“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.
When the criteria to be used in the financial statement audit is established, the auditor’s
responsibility is to
A) evaluate the reporting framework used.
B) select the acceptable financial reporting framework.
C) make a recommendation to management for selecting the framework.
D) create and document the framework used.
CAS 200 explains that as part of general qualifications and conduct the auditor should
be professionally competent. Which of the following help the auditor achieve
competence?
A) the use of due care in the performance of all aspects of auditing
B) have an objective state of mind and independence from the client
C) formal education, practical experience and continuing education
D) conducting the audit using a risk-based approach and being skeptical
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.
When a dividend is declared by the Board, the source for determining who should
receive dividend cheques is the
A) shareholders’ capital stock register or master file.
B) stock certificate books.
C) common stock account in the general ledger.
D) corporate directory.
PA is comparing the liabilities section of ABC Ltd. from last year to this year. Last year,
ABC Ltd. had large loans due to major shareholders and officers and to one bank. This
year, the debt has been reorganized, so there are now two different banks used for loans.
Instead of having debt to shareholders and officers, the company now owes notes to 25
different foreign investors, who are entitled to convert the debt to shares if interest is
not paid or if principal instalments are not paid on time. For this year’s audit, how will
the change in debt structure affect the audit risk model?
A) no effect on the audit risk model
B) higher control risk
C) lower audit risk
D) higher audit risk
Donna sees a large variation in the gross margin percentage as a result of analytical
procedures she performed. This means that
A) Donna should perform more tests.
B) the financial statements contain an error.
C) Donna cannot rely on the company’s internal controls.
D) Donna should document this difference.
The purchase order, usually in writing, is a legal document that is
A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor’s catalogue offer to sell.
The defalcation process, which postpones entries for the collection of accounts
receivable to conceal an existing cash shortage, is referred to as
A) kiting.
B) lapping.
C) computer fraud.
D) financial statement fraud.
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?
Special use prospective financial statements are intended for
A) internal management only.
B) any third party.
C) third parties with whom negotiations are being conducted directly by the responsible
party.
D) the relevant provincial securities commissions.
Analytical procedures are mandatory during which phases of the audit?
A) tests of controls and tests of details
B) planning and final evaluation
C) planning and tests of details
D) tests of details and final evaluation
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.
Locker Building is a new apartment building in a Vancouver suburb. In order to receive
a subsidy from the municipality, it needs to prove that it has complied with the city’s
new rules about “green efficiency”. The “green efficiency” rules are described on the
municipality’s website and list the requirements a building must meet to be considered
green and efficient. Your firm, with the help of an environmental scientist, has been
asked to perform a direct reporting engagement for Locker building. The suitable
criteria in this case are the
A) green efficiency rules.
B) auditor’s judgment.
C) environmental scientist’s judgment.
D) federal environmental laws.
When considering the relationships between types of audit tests and evidence, which of
the following procedures is suitable for use for all types of audit tests (procedures to
obtain an understanding of internal control, tests of controls, analytical procedures, and
tests of details of balances)?
A) inspection
B) observation
C) inquiries of the client
D) recalculation
A major control available in a small company, which might not be feasible in a large
company, is
A) a wider segregation of duties.
B) use of sequentially numbered documents.
C) fewer transactions to process.
D) the owner-manager’s personal interest and close relationship with the personnel.
When labour is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning
A) proper classification of transactions.
B) authorization of wage rates.
C) fictitious employees.
D) completeness of recorded transactions.
Which one of the following analytical procedures would be most helpful in alerting the
auditor to the possibility of obsolete inventory? Comparing
A) gross margin percentage with previous years.
B) unit costs of inventory with previous years.
C) inventory turnover with previous years.
D) current year manufacturing costs with previous years.
One of the most important test of details of balances for accounts receivable is
A) recalculation of the aged receivables and uncollectible accounts.
B) confirmations.
C) tracing from shipping documents to journals to the accounts receivable ledger.
D) tracing credit memos for returned merchandise to receiving room reports.
