Auditing Final Exam Use This Flashcards
8-11
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to
a. Eliminate the risk of nonsampling errors
b. Reduce audit risk and materiality to a relatively low level
c. Measure the sufficiency of the evidential matter obtained
d. Minimize the failure to detect errors and fraud
C
8-12 Samples to test internal controls are intended to provide a basis for an auditor to conclude whether
a. The controls are operating effectively
b. The financial statements are materially misstated
c. The risk of incorrect acceptance is too high
d. Materiality for planning purposes is at a sufficiently low level
A
8-13
When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in material misstatements. This explains why
a. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded
b. Deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions
c. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rate
d. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement
A
8-15 In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the
a. Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent)
b. Expected population deviation rate (7 percent) was more than the percentage of errors in the sample (3/2 percent)
c. Computed upper deviation rate (8 percent) was more than the percentage of errors in the sample (31/½ percent)
d. Expected population deviation rate (2½ percent) was less than the tolerable deviation rate (7 percent)
A
8-16 Based on the information above, the planned allowance for sampling risk was
a. 5½ percent
b. 4½ percent
c. 3½ percent
d. 1 percent
B
8-18
Which of the following statements is correct concerning statistical sampling in tests of controls?
a. Deviations from controls at a given rate usually result in misstatements at a higher rate.
b. As the population size doubles, the sample size should also double.
c. The qualitative aspects of deviations are not considered by the auditor.
d. There is an inverse relationship between the sample size and the tolerable deviation rate
D
8-19
Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations.
What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, and the allowance for sampling risk is 2 percent?
a. The planned assessed level of control risk should be modified because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate.
b. The sample results should be accepted as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
c. The sample results should be accepted as support for the planned assessed level of control risk because the tolerable deviation rate less the allowance for sampling risk equals the expected population deviation rate.
d. The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate.
D
8-20
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that
a. The deviation rates of both the auditor’s sample and the population exceed the tolerable deviation rate
b. The deviation rates of both the auditor’s sample and the population are less than the tolerable deviation rate
c. The deviation rate in the auditor’s sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate
d. The deviation rate in the auditor’s sample exceeds the tolerable deviation rate, but the deviation rate in the population is less than the tolerable deviation rate
C
9-11
Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value?
a. Random sampling
b. Numeric sampling
c. Attribute sampling
d. Variable sampling
D
9-12
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample
size?
a. Greater reliance on internal controls
b. Greater reliance on analytical procedures
c. Smaller expected frequency of misstatements
d. Smaller amount of tolerable misstatement
D
9-14
The risk of incorrect acceptance relates to the
a. Effectiveness of the audit
b. Efficiency of the audit
c. Planning materiality
d. Allowable risk of tolerable misstatement
A
9-15
Which of the following statements concerning monetary-unit sampling is correct?
a. The sampling distribution should approximate the normal distribution.
b. Overstated units have a lower probability of sample selection than units that are understated.
c. The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan.
d. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
C
9-16
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?
Increase in Tolerable Misstatement
Increase in Assessed Level of Control Risk
a. Decrease sample size
Decrease sample size
b. Decrease sample size
Increase sample size
c. Increase sample size
Decrease sample size
d. Increase sample size
Increase sample size
B
9-17 An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?
a. Classical variables sampling
b. Monetary-unit sampling
c. Stop-n-go sampling
d. Attribute sampling
A
9-18
Which of the following statements concerning the auditor’s use of statistical sampling is correct?
a. An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling.
b. An assumption of monetary-unit sampling is that the underlying accounting population is normally distributed.
c. A classical variables sample needs to be designed with special considerations to include negative balances in the sample.
d. The selection of zero balances usually does not require special sample design considerations when using monetary-unit sampling.
A
9-19
In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?
a. The qualitative aspects of misstatements
b. The total dollar amount of the population
c. The acceptable level of risk
d. The estimated percentage of deviations in the population
C
9-20 Which of the following would most likely be an advantage in using classical variables sampling rather than monetary-unit sampling?
a. An estimate of the standard deviation of the population’s recorded amounts is not required
b. The auditor rarely needs the assistance of a computer program to design an efficient sample
c. Inclusion of zero and negative balances generally does not require special design considerations
d. Any amount that is individually significant is automatically identified and selected
C
10-12
For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve
a. Employee overtime wages
b. Credit granted to customers
c. Write-offs of customer accounts
d. Cash disbursements
C
10-13
Which of the following controls is most likely to help ensure that all credit revenue transactions. of an entity are recorded?
a. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer’s authorized credit limit and current account balance.
b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.
c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
D
10-14
Which of the following internal controls would be most likely to deter the lapping of collections from customers?
a. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries
b. Authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function
c. Segregation of duties between receiving cash and posting the accounts receivable ledger
d. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries
C
10-15 Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to
a. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations
b. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit
c. Request a printout of all account balances so that they can be manually checked against the credit limits
d. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits
B
10-16 Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
a. Understating the sales journal
b. Overstating