Audit

Question 1

An auditor asks, “Have the assets, liabilities, and equity of the entity been included in the financial statements at the correct amount?”

Which of the following assertions does the auditor’s question describe?

a) Occurrence and rights and obligations
b) Completeness
c) Classification
d) Valuation and allocation

Answer 1

D

Question 2

When a sample is stratified, which items would the practitioner judgmentally select from the population for testing?

a)

High-value items

b)

High-risk items

c)

Representative items

d)

Both a) and b) above

Answer 2

D - Both high-value items and high-risk items are considered to be “specific” items when stratifying a population.

Question 3

A company had:

total debt of $100 million
total equity of $50 million
net income of $10 million
The company recently paid down its long-term debt with cash from the issuance of common stock of $50 million.

How will this transaction impact the company’s debt-to-equity ratio and its return on equity?

a) There will be no impact on the debt-to-equity ratio or the return on equity.
b) The debt-to-equity ratio will increase and the return on equity will decrease.
c) The debt-to-equity ratio will decrease and the return on equity will increase.
d) Both the debt-to-equity ratio and the return on equity will decrease.

Answer 3

D

Question 4

Which of the following policies is an internal accounting control weakness?

a)

Acquisitions are to be made through, and approved by, the department in need of the equipment.

b)

Advance executive approvals are required for equipment acquisitions.

c)

Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.

d)

Depreciation policies are reviewed only once a year.

Answer 4

A - This is a control weakness related to the acquisition of factory equipment. There is no authorization process to approve acquisitions. The department that needs the equipment may not be authorized to purchase such equipment.

Question 5

Financial statement analysis:

a) consists solely of ratio analysis and interpretation including current, quick, and debt ratios
b) focuses on comparisons within a company, such as business units, departments, product lines, or employees
c) requires analysis on the full balance sheet and income statement
d) relates to several competency areas including financial reporting and strategy governance

Answer 5

D

Question 6

Which of the following statements about other common engagements is true?

a) Reasonable assurance is provided during reviews of compliance with agreements and regulations (Section 8600).
b) No assurance is provided by compliance audits to determine whether an organization has adhered to applicable rules, policies, procedures, laws, and regulatory guidelines (Section 5815).
c) No assurance is provided from the results of applying specified auditing procedures to financial information other than financial statements (Section 9100).
d) Limited assurance is provided by operational audits that determine the effectiveness, efficiency, and economy of an organization’s operations.

Answer 6

C

Question 7

Which of the following would an auditor NOT consider in accepting a new client?

a) The client’s reputation with the local chamber of commerce
b) The owner-manager’s knowledge of computers
c) The client’s reporting requirement expected by the bank
d) Whether adequate records exist for the current year

Answer 7

B

Question 8

An important aspect of analyzing a client’s information is the use of ratios. Which one of the following statements is true?

a) The proper ratios to use to determine if a company can meet existing obligations as they become due are the debt-to-equity and profit margin ratios.
b) The most useful analytical tools to assess long-run solvency include the debt-to-equity ratio.
c) When return on equity or return on investments is the critical concern, the most useful ratios include earnings per share, gross profit margin and receivables turnover.
d) Contribution margin analysis is useful in evaluating the company’s ability to manage its productive assets efficiently.

Answer 8

B

Question 9

Which of the following statements for financial statement analysis is true?

a) A high debt-to-equity ratio is a negative qualitative factor.
b) A high gross-margin-percentage ratio is a negative qualitative factor.
c) A high dividend-payout ratio is positive qualitative factor.
d) A high days-payable-outstanding ratio is a positive qualitative factor.

Answer 9

A

Question 10

As an internal auditor, you are evaluating your company’s credit risk and internal controls on granting credit. Which one of the following procedures would be considered a weakness?

a)

New customers complete a credit application form and supply credit references from their bank and other major creditors.

b)

Credit applications are approved by a sales manager who is knowledgeable about both financial and credit issues.

c)

All major credit references on credit applications being considered for approval are corroborated by letter or telephone call.

d)

All potential new customers applying for credit in excess of $5,000 are vetted through appropriate credit rating agencies.

Answer 10

B - This is a control weakness. There should be segregation of duties between the sales department and the credit-granting function. There is an incentive for the sales department to be generous in granting credit.

Question 11

You, CPA, are a senior audit staff member at Duncan and Duncan LLP. You are performing financial statement analysis to assess the going-concern assumption of your client, Crash Rockets Inc. (CRASH). Which one of the following would most strongly suggest that CRASH is no longer a going concern?

a) A decrease in the accounts receivable turnover ratio
b) An increase in the current ratio
c) An increase in the inventory turnover ratio
d) An increase in the debt-to-equity ratio

Answer 11

D

Question 12

You, CPA, are the new corporate controller at Flash Fish Inc. (FISH), a public company that specializes in flash-dried fish. This new technology applies a flash drying process to farmed fish that preserves their freshness and nutrients during the shipping process. The owner, Bob, comes by your office after receiving an email from FISH’s auditors requesting a meeting to discuss FISH’s ability to continue as a going concern. He wants to know what FISH’s involvement will be in this going-concern matter.

Which of the following statements will you tell Bob?

a) Management must review the auditors’ assessment of matters pertaining to operations and whether the company will have sufficient resources for the next 12 months.
b) The auditors will base their going-concern assessment on discussion with management.
c) The auditors have a checklist they must go through as a formality before completing the audit engagement.
d) Management must provide the auditors with an assessment of cash flows and whether those cash flows are sufficient to sustain operations for 12 months from the date of the financial statements.

Answer 12

D

Question 13

An audit strategy:

a) Sets the scope, timing, and direction of the audit
b) Is set based on analysis of the risk of material misstatement (RMM)
c) Is set the same for all accounts
d) Both a) and b)

Answer 13

D

Question 14

Why are substantive procedures required in both a purely substantive audit approach and a combined audit approach?

a) Inherent risk cannot be eliminated entirely.
b) Tests of controls alone are too costly.
c) It is more effective to audit a large number of transactions using substantive procedures.
d) Substantive procedures can be performed after year end.

Answer 14

A

Question 15

You are reviewing the risk assessment of Bob’s Bassoons Inc. (Bob’s) and have a concern with one of the following statements:

Bob’s exports bassoons all over the world and sells in numerous currencies. Control risk at the overall financial statement level is increased.
There was a period when the controller position was not filled. Control risk at the overall financial statement level is increased.
Bob’s is considering issuing convertible bonds in the next year. General risk at the overall financial statement level is increased.
The sole shareholder of Bob’s is considering selling Bob’s to one of two interested buyers. General risk at the overall financial statement level is increased.
Which of the following best describes your concern?

a) The assessment of foreign currency as a control risk factor at the overall financial statement level is incorrect. This is an inherent risk at the account level.
b) The assessment of the changes in the accounting department staff as a control risk factor at the overall financial statement level is incorrect. This is a general risk factor at the overall financial statement level.
c) The anticipated issuance of the convertible bonds does not increase general risk at the overall financial statement level.
d) The assessment of the potential sale of Bob’s as a general risk factor at the overall financial statement level is incorrect. This is a control risk at the overall financial statement level.