The rules of accounting bodies in Canada require their members to behave in the best
interest of the profession and the public. Identify the situation where the accountant is
acting in the best interest of the profession. An accountant
A) reports a fellow accountant after noticing that the accountant helped a client with tax
evasion.
B) openly criticizes a fellow accountant’s competencies after having lost a bid for a new
client.
C) brags about his competence and professional title, and encourages clients to invest in
a new venture he is starting.
D) refuses to cooperate with the new auditor after having lost a client.
What is the primary difference between internal and external auditors? The
A) methodology used to conduct financial statement audits.
B) level of competence required.
C) parties to whom the auditor is responsible.
D) level of objectivity required.
Financial information prepared using one or more assumptions (hypotheses) that do not
necessarily reflect the most likely course of action in management’s judgment is called
a(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
You are analyzing the exceptions that arose after your control testing of credit limit
approvals. There were four exceptions where credit had not been approved. One was for
a customer that was subsequently placed on C.O.D. (cash on delivery), and three
occurred while the business was in the middle of its busy season, processing three times
more transactions than most other times of the year. The company’s busy season
normally lasts about two months.
Required:
A) What is an anomaly?
B) Are any of the exceptions that you found anomalous? Why or why not?
C) Provide an example of a credit approval testing exception that would be anomalous.
Which of the following controls helps to prevent error with set up of access rights, and
also helps to prevent unauthorized changes to the access rights?
A) independent comparison to check that they have been set up properly
B) access rights forms that are signed by the user’s manager
C) tracking all accesses in an access log by user identification code
D) using audit software to provide a list of who has accessed sensitive data
An essential characteristic of the persons performing internal check procedures is
A) independence from the original data preparer.
B) a thorough knowledge of accounting.
C) an analytical and inquisitive mind.
D) competence in data entry skills.
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) During 2012, your client was sued by a customer who had a serious car accident as a
result of scrap metal that had been dumped in the parking lot. The customer drove over
the scrap metal, which was imbedded in the tires of her vehicle. The tires blew, and the
car went out of control on a major highway. The amount in dispute is $400,000, with
estimated legal bills of about $20,000. The client does not wish to disclose the suit in
the financial statements.
B) During the current year, your client leased a large amount of equipment. As the lease
qualifies as a capital lease, the equipment has been recorded as an asset, with the
corresponding liabilities recorded on the financial statements. The implicit interest rate
in the lease is seven percent. The annual payments due over the terms of the lease have
been disclosed in the notes to the financial statements.
When a different extent of evidence is needed for the various cycles, the difference is
caused by
A) errors in the client’s accounting system.
B) the client’s need to achieve an unqualified opinion.
C) the auditor’s need to follow GAAS.
D) the auditor’s expectations of errors and assessment of internal control.
A major benefit of computerized analytical procedures is the
A) ease of doing the calculations.
B) ease of updating the calculations.
C) ease of correcting math calculations.
D) ability to push the work down to lower levels of the audit staff to do the analysis.
Although considerable evidence is obtained from the client through inquiry, it usually
cannot be regarded as conclusive because
A) the client may not have sufficient knowledge to answer the question.
B) it is not from an independent source and may be biased.
C) there is a risk that the auditor will misinterpret what the client said.
D) the client cannot be trusted to provide persuasive information.
The ASPE (Accounting Standards for Private Enterprises) financial reporting
framework normally requires the auditor to report using the corresponding figures
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.
If the internal controls for recording sales returns and allowances are evaluated as
ineffective,
A) a larger sample is needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.
A) One step in the planning phase of an audit is to obtain information about the client’s
legal obligations. Identify the types of legal documents and records that auditors
examine to obtain this information.
B) Discuss the audit-relevant information contained in each of these three types of
documents that an auditor should be aware of early in the audit.
The file for recording each payroll transaction for each employee and maintaining total
employee wages paid for the year to date is the
A) payroll master file.
B) payroll transaction file.
C) payroll journal.
D) job time ticket.
For the most part, auditors treat each transaction cycle
A) separately as the audit is being performed.
B) as an interrelated unit with the other cycles throughout the entire audit.
C) as a separate business unit with different audit teams.
D) as a joint venture with other clients in the same industry.