On a bank transfer schedule, if a cash disbursement was recorded in the current fiscal
year, and the receipt in the subsequent fiscal year, this might be
A) the best way to record this type of transaction.
B) an indication of increased inherent risk with respect to cash.
C) an attempt to cover a cash shortage.
D) an indication of an error in recording information by the bank.
In addition to having modifications of wording for the financial statement audit opinion,
other types of opinions can have modifications as well. Which one of the following
describes a situation where there would be a qualification or disclaimer of opinion for a
direct reporting engagement? The
A) subject matter does not conform to the criteria.
B) information is not presented fairly.
C) practitioner conducted alternative procedures where there was a scope limitation.
D) practitioner and management disagree about the content of the report.
Bank reconciliations are normally verified on a 100-percent basis. Testing the
reasonableness of the cash balance is therefore
A) less important than for most other audit areas.
B) more important than for other audit areas.
C) equally important than for other audit areas.
D) less important than for the audit of other assets, but more important than the audit of
liabilities.
Some companies use a lockbox system, whereby customers mail payments to a post
office box address. The lockbox contents could be handled by a bank, another external
organization, or the owner of the company. One of the advantages of using a lockbox is
that
A) improves segregation of duties.
B) results in more accurate bank deposits.
C) results in more accurate accounts receivables.
D) provides more detailed bank deposit information.
A document which the auditor receives from the client, but which was prepared by
someone outside the client’s organization, is a(n)
A) external confirmation.
B) copy of sales invoice.
C) copy of bank note payable.
D) inventory receiving report.
The management letter
A) is required by the CAS whenever there are “reportable conditions.”
B) must follow the format prescribed by the CICA.
C) spells out to the audit committee the auditor’s responsibilities under generally
accepted auditing standards.
D) is optional and is intended to help the client operate its business more effectively.
A positive confirmation is more reliable evidence than a negative confirmation because
A) the auditor has a document which can be used in court.
B) follow-up procedures can be performed if a response is not received from the debtor.
C) the debtor’s lack of response indicates agreement with the stated balance.
D) fewer confirmations can be sent out.
Which of the following types of evidence would be considered most reliable in the
audit of accounts payable?
A) review of internal budgets for the period under audit
B) inquiry of management with respect to recent purchases
C) inspection of client purchase orders
D) inspection of supplier invoices
Most large corporations employ the services of a stock transfer agent for the purpose of
A) maintaining the shareholder records.
B) recording share capital in the accounts.
C) issuing the shares for the company.
D) ensuring that stock issuances are complying with federal and provincial laws.
Which of the following situations would be an example a of self-review threat? Prior to
commencing the audit engagement, PA has completed
A) personal and corporate tax returns.
B) audit of a company where the client owns a minority interest.
C) purchase price allocation calculation for a company that the client purchased during
the year.
D) audit of the non-for profit organization of the client.
Which of the following describes the class of transactions associated with payroll?
A) Posting costs of purchasing inventory
B) Payment of employee services
C) Payment of withholding taxes and benefits
D) Write-off of damaged inventory dropped by employees
There are three main types of revenue manipulations. Which of the following revenue
manipulations affects the occurrence objective?
A) recording subsequent period sales as current period sales
B) the use of “bill and holds” (goods are invoiced but not shipped)
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue
The auditor has considerable responsibility for notifying users whether the financial
statements are fairly stated. This imposes upon the auditor a duty to
A) be an insurer of the fairness in the statements.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial
statements.
D) provide reasonable assurance that material misstatements will be detected.
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.
Ricky recently got an internal transfer from payroll analyst to assistant regional
manager of production. An employee at the production facility came to see Ricky since
he was not paid on the last payroll cheque for the overtime he had done. Ricky
apologized for this mistake and logged into the payroll system to modify the next
paycheque for the employee to ensure that he would be paid for the additional hours.
A) The company did not properly allocate access rights.
B) The company did not properly complete the access rights approval form.
C) The company did not properly check employee background when they hired Ricky.
D) Ricky did not do anything wrong since the employee had worked the hours.
If the client has set unreasonable objectives or if the performance measurement system
encourages aggressive accounting, the auditor will
A) increase inherent risk of financial statement misstatements.
B) lower inherent risk of financial statement misstatements.
C) increase control risk of financial statement misstatements.
D) lower control risk of financial statement misstatements.
Refusal by a client to prepare and sign the representation letter would require a(n)
A) qualified opinion as to scope limitation or a disclaimer of opinion.
B) adverse opinion or a denial of opinion.
C) qualified opinion as to accounting treatment departure or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.
Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm.
Leon Levy is the auditor in charge of the audit. The accountable party in this assurance
engagement is
A) Leon Levy.
B) Pilott & Levy.
C) management of Thermos Inc.
D) the board of directors of Thermos Inc.
A note payable is
A) a long-term account payable.
B) a legal obligation to a creditor secured by assets.
C) an unsecured legal obligation to a creditor.