Answer 15

A

Question 16

You are performing a review engagement on the financial statements for LMN Inc. Excerpts from the financial statements are as follows:
2016 2015
Property, plant, and equipment (PPE),
net of accumulated amortization $1,556,800 $1,755,200
Repairs and maintenance expense 26,880 11,200

The change in capital assets is due to amortization only. Which of the following statements would accurately suggest that a review should occur of the repairs and maintenance expense account for 2016?

a) PPE has decreased.
b) PPE has increased.
c) There is no need to look at the repairs and maintenance expense account.
d) Repairs and maintenance expense has increased.

Answer 16

D

Question 17

Which of the following would be considered a control weakness for the inventory system?

a)

The warehouse is accessible to a few authorized employees.

b)

Inventory is depleted when goods are sold.

c)

When goods are shipped, the only copy of the shipping report is included in the shipment for the customer.

d)

Inventory is counted by one warehouse employee and another employee from a different area.

Answer 17

C - A copy of the shipping report should be kept on hand in the warehouse, and another copy should be sent to accounting for matching to the invoice.

Question 18

You are auditing the inventory of International Potash. The company stores a significant amount of potash inventory off-site at third-party warehouses. The audit manager would like you to send inventory confirmations to a sample of these off-site, third-party warehouses. The confirmation requests that the third-party warehouse indicate the quantity of inventory held. For the inventory account, which of the following assertions would be covered by this procedure?

a) Existence
b) Accuracy and existence
c) Valuation and allocation, and existence
d) Rights and obligations, and existence

Answer 18

A

Question 19

Which of the following is true regarding an engagement letter?

a) It describes the responsibilities of management, but does not describe the responsibilities of the practitioner.
b) It identifies the applicable financial reporting framework for the preparation of the financial statements.
c) It outlines any new or emerging risks that could have an impact on the engagement.
d) It is prepared by the auditor prior to the start of the audit and is acknowledged by the client at the end of the audit.

Answer 19

B

Question 20

The objective of an audit is to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement. In determining the basis of materiality, the practitioner should do which of the following?

a) Calculate materiality as 5% of net income after tax.
b) Consider the overall financial statement level risk assessment.
c) Consider external users and why they are interested in the financial results.
d) Adjust net income for performance bonuses included in management’s normal remuneration.

Answer 20

C

Question 21

Which of the following would be a consideration in determining materiality for the audit of Bells and Whistles Enterprises?

a) Bells and Whistles is planning to move head office locations this year.
b) Employees are unionized and salaries are scheduled to increase.
c) The financial statements and the audit report must be completed within three weeks.
d) The current shareholders want to minimize income taxes.

Answer 21

D

Question 22

Which of the following questions addresses the cut-off assertion?

a) Have the entity’s revenues and expenses been recorded in the correct reporting period?
b) Have the entity’s revenues and expenses been classified to the appropriate accounts?
c) Have the entity’s revenues and expenses been recorded accurately?
d) Have all the entity’s revenues and expenses been recorded?

Answer 22

A

Question 23

You are working on the audit of Smith’s Shovels Inc. Your audit manager has assigned you the revenue section and has asked you to obtain the last five shipping documents for the year. You are to trace these shipping documents to the related invoices and to the general ledger. Which of the following assertions, with respect to revenues, is best addressed by this procedure?

a) Valuation and allocation
b) Accuracy
c) Cut-off
d) Occurrence

Answer 23

C

Question 24

Mountain Valley Inc. (Mountain) is a private company owned and operated for 10 years by Tony and Maggie Johnson. As a result of their recent divorce, Tony and Maggie are both spending less time at the office. The company offers trail rides and is currently expanding into other outdoor tour activities in the Kananaskis Valley. Mountain’s competitor, Rocky Mountain Adventures, currently offers a wide variety of tours of the Kananaskis Valley.

Your firm recently accepted the audit of Mountain, and the client meeting scheduled for tomorrow was just postponed to next week because the Johnsons are in the process of hiring a new controller.

Which of the following DECREASES the overall financial statement level risk for Mountain?

a) Mountain is expanding its services to include outdoor tour activities in the Kananaskis Valley.
b) Mountain is a private company.
c) Mountain’s revenue and net income have been decreasing over the past six years.
d) The company is hiring a new controller.

Answer 24

B

Question 25

You are working on the cost of sales section for a farming client, John’s Cow Farm. You have been examining invoices for the purchase cost of cow feed to ensure that the correct amount is recorded in the general ledger. Which of the following assertions are you addressing with this procedure?

a) Valuation and allocation
b) Completeness
c) Occurrence
d) Accuracy

Answer 25

D

Question 26

You are planning a continuing audit engagement. Several new events and factors have been identified in the planning stage. Which of the following would prompt you to consider reducing materiality from the prior year?

a) The client laid off 50% of the accounting department staff during the year.
b) The client is currently negotiating the issuance of a new class of preferred shares to a potential investor.
c) The client is in the process of renegotiating its operating line of credit with the bank. The client has used this bank for several years, and the bank’s policy is to renegotiate every two years.
d) The client introduced a new line of products that have a high risk of obsolescence.

Answer 26

B

Question 27

Which of the following best describes when an auditor is required to consider materiality in an audit?

a) During the planning phase of the audit
b) Throughout the entire audit
c) At the end of the audit
d) When risk is assessed

Answer 27

B

Question 28

A compilation engagement:

a) Is also known as a Notice to Reader engagement
b) Has specific documentation requirements per the CPA Handbook – Assurance
c) Requires a practitioner to gain an understanding of the client’s business
d) Is costly and time consuming to produce

Answer 28

A

Question 29

You are planning the audit engagement for Samantha’s Jewels Inc., an importer of fashion jewelry. Which of the following factors would you include in your assessment of control risk at the account level?

a) The company’s senior management regularly reviews key internal control reports.
b) The company’s staff read and sign the employee code of conduct on an annual basis.
c) High-value jewelry is stored in a secure room that can be accessed only by key staff members who use a pass card.
d) The company rented a larger hall for its Annual General Meeting this year due to an increase in the number of shareholders.

Answer 29

C

Question 30

Substantive procedures are designed to:

a)

Detect material misstatements at the account level

b)

Detect material misstatements at the overall financial statement level

c)

detect all misstatements.

d)

Both a) and b) above

Answer 30

A - substantive procedures are designed to detect material misstatements at the account level.

Question 31

Why might management prefer compiled financial statements over audited financial statements?

a) A compilation engagement provides management with reasonable assurance that the financial statements are not materially misstated.
b) Management is cost sensitive.
c) A compilation engagement takes longer to complete than a financial statement audit.
d) The accountant does not have to be independent, and disclosure is not required in a compilation engagement when the accountant lacks independence.

