenues reported by Gonzo.
A financial statement review emphasizes four broad areas, one of which is to “Perform
analytical procedures.” State the other three areas emphasized.
Following are examples of evidence that could be collected during an audit of financial
statements.
1. Duplicate copies of sales invoices.
2. Inspection of new $100,000 cutting machine.
3. Bank confirmation.
4 Remittance advices.
5. Vendor’s invoices.
6. Standard letter from lawyer to auditor.
7. Auditor inventory count sheets.
8. Shipping documents.
9. Payroll cheques.
10. Long-term debt agreements review notes.
11. Auditor interest expense calculation worksheet.
12. Observation by auditor of computer error message (invalid supplier number).
13. Gross margin calculation.
14. Interview notes from interview with credit manager.
Required:
Classify each type of evidence as to its reliability (1 – high, 2 – moderate, 3 – low).
Justify your classification.
As part of your audit of the payroll for Jones Chu Company Limited (JCC), you used
generalized audit software. You had available to you the payroll transactions for the
month of September and the employee master file as of the date of September 30. You
conducted the following tests, with results noted:
1. Ran a duplicates test on employee number in the transaction file. You found that one
employee, employee number 320, had been paid twice, using cheque numbers 12376
and 12377.
2. Check the calculation of “pay per period” in the employee master file. (Divide the
salary field by 12 to derive the monthly pay). It was found that for two employees these
calculations did not match. Employee #20 had a pay of $200 higher than the
calculation, while employee # 220 had a pay that was $65 higher than the calculations.
3. Check that “gross pay” less “unemployment insurance, Canada Pension Plan and
income taxes deducted” equals “net pay.” No errors were found.
Required:
For each audit test
(i) Describe the audit assertion associated with your audit test.
(ii) Discuss the results that the auditor would have expected before running the test.
(iii) Discuss the implications of the findings upon the audit process or upon specific
audit procedures.
Discuss the three key controls over notes payable.
List four specific matters that should be included in a client representation letter.
The audit of the inventory and distribution cycle consists of five parts. State the five
parts and, for each part, identify the cycle in which that part is tested by the auditor.
You have been assigned the in-charge-auditor for a new client, Beltair House. Beltair
House is a non-profit charitable organization which operates a home for unwed mothers
who have decided that they would like to keep their child. In the past, the organization
had been almost fully funded by the provincial government. However, due to recent
budget cut-backs, Beltair has to raise operating funds from public donations.
Because of financial constraints, there is now only one full time manager, Joan Ng. Joan
has the help of several volunteers, and the residents help out with the chores and with
maintenance and cleaning. Ng has been able to arrange for a local food bank to provide
a large portion of the food required for meals. Door-to-door canvassers have been able
to raise money to keep the House going, but Ng is concerned that this will change.
Required:
Identify issues that you will need to consider that affect the risk of this audit
engagement.
Discuss the alternative procedures an auditor can perform to test the existence objective
for accounts receivable when customers do not respond to confirmation requests.
Describe the audit procedures typically used to test for out-of-period liabilities (also
referred to as the search for unrecorded accounts payable).
State the three conditions required for a contingent liability to exist.
State the three main reasons why it is essential that working papers be thoroughly
reviewed by another member of the audit firm at the completion of the audit.
Explain why the auditor’s verification of owners’ equity is more complex for
publicly-held corporations than closely-held corporations.