D) a legal obligation to a creditor which may be unsecured or secured by assets.
Most accounting and auditing professionals agree that when an audit has failed to
uncover material misstatements, and the wrong type of audit opinion is issued, the audit
firm
A) has failed to follow generally accepted auditing standards (GAAS).
B) deserves to lose the lawsuit.
C) should be asked to defend the quality of the audit.
D) should not be held responsible for the financial loss suffered by others.
The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to
A) the auditor.
B) management.
C) both management and the auditor equally.
D) management for the statements and the auditor for the notes.
The most important objectives for amortization expense are valuation and
A) accuracy.
B) classification.
C) cutoff.
D) understandability.
Celebra sold some goods to Frankfurt Corp. Frankfurt sent a cheque to Celebra to pay
for the goods on December 24th. Celebra received the check on January 4th. At
December 31st, Celebra still showed an account receivable from Frankfurt while
Frankfurt no longer had an account payable to Celebra. This situation represents a
A) cut-off error.
B) timing difference.
C) error in presentation.
D) lack of communication between the two companies.
A) State the five specific transaction-related audit objectives for cash receipts and
describe one common test of controls for each objective.
B) Discuss what is meant by proof of cash receipts and explain its purpose.
The overall objective in the audit of the sales and collection cycle is to evaluate whether
A) the sales account and the accounts receivable account are free of errors.
B) the sales account and the accounts receivable account are free of material errors.
C) the sales account and the accounts receivable account are presented fairly in
accordance with an applicable financial reporting framework.
D) the account balances affected by the cycle are fairly presented in accordance with an
applicable financial reporting framework.
Further possible misstatement considers
A) possible presence of management fraud.
B) possible lack of knowledge of the audit team.
C) imprecision in the sampling process.
D) imprecision in the audit procedures.
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
Three of the following conditions would, by themselves, require the auditor to issue a
report other than an unqualified report. Which one would permit a standard unqualified
report?
A) The financial statements show a significant net loss for each of the last three years,
including the current fiscal period.
B) The financial statements have not been prepared in accordance with an acceptable
financial reporting framework and are misleading.
C) The auditor is not independent during the fiscal period under audit.
D) The scope of the auditor’s examination has been restricted, although the cause of the
restriction was not the client’s fault.
What should a PA do if approached by a client where he and his firm lack or do not
have access to the technical knowledge required to complete the audit?
A) Subcontract the audit to another firm
B) Indicate that they can do a review engagement, not an audit
C) Decline the new audit engagement
D) Conduct the engagement, but prepare a qualified audit report
Which of the following is an example of semi-permanent information that would be
included in personnel records?
A) gross pay for the monthly pay issued in September
B) met pay for the weekly pay issued in the first week of October
C) category of job the person is employed in
D) income tax deducted for the current pay
There are three phases in the risk response category of the audit process (design further
audit procedures, tests of control, substantive tests). When will the auditor conduct tests
of controls?
A) when there are poor internal controls
B) if the auditor plans to rely upon them
C) when a substantive audit approach is selected
D) when there are low risks of material error
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 auditor must verify whether the physical counts were correctly summarized, the
inventory quantities and prices were correctly extended, and the extended inventory
was correctly footed. These tests are called
A) price tests.
B) compilation tests.
C) cost tests.
D) mechanical tests.
The client has a perpetual inventory system, and takes an inventory count of 100 items
every two weeks, for comparison to the perpetual records. There are no plans to have a
complete year end physical count of inventory. How will the auditor conduct the audit
of physical inventory?
A) select an attribute sample of items to count at the year end for comparison to the
perpetual records
B) select a dollar unit sample of items to count at the year end for comparison to the
perpetual records
C) use roll-forwards to carry forward the inventory records from the cyclical counts for
an attribute sample of inventory items
D) conduct test counts and compare the perpetual records with a cyclical count during
the intern audit
Musical Productions Limited has had declining sales as more and more media are being
presented online rather than on CD or DVD. It diversified its business by moving into
backup systems, but are still having trouble boosting income.
The audit team was led by Theresa Sanford, who obtained her CA last year. Theresa had
two assistants, Marv and Uhta, who did the work in the accounts receivable and
inventory area. Theresa felt that they did not require supervision, as they had been with
the firm for two years, and were expected to do well on their professional exams this
year. Marv found that the accounts receivable had many old accounts, and customers
were tough to get hold of. Accordingly, he decided to accept management’s
representations with respect to the balances. Similarly, Uhta noted that there were still
many CDs in inventory that had been there for over three years. Management insisted
on recording these at cost. Uhta accepted managements’ valuation.
Two months after the audit report was issued, Musical Productions Limited went
bankrupt. It was found that many accounts receivable were for fictitious customers, and
the receiver was only able to obtain five cents on the dollar for the inventory, which was
sold as scrap.
The bank is suing the auditors to recover its bank loan, which had been renegotiated
based upon the results of the financial statements.
Required:
Will the bank be successful in its suit? Why or why not?