Answer 31

B

Question 32

During which stage does the practitioner form an opinion on the fair presentation of the financial statements?

a) Client acceptance and continuance
b) Planning
c) Execution
d) Reporting

Answer 32

C

Question 33

You, CPA, are conducting an audit of your client, Clothing Retailers Corp. In auditing property, plant, and equipment, you found that depreciation had been incorrectly calculated for the new plant and machinery purchased during the year. The misstatement was aggregated with other errors found in multiple other accounts. Together, the unadjusted misstatements are material and pervasive.

As part of your auditor’s report, which of the following must be included?

a)

An emphasis of matter paragraph

b)

An unqualified opinion

c)

A qualified opinion

d)

An adverse opinion

Answer 33

D - because an adverse opinion is required in this case, where the total of the misstatements is determined to be material and pervasive.

Question 34

Which of the following statements about audits is true?

a) A compliance audit is conducted to provide assurance that an entity’s governance, internal control, and risk management processes are operating effectively.
b) An audit on controls at a service organization is conducted by an entity’s employees to provide assurance over various aspects of an organization’s activities.
c) An audit of special purpose financial statements is conducted to ensure financial reporting compliance with specific laws, policies, procedures, and regulations.
d) An operational audit determines whether an entity’s activities are efficient, effective, and economic.

Answer 34

D

Question 35

Alex, CPA, has completed his audit of Soberry’s Inc. In his audit, Alex found that intangible assets had NOT been tested for impairment although this was required by the relevant accounting standards. Alex was able to obtain sufficient audit evidence to conclude that the related misstatement is material but NOT pervasive for the year end statements.

As a result, the auditor’s report will have:

a)

A qualified opinion

b)

A disclaimer of opinion

c)

An emphasis of matter paragraph

d)

An adverse opinion

Answer 35

A - because a qualified opinion is required when a misstatement, individually or in aggregate, has been determined to be material but not pervasive.

Question 36

Which of the following describes audit risk?

a) The risk that the practitioner accepts a client but later determines that, due to a lack of sufficient staffing resources, it is not possible to complete the engagement
b) The risk that audit evidence is not scrutinized using professional judgment by the practitioner’s undesignated staff
c) The risk that an unmodified audit opinion is issued on materially misstated financial statements
d) The risk that insufficient analytical procedures are performed during the planning stage of the audit

Answer 36

C

Question 37

A client tells you that a business associate advised him of the following differences between a review engagement and a compilation engagement. Which of the following statements is FALSE?

a) A review is intended to provide limited assurance and a compilation provides no assurance.
b) The practitioner must be independent for both a review engagement and a compilation engagement.
c) In a review engagement, the financial statements must comply with ASPE or IFRS, while financial statements prepared under a compilation are not required to comply.
d) Both review and compilation engagements require the accountant to ensure that the financial statements are not false or misleading.

Answer 37

B

Question 38

In the planning phase of the audit, you assess that Johnson Manufacturing has low quick and current ratios compared to previous years and industry. You are worried that a going-concern issue may exist. Which one of the following audit procedures should be performed to assess the potential going concern issue?

a) Propose an adjustment to reclassify all long-term assets as current.
b) Discuss the concern with major suppliers and evaluate whether credit terms will be extended.
c) Discuss the concern with management and evaluate management’s cash flow forecasts.
d) Calculate the return-on-equity ratio compared to previous years and industry.

Answer 38

C

Question 39

If the practitioner is unable to obtain sufficient appropriate audit evidence related to all accounts, classes of transactions, and disclosures in the financial statements, then the practitioner is unable to:

a)

Continue with the engagement

b)

Issue an unqualified opinion

c)

Perform a combined audit

d)

Rely on management’s statements as fact

Answer 39

B - If sufficient and appropriate audit evidence is not obtained, then the practitioner is unable to issue an unqualified audit opinion

Question 40

Which of the following could be considered to be a part of the representative population?

a)

Related parties

b)

Management expenses

c)

Smaller-value items

d)

Higher-value items

Answer 40

C

Question 41

Which one of the following situations shows an inappropriate segregation of duties?

a)

The controller performs the bank reconciliation independent of the accounts receivable and accounts payable personnel.

b)

The cashier receives cash, prepares the bank deposit, and turns over the cash and deposit book to the accounting manager for review and deposit.

c)

The receiving supervisor approves all receiving reports and updates the perpetual inventory records.

d)

The assistant controller authorizes payments to vendors and cancels supporting documents to prevent reuse.

Answer 41

C - the receiving supervisor has access to the assets and the accounting records, and could misappropriate inventory and cover it up with false entries to the perpetual inventory records.

Question 42

You, CPA, are currently conducting an audit of your client, Bikes and Spokes. In completing your testing of a sample of sales invoices, you found nine invoices that used incorrect prices and six invoices where incorrect quantities had been billed. Because of these findings, you have concluded that the amount of total sales for the year is understated by $752,000.

What type of misstatement does this represent?

a)

Fraud

b)

Judgmental

c)

Projected

d)

Factual

Answer 42

C - because projected misstatements are calculated by projecting misstatements identified in audit samples to the entire representative population from which the sample was drawn.

Question 43

You are a senior staff member of a public accounting firm in Winnipeg. You are working on the audit of Austin Works Ltd. (Austin). You have collected the following information and are assessing the overall financial statement level risk of Austin.

Which of the following is LEAST likely to be an overall financial statement level risk factor?

a) Austin is a publicly traded company that is listed in the U.S.
b) Austin is a biotech company that is trying to clone human organs for transplant. Austin faces stringent industry regulations.
c) Austin is regulated by the U.S. and Canadian governments and must file a special report on its projects.
d) Austin is located in Winnipeg, Manitoba. The company operates out of two buildings, both of which it owns. One building is used for Austin’s head office and one building serves as Austin’s lab.

Answer 43

D

Question 44

You are performing an audit engagement. One of the procedures that you are scheduled to perform is to inspect the aged accounts receivable listing and identify for followup all balances that are older than 90 days. Which financial statement assertion are you providing assurance over by performing this procedure?

a) Valuation and allocation
b) Completeness
c) Existence
d) Cut-off

Answer 44

A

Question 45

You, CPA, are provided with the following financial information of your audit client Green Tee Ltd:

Net income before tax is $200,000.
Net income after tax (20%) is $160,000.
The sale of public company shares resulted in a $50,000 gain.
There was a one-time bonus paid to the production manager for $75,000.
Green Tee paid severance of $25,000 to the production manager.
Green Tee’s assets include the purchase of a new chocolate mould for $25,000.
Liabilities include a new bank loan to cover the cost of the new mould.
Using normalized net income before tax as a base and 5% as a threshold, what is the estimated materiality for Green Tee?

a) $7,500
b) $8,000
c) $10,000
d) $12,500

Answer 45

D

Question 46

Your audit team has recently completed its assessment of the internal controls of one of your firm’s largest clients. The tests of controls confirmed that the client’s internal controls were working as expected. Given the results, which of the following will you most likely do?

a) Increase the amount of analytical testing.
b) Eliminate substantive testing.
c) Reduce substantive tests.
d) Increase testing of controls.

Answer 46

C

Question 47

Which of the following is included in the calculation of the current ratio?

a) Property, plant, and equipment
b) Goodwill
c) Demand loan
d) Bonds payable, maturing in three years

Answer 47

C

Question 48

Nabors Enterprises has 14 desktop computers in its accounting department, as well as six laptop computers. All the computers are password protected and connected by a secured wireless network. Staff can use the computers for personal use outside of working hours.

What should Nabors do to prevent a possible loss of information?

a)

Nabors should ensure the computers have up-to-date virus and spyware protection.

b)

Nabors should monitor the personal use of the computers at work.

c)

Nabors should perform regular backup procedures.

d)

Nabors should eliminate the use of laptop computers.

Answer 48

A - If the computers are used for personal reasons, employees may be visiting sites that contain viruses and/or spyware. By ensuring that the computers have up-to-date virus and spyware protection, Nabors is guarding itself against a possible loss of information.

Question 49

Obtaining written communication from a third party and footing subledger are examples of which two types of substantive procedures, respectively?

a)

Inspection and observation

b)

Confirmation and recalculation

c)

Analytical reviews and reperformance

d)

Inquiry and reperformance

Answer 49

B

Question 50

Josh Flagg owns a small service company where:

Payments are received in person at the front desk as well as in the mail.
There is one secretary who opens the mail, prepares and makes the bank deposits, and records them in the accounting software package.
Josh prepares bank reconciliations regularly and reviews the aged accounts receivable listing any time there is something outstanding for 90 days or more.
Which of the following changes would you suggest to Josh to improve controls over cash?

a)

The secretary should perform an independent review of the aged accounts receivable listing.

b)

Josh should record cash received in the accounting software package and review the aged listing more regularly.

c)

The secretary should perform the bank reconciliation.

d)

Josh should prepare the bank deposits.

Answer 50

B - By recording the deposits in the accounting software package, Josh will be able to ensure that all deposits are posted to the correct receivable accounts. By reviewing the aged accounts receivable listing more regularly, Josh will be able to identify accounts that are at risk of non-collection, regardless of whether the accounts are outstanding for 90 days or more.

Question 51

Audit evidence can consist of information that:

a)

Contradicts management’s assertions

b)

Supports management’s assertions

c)

Is primarily gathered during the planning of an audit

d)

Both a) and b) above

Answer 51

D

Question 52

You, CPA, are a senior audit staff member at Duncan and Duncan LLP and are auditing the Vulcan Township Fund (Vulcan). You have obtained management’s forecast for the next 12 months’ cash flows to test for Vulcan’s ability to remain as a going concern. Which procedure is most
appropriate?

a) Reperform the addition of Vulcan’s 12 months of cash flows.
b) Compare Vulcan’s financial statements to other nearby townships’ financial statements.
c) Send out bank confirmations to assess the existence of cash.
d) Obtain similar township metrics for growth and compare them to Vulcan’s cash flow assumptions.

Answer 52

D

Question 53

Why is conducting an analysis of a company’s financial ratios beneficial?

a) It is a central component of value-chain analysis.
b) It identifies external opportunities for the company to pursue.
c) It uncovers critical industry trends.
d) It provides insights into a company’s financial state.

Answer 53

D

Question 54

Which of the following would be considered a fraud risk factor?

a) The controller was fired and has not yet been replaced.
b) The company is a first-time audit client.
c) The CEO receives an annual salary increase of 5%.
d) The company just converted from ASPE to IFRS.

Answer 54

A

Question 55

If the expected misstatement is high, then:

a)

A larger population may be appropriate

b)

A test of controls may be appropriate

c)

100% examination may be appropriate

d)

Decreasing materiality may be appropriate

Answer 55

C - During the test of details, if the expected misstatement is high, then 100% examination may be appropriate.

Question 56

When audit, inherent, and control risk are all assessed as low, detection risk is assessed as high. As a result:

a) Risk of material misstatement is assessed as high.
b) The number of substantive tests will decrease.
c) Controls cannot be relied on.
d) Fraud risk is assessed as high.

Answer 56

B

Question 57

Sophia’s Ballet Academy has approached your CPA firm to perform its year-end audit. You, CPA, are reviewing the Academy’s financial statements for the most recent year end. Which of the following statements describes your concern about the Academy’s accounts receivable?

a)

The accounts receivable turnover has increased, despite a reduction in sales. This indicates a potential problem with collections.

b) The accounts receivable turnover has decreased, despite a reduction in sales. This indicates a potential problem with collections.
c) The accounts receivable turnover has decreased and this indicates a reduction in sales. Collection of outstanding accounts should not be a problem.
d) The accounts receivable turnover ratio has decreased and this indicates an increase in sales. Collection of outstanding accounts should not be a problem.

Answer 57

B

Question 58

P&M Ltd. is a property development company. Lately, it has been struggling, as the turmoil in the economy has caused the real estate market and P&M’s assets to decline in value. P&M has debt coming due in the current year and the covenants are only marginally being met at this time. P&M has also just reported operating losses and was forced to cancel its dividend. You have assessed and performed audit procedures on management’s action plan and found that the plan appropriately supports that the company will be able to renegotiate terms of the maturing debt.

Which issue exists?

a) No issue exists.
b) A going-concern issue exists.
c) A material uncertainty exists.
d) A going-concern issue and a material uncertainty exist.

Answer 58

C

Question 59

You have assessed the risk for property, plant, and equipment, and now must begin additional substantive testing. Which of the following tests provides the least compelling audit evidence?

a)

Adding and cross-adding the client’s property, plant, and equipment balances, and recalculating the amortization provisions

b)

Comparing current-year property, plant, and equipment balances to the prior year

c)

Examining the repairs and maintenance account for material items that may be property, plant, and equipment

d)

Physically inspecting the new capital additions

Answer 59

B - Additions, dispositions, and/or depreciation have likely occurred during the year, meaning that comparisons to prior years are not as meaningful.

Question 60

In which of the following situations might a bank be satisfied with a financial statement review instead of a financial statement audit?

a) The business is considering issuing more shares to private investors to attract more capital.
b) The business is expanding and wants to borrow more money to purchase additional facilities.
c) The business’s industry is starting to decline and the company has had some trouble meeting its loan payments.
d) Inventory and accounts receivable have increased significantly, and loan balances are a function of these two accounts.

Answer 60

A

Question 61

Steven, CPA, has completed his audit of Abbots Machining Inc. (AMI). The confirmation of accounts receivable did not go well, and the majority of AMI’s customers were unresponsive to the confirmations and follow up requests. Steven is now preparing the auditor’s report.

This failure to be able to obtain external confirmation of customers’ outstanding balances was determined to potentially have material and pervasive impacts on the financial statmenets.

As a result, the auditor’s report will have:

a)

A qualified opinion

b)

A disclaimer of opinion

c)

An emphasis of matter paragraph

d)

An adverse opinion

Answer 61

B - because a disclaimer of opinion is provided when the effect of the scope limitation is determined to limit the ability to identify errors that may be material and pervasive.

Question 62

Which of the following statements is FALSE?

a) A financial statement audit requires an understanding of the internal controls of an organization, whereas a financial statement review does not.
b) Financial statement audits will often require confirmation of balances and attendance at inventory counts, while financial statement reviews primarily focus on inquiry, analytical procedures, and discussion.
c) A financial statement audit and a financial statement review both require the practitioner to be independent.
d) A financial statement audit and a financial statement review both offer a positive opinion.

Answer 62

D

Question 63

You are reviewing the planning of the audit of Sarya’s Bakery Ltd. (Sarya’s), the largest bakery in Western Canada. You note the following information in the planning section of the audit file:

Sarya’s ships perishable goods all across Western Canada.
Sarya’s products are high in carbohydrates at a time when “low-carb” diets are popular.
Sarya’s accounting department has remained relatively stable for the last three years, and the accounting staff have a good attitude toward internal control.
Sarya’s implemented a new bonus plan for salespeople during the year based on net income before taxes.
Which one of the following statements is true?

a) The fact that Sarya’s goods are perishable affects general risk at the overall financial statement level.
b) The current popularity of “low-carb” diets does not affect the risk of this engagement.
c) The stability in the accounting department affects the control environment.
d) The new bonus plan affects the control environment.

Answer 63

C

Question 64

If the expected rate of deviation is unacceptably high, the practitioner will normally decide:

a)

To decrease the sample size

b)

To increase the sample size

c)

Not to perform the test of controls

d)

Not to perform the test of details

Answer 64

C - if the expected rate of deviation is unacceptably high, the practitioner will normally decide not to perform the test of controls.

Question 65

You, CPA, work for the public accounting firm Dickson and Doerksen LLP. You are the senior auditor of Aero Corp Inc. (Aero), a new client. While reviewing your notes from a meeting with the client for this year’s upcoming audit, you note the following information related to Aero’s risk assessment:

This is the first year the company is being audited by Dickson and Doerksen LLP.
The company has generated stable profits for the last 10 years.
The company is looking to issue an initial public offering (IPO) next year.
The company lacks an internal audit function.
The company’s accounting department is stable.
Which of the following statements is true?

a) Aero is being audited by Dickson and Doerksen LLP for this first time this year. This factor has no impact on overall financial statement level risk.
b) Aero’s ability to generate stable profits for the last 10 years increases risk at the overall financial statement level.
c) Aero’s plan to issue an IPO next year has no impact on overall financial statement level risk.
d) The company lacks an internal audit function. This factor has an impact on overall financial statement risk.

Answer 65

D

Question 66

In which of the following situations would a practitioner use a purely substantive approach instead of a combined approach when planning the audit?

a) The company’s chief financial officer is a CPA.
b) The company has many transactions.
c) The company has controls that can be relied on.
d) The company has few transactions.

Answer 66

D

Question 67

You, CPA, are conducting an audit of your client, Georgetown Plastic Corp. (GPC). Early in the fiscal year, GPC suffered a gas explosion, which had a significant impact on its results and will continue to have a significant effect on its financial position. The gas explosion has been properly recognized and disclosed in the financial statements. You were able to obtain sufficient appropriate audit evidence to ensure that the financial statements at year end are free of material misstatements.

As part of your auditor’s report, which of the following must be included?

a)

An emphasis of matter paragraph

b)

A scope limitation

c)

A qualified opinion

d)

An adverse opinion

Answer 67

A - an emphasis of matter paragraph is used by a practitioner when it is necessary to draw the users’ attention to a matter presented or disclosed in the financial statements that is, according to the practitioner’s judgment, fundamental to the users’ understanding of the financial statements.

Question 68

You, CPA, are conducting an audit of your client, Books Publisher Corporation (BPC). In auditing long-term investments, you found that BPC had NOT used the equity basis of accounting required under IFRS, but instead had used cost. As a result, dividends received of $150,000 on this investment were recognized as income. After discussions with the CFO, BPC made an adjusting journal entry to record the earnings from the investee of $78,000 as income and the dividends as a reduction of the investment. These adjustments were material.

As part of your auditor’s report, which of the following must be included?

a)

An emphasis of matter paragraph

b)

An unqualified opinion

c)

An unqualified opinion with an emphasis of matter paragraph

d)

A scope limitation

Answer 68

B - Since the misstatement has been corrected, an unqualified opinion can be issued.

Question 69

You, CPA, are conducting an audit of your client, Bread Baker Corp. You have just completed your audit of the accounts receivable and found that the company has recorded an allowance for doubtful accounts of $560,000. Based on your audit, you have determined the allowance for doubtful accounts to be $970,000. The difference arises due to disagreement on what assumptions have been used to recognize the allowance. Thus, there is a misstatement of $410,000 in Bread Baker’s year-end statements.

What type of misstatement does this represent?

a)

Factual

b)

Projected

c)

Judgmental

d)

Fraud

Answer 69

C - The allowance for doubtful accounts is based on assumptions and estimates, and therefore represents a judgmental misstatement because you, as the auditor, consider management’s estimate to be unreasonable or inappropriate.

Question 70

Which one of the following statements describes analytical procedures?

a)

Analytical procedures are only used in the planning stage of an engagement.

b)

Analytical procedures help to identify unusual or incorrect areas that require further assurance work.

c)

Analytical procedures are not used in the planning stage of an engagement.

d)

Analytical procedures are used exclusively on the income statement to analyze the reasonability of accounts as compared to plan and prior year.

Answer 70

B - Analytical procedures are generally used to identify items that indicate risk of misstatement, exceptions to predicted patterns, and items that should be addressed or followed up on.

Question 71

Which of the following is true regarding the client acceptance and continuance stage?

a) It is the second stage of the audit process.
b) It is the stage where the auditor plans the audit to reduce audit risk to an acceptably low level.
c) It is the stage where the auditor must review the threats to independence and ensure that safeguards are in place to reduce or remove those threats.
d) It is the stage where the auditor tests in detail the controls, transactions, and balances of the client.

Answer 71

C

Question 72

An entity’s system of internal controls is designed to prevent or detect material misstatements in the financial statements caused by:

a)

Collusion between parties performing segregated functions

b)

Transactions of an unusual nature

c)

Employee error and unauthorized actions

d)

Management’s ability to override internal controls

Answer 72

C - Internal controls are designed to provide reasonable assurance that errors are prevented or detected. It is costly to implement an ideal system, and impossible to design a system that is not subject to human error, management override, or collusion.

Question 73

Which of the following is the most significant factor that Bill must consider in deciding whether to accept the client?

a) Why Golden requires audited financial statements
b) Whether Bill has an office in Alaska
c) Whether Bill has other clients in the same industry
d) The quality of Golden’s internal controls

Answer 73

A

Question 74

Which of the following statements is true?

a) The execution stage consists of the practitioner performing either tests of controls and detailed substantive tests or detailed substantive tests alone.
b) The reporting stage consists of the practitioner evaluating the audit evidence. Analytical procedures are not performed at this stage.
c) The planning stage consists of the practitioner assessing the client’s integrity to determine whether there are any factors to prevent the practitioner from continuing with an existing client.
d) The client acceptance and continuance stage consists of the practitioner preparing the management letter based on the practitioner’s understanding of the client.

Answer 74

A

Question 75

The internal auditor is reviewing controls in the sales cycle. Which of the following internal control procedures will most likely prevent the improper writeoff of a trade accounts receivable?

a)

A responsible officer must approve writeoffs after reviewing credit department recommendations and supporting evidence.

b)

Writeoffs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

c)

Writeoffs must be approved by the accounts receivable supervisor, who is in a position to know whether the receivables have, in fact, been collected.

d)

Sales employees are in a position to determine the financial standing of the customers and should authorize writeoffs.

Answer 75

A - the credit department is in the position to authorize credit, and the writeoff of an account should be authorized by an individual in a position of authority higher than the credit department.

Question 76

During the year, LMN Inc. had:

sales of $2,500,000
gross profit of $1,000,000
net income of $125,000
Inventory was $275,000 at the beginning of the year and $300,000 at the end of the year. Assume the company
used average balances when measuring its performance. What is the inventory turnover for the year?

a) 5 times
b) 5.22 times
c) 5.45 times
d) 8.70 times

Answer 76

B

Question 77

Which of the following is an effective internal control measure that encourages receiving department personnel to count and inspect all merchandise received?

a)

Quantities ordered are excluded from the receiving department copy of the purchase order.

b)

Vouchers are prepared by the accounts payable department personnel only after they match item counts on the receiving report with the purchase order.

c)

Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.

d)

Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports.

Answer 77

A - This measure would prevent receiving staff from overlooking or removing any additional merchandise that may have been received.

Question 78

Which one of the following methods would be most effective to assess a potential new client’s character and integrity?

a) Request information from the client on what business organizations it belongs to, and a detailed explanation of the nature of its association with these business organizations.
b) Ask the client about its history with the Canada Revenue Agency and whether it has been assessed penalties and fines.
c) Inquire of references such as relatives and in-laws.
d) Ask the prospective client’s banker for his or her opinion of the client

Answer 78

D

Question 79

In a review engagement:

a) The practitioner determines whether the financial statements present fairly, in all material respects.
b) The practitioner is required to gain an understanding of the client’s industry.
c) The practitioner may issue an opinion on the financial statements.
d) The practitioner must obtain an understanding of the client’s internal controls and assess control risk.

Answer 79

B

Question 80

Which one of the following statements is true?

a)

The internal auditor is interested primarily in the internal controls that relate to reliable financial statements.

b)

Well-designed internal controls prevent or detect errors, thereby ensuring that financial statements are not materially misstated.

c)

Even well-designed internal controls cannot prevent or detect all fraudulent activities.

d)

Small entities are unable to segregate duties well enough to implement good internal controls.

Answer 80

C - Fraud can be perpetrated, as there is always a trade-off between the cost and benefits of internal controls. For example, collusion between employees and third parties, or between management and employees, can circumvent normal controls. Management override of controls can result in fraudulent financial reporting.

Question 81

Sarah, CPA, is conducting an audit for her client, Jimmy’s Trattoria Restaurants (JTR). After gathering sufficient and appropriate audit evidence, Sarah is faced with the following misstatements that JTR refuses to adjust:

marketing expenses of $150,000 that relate to next year and should not have been accrued at year end
a provision for warranty costs in the amount of $280,000 that was not recognized
a purchase of land for $125,000 that was incorrectly recorded as an intangible asset
The total impact of JTR’s uncorrected misstatements is that pre-tax income is:

a)

Understated by $430,000

b)

Understated by $5,000

c)

Overstated by $130,000

d)

Overstated by $555,000

Answer 81

C -The impact of these unadjusted differences is calculated as follows: $150,000 (marketing expenses) minus $280,000 (warranty costs). The adjustment for the land is to reduce intangible assets and increase property, plant, and equipment, so there is no impact on pre-tax income.

Question 82

In which of the following examples does the procedure best match the listed assertion?

a) Completeness of inventory — Select a random sample of items on the inventory list and locate the inventory item on the warehouse floor.
b) Completeness of inventory — Recount the inventory on a test basis and ensure that the recorded counts match the inventory quantities per the inventory list.
c) Accuracy of inventory — Recalculate the quantities per the inventory list; foot the inventory list to ensure accuracy of the list total.
d) Rights and obligations — Examine counted inventory to make sure that it is tagged.

Answer 82

B

Question 83

Denver Company has an online, real-time order entry system. Denver Company has two key business objectives:

Ensure products are shipped only to good credit risk customers.
Minimize any undue shipping delays.
Which one of the following controls would best contribute to meeting both of these key business objectives?

a)

All orders that cause the customer’s accounts receivable balance to exceed the credit limit are printed on an exception report for followup after the goods are shipped.

b)

All orders that cause the customer’s accounts receivable balance to exceed the credit limit are printed on an exception report and are reviewed by the credit manager on a daily basis before the shipment is released.

c)

Orders will not be accepted by the system once the customer’s accounts receivable balance is greater than the customer’s credit limit.

d)

All orders that cause the customer’s accounts receivable balance to exceed the credit limit are printed on an exception report and are reviewed by the credit manager on a weekly basis before the shipment is released.

Answer 83

B - This control will both minimize any undue shipping delays and ensure that products are only being shipped to customers with an ability to pay for it. Because the manager reviews the exception report on a daily basis, there will be minimal shipping delays once the order is approved. Because the manager reviews the exception report and only releases shipments to customers with a good credit risk, the risk of uncollectable accounts receivable is reduced.

Question 84

Discussion with management and examining tangible assets are examples of which two types of substantive procedures, respectively?

a)

Confirmation and observation

b)

Confirmation and reperformance

c)

Inquiry and inspection

d)

Inquiry and analytical reviews

Answer 84

C

Question 85

When considering the effectiveness of internal control over financial reporting, one must recognize that inherent limitations exist. Which of the following is an example of an inherent limitation in internal control?

a)

The effectiveness of procedures depends on the segregation of employee duties.

b)

Procedures are designed to ensure the execution and recording of transactions in accordance with management’s authorization.

c)

In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment.

d)

Procedures for handling large numbers of transactions are processed by computer systems.

Answer 85

C - At some point in any process, individual judgment will be relied on, and it is neither controllable nor always correct.

Question 86

Which of the following is a factor that affects account-level risk?

a) Lack of an employee manual
b) Increased competition
c) Barter transactions for inventory items
d) The entity being a private company

Answer 86

C

Question 87

Existence is when management asserts that:

a) Inventory that is present is recorded in the general ledger.
b) Inventory is measured appropriately.
c) Inventory occurs.
d) Inventory that is recorded on the general ledger is present in the warehouse.

Answer 87

D

Question 88

You, CPA, are concerned about one of your firm’s clients, Farm Acre Foods Inc. (Farm). Although very profitable, you suspect that Farm may be experiencing problems paying off short-term debt. Which one of the following analytical review calculations will highlight this concern?

a) Gross profit percentage
b) Inventory turnover ratio
c) Quick ratio
d) Times interest earned

Answer 88

C

Question 89

Which of the following options supports a practitioner using a combined approach instead of a purely substantive approach when planning the audit?

a) The company has an employee code of conduct manual.
b) The company has few transactions.
c) The company does not have an internal audit department.
d) The company has many foreign-currency transactions.

Answer 89

A

Question 90

Which of the following represents the correct order of the four stages of a financial statement audit?

a) Client acceptance and continuance; planning; execution; reporting
b) Planning; client acceptance and continuance; execution; reporting
c) Client acceptance and continuance; planning; reporting; execution
d) Planning; client acceptance and continuance; reporting; execution

Answer 90

A

Question 91

Larry, CPA, is conducting an audit for his client, Custom Furniture Inc. (CFI). After gathering sufficient and appropriate audit evidence, Larry is faced with the following misstatements that CFI refuses to adjust:

Accrual for vacation pay is understated by $75,000.
Sales invoices totalling $370,000 were incorrectly excluded from this year’s revenue.
The allowance for doubtful accounts was understated by $86,000.
The total impact of CFI’s uncorrected misstatements is that pre-tax income is:

a)

Understated by $381,000

b)

Understated by $209,000

c)

Overstated by $359,000

d)

Overstated by $531,000

Answer 91

B - The impact of these unadjusted differences is calculated as follows: $370,000 (sales) minus $75,000 (vacation pay accrual) minus $86,000 (bad debts expense).

Question 92

You, CPA, are an auditor at Hollar and Shout LLP. You are currently auditing Sparky’s Ltd., a struggling IT consulting services firm. Sparky’s financial statements have been prepared on a going-concern basis. However, based on the results of several going-concern audit procedures, you disagree with management’s use of the going-concern assumption in the financial statements.

Which of the following statements is true?

a) Hollar and Shout LLP shall express an unqualified opinion.
b) Hollar and Shout LLP shall express an unmodified opinion and include an Emphasis of Matter paragraph.
c) Hollar and Shout LLP shall resign from the audit engagement.
d) Hollar and Shout LLP shall express an adverse opinion.

Answer 92

D

Question 93

Which of the following statements regarding testing is true?

a) Tests of controls are always performed.
b) Test of controls and substantive tests are always performed.
c) Test of controls and analytics are always performed.
d) Detailed substantive tests are always performed.

Answer 93

D

Question 94

You are planning the audit engagement of a new client, Campbell’s Collectibles Ltd. (Campbell), a retailer of movie memorabilia. Which one of the following represents an inherent risk factor at the account level for sales?

a) The majority of Campbell’s sales are made to the U.S. and France. These sales are made in U.S. dollars.
b) Campbell has been experiencing poor financial health over the past five years, and revenues have declined dramatically in the current year.
c) In an attempt to improve the financial results of Campbell, management has implemented a new employee bonus plan based on net income.
d) Campbell is a new audit client for our firm.

Answer 94

A

Question 95

Which of the following statements regarding audit evidence is true?

a)

Sufficiency is the measure of the quality of audit evidence.

b)

The higher the relevance and reliability, the lower the quality of results

c)

The higher the quality, the less evidence may be required.

d)

Reliability refers to the connection between audit procedures and assertions.

Answer 95

C

Question 96

During an audit, which of the following characteristics of the population must a practitioner consider?

a)

The known misstatement

b)

The completeness of the population

c)

The risk of the population

d)

Both a) and b) above

Answer 96

B - The practitioner must consider whether the population is complete when determining the characteristics of the population.

Question 97

Which of the following would improve the quick ratio?

a) Sell fixed assets to reduce accounts payable.
b) Increase bank indebtedness to purchase equipment.
c) Issue common stock to purchase inventory.
d) Aggressively collect accounts receivable to pay current obligations.

Answer 97

A

Question 98

You are a bank loan officer and you have been asked by your client to examine the financial leverage of her company. Which of the following analytical tools would yield the most useful insight about the ability of her company to obtain additional bank financing?

a) Calculation of the working capital ratio
b) Preparation of the income statement
c) Calculation of the debt-to-equity ratio
d) Gross profit analysis

Answer 98

C

Question 99

Which of the following best describes a possible increase in cash for the year?

a) A redemption of term deposits
b) A decrease in accounts payable
c) A purchase of term deposits
d) Advances to related parties

Answer 99

A

Question 100

Audit evidence is primarily gathered during which stage of the audit process?

a)

Stage 1 — Acceptance/continuance

b)

Stage 2 — Planning

c)

Stage 3 — Execution

d)

Stage 4 — Reporting

Answer 100

C

Question 101

Which of the following is the most reliable type of audit evidence?

a)

Calculating the current ratio

b)

Inspecting bank statements from the client

c)

Footing (recalculating) the accounts receivable subledger

d)

Performing test counts of inventory

Answer 101

D - The auditor’s execution of procedures or controls is an externally generated type of audit evidence, which is the most reliable of the three types of audit evidence (internally generated, externally generated but held by the client, and externally generated).

Question 102

A bank confirmation tests which of the following assertions?

a) Existence
b) Rights and obligations, and existence
c) Accuracy
d) Rights and obligations

Answer 102

A

Question 103

You, CPA, are conducting an audit of your client, Window Installers Inc. You have just completed your audit of the inventory and found that the opening inventory had incorrectly included the inventory at an off-site storage facility twice, causing the opening inventory to be overstated by $135,000.

What type of misstatement does this represent?

a)

Fraud

b)

Factual

c)

Projected

d)

Judgmental

Answer 103

B - This is a factual misstatement since there is no doubt as to the amount by which the opening inventory is overstated. In this case, the misstatement arises due to including certain inventory items twice.

Question 104

During an audit, a deviation occurs:

a)

When the reported amount differs from the actual amount that is determined when applying the audit procedure

b)

When audit procedures are applied to less than 100% of the population and each unit has a chance of selection

c)

When the practitioner decides to examine the entire population of items that make up a class of transactions or account balance

d)

When the control is not performing as it was designed and expected to perform

Answer 104

D - a deviation occurs when the control is not performing as it was designed and expected to perform.

Question 105

Which of the following is an internal control weakness relating to IT?

a)

Backups are made regularly and stored off-site.

b)

Each function is password protected, and employees change their passwords whenever they feel it is warranted.

c)

The server is located in a locked room accessible only by authorized personnel.

d)

Each department has its own dedicated printer located within the department.

Answer 105

B - Employees should be required to change their passwords on a regular basis to avoid unauthorized access to the company’s computer systems.

Question 106

A bank loan officer is examining the financial statements of a customer and notices a decrease in the year-end ratio of bad debt expense to accounts receivable. What might this indicate?

a) Fewer sales occurred toward the end of the year.
b) Bad debts occur randomly and cannot be predicted.
c) Credit controls may have been tightened.
d) Accounts receivable are under-recorded.

Answer 106

C

Question 107

Barbara Beattie, CPA, is the controller of Norm’s Sandwiches, a national chain of sandwich stores. During the year-end audit:

Barbara made a number of changes to the accounting policies
Barbara became aware that the CFO of the company, Warren Griffey, CPA, had included adjustments to the financial statements that were not in accordance with GAAP, so the financial statements are materially misstated.
The year-end audit has just been completed. Barbara has not informed the auditors or anyone else of the material misstatement.

Which of the following is true?

a)

Barbara is guilty of breaching the rules of professional conduct, as she is associated with false and misleading information.

b)

Barbara is not guilty of breaching the rules of professional conduct because the reason for the non-GAAP adjustments posted by Warren is confidential.

c)

Barbara is guilty of breaching the rules of professional conduct because she posted adjustments to the financial statements that were not in accordance with GAAP.

d)

Barbara is not guilty of breaching the rules of professional conduct because she did not post the adjustments to the financial statements that resulted in a material misstatement.

Answer 107

A - A CPA member or student shall not sign or associate himself or herself with any letter, report, statement, or representation that the member or student knows, or should know, is false or misleading.

Question 108

Bartle and Nibson LLP (BN) accepted the audit engagement of Austin Design Ltd. (Austin) from one of its competitors:

Austin indicated it chose BN after seeing BN’s advertisement in the yellow pages.
Austin is going public and has agreed to compensate BN for its services at a rate of 1% of the funds raised from the public offering.
Austin is BN’s largest client.
Which of the following represents a breach of the rules of professional conduct regarding BN’s relationship with Austin?

a)

Association with a disreputable client

b)

Accepting a contingent fee for consideration

c)

Soliciting another firm’s client

d)

Being economically dependent on a client

Answer 108

B - A firm engaged in the practice of public accounting shall not offer or engage to perform a professional service for a fee, the amount of which is to be fixed as a percentage of the result of the service.

Question 109

Bartle and Nibson LLP (BN) accepted the audit engagement of a new client, Spiroland Ltd.:

BN obtained this client after it hired a former associate, Bob Hartigan, from its competitor, Haynes and Able LLP (HA).
Bob brought HA’s entire client list with him.
BN sent advertising to HA’s client list.
Which of the following represents a breach of the rules of professional conduct regarding BN’s relationship with Spiroland?

a)

Association with a disreputable client

b)

Accepting a contingent fee for consideration

c)

Disclosure of confidential information

d)

Being economically dependent on a client

Answer 109

C - A member shall not use the confidential information of a former employer for his or her advantage without consent of the former employer. In this case, HA’s former associate, Bob, provided HA’s client list to BN without HA’s consent. Bob brought the client list with him for his and BN’s advantage.

Question 110

Which of the following best describes the rules of professional conduct?

a)

They govern the responsibilities of the practitioner to only those to whom professional services are provided.

b)

They provide ethical standards based on the five key principles of objectivity, integrity and due care, competence, confidentiality, and professional behaviour.

c)

They are solely designed to help to maintain the profession’s integrity.

d)

They are solely designed to develop and maintain the public’s confidence and trust in the profession.

Answer 110

B - The rules of professional conduct provide ethical standards based on the five key principles of objectivity, integrity and due care, competence, confidentiality, and professional behaviour.

Question 111

`As a practitioner, in which of the following situations would you be considered associated with an organization?

a)

Your immediate family member performs services for the organization.

b)

You refuse to give permission to the organization to use your name in connection with the financial information.

c)

A third party indicates that you are involved with the organization’s financial information (with or without your consent).

d)

Another CPA performs services for the organization.

Answer 111

C - A practitioner is associated with an organization when a third party indicates that he or she is involved with the organization’s financial information (with or without the practitioner’s consent).

Question 112

Which of the following best describes safeguards to independence?

a)

Safeguards cannot minimize the risk that a threat to independence will develop.

b)

Safeguards reduce the impact of a threat to independence once they have been developed.

c)

Safeguards are only created by the profession.

d)

Safeguards are only created by the practitioner and the client.

Answer 112

B - safeguards to independence are designed to minimize the risk that a threat to independence will develop or reduce the impact of the threat once it has developed.

Question 113

Which of the following would result in an advocacy threat?

a)

The client’s fees are significant in relation to the total fee base of the practitioner.

b)

The practitioner (or his or her firm) represents the client in a legal dispute.

c)

Members of the assurance team have a long-standing association with the client.

d)

The practitioner has recently been a director of the client.

Answer 113

B - An advocacy threat arises when the practitioner (or his or her firm) represents the client in a legal dispute.

Question 114

Tess, CPA, is a sole practitioner performing an audit engagement for ABC Ltd. ABC has asked Tess for assistance in preparing journal entries for the year end. Which of the following is a safeguard that Tess must implement to avoid violating the rules of professional conduct relating to independence?

a)

Tess must refuse to assist with preparing the journal entries.

b)

Tess must ensure no source documents are changed during the audit.

c)

Tess must ensure that ABC’s management approves any journal entries prepared by Tess.

d)

Both b) and c) above.

Answer 114

D - Answer a) is incorrect. Tess is allowed to prepare journal entries for ABC as long as safeguards are implemented. Answer d) is correct. Both b) and c) are correct because they are both safeguards Tess must implement if she will be preparing journal entries for ABC.

Question 115

Which of the following is in breach of a rule of professional conduct?

a)

Michael, a CPA candidate, is a member at the same private club as his mother, a CPA. The same club is frequented by the owner of a private company that uses the firm Michael is employed at for its year-end audit and tax filings.

b)

Jeremy has been in public practice for over 40 years and is winding down for retirement. He has not taken any professional development courses in the last three years, since he has extensive experience and his CPA students keep him up to date with any new technical information.

c)

Henry is a CPA student and works for a small firm, H&J, which happens to be the auditor for the Scarborough Credit Union. Henry obtained his first mortgage through the Scarborough Credit Union.

d)

The Snow White Ski Club, a not-for-profit organization has approached M&L, a small CPA firm, for advice and assistance in preparing a business plan for the bank. The ski club has asked that it be charged $500 unless the loan is approved. If the loan is approved, Snow White has agreed to pay M&L the fair value of the service. M&L has accepted the engagement.

Answer 115

B - A CPA cannot provide an assurance engagement on a contingency fee basis or without fee. However, the engagement M&L accepted is not an assurance engagement. Answer b) is correct because Jeremy has breached the rules of professional conduct. He has not maintained his professional competence because he has failed to partake in professional development for the last three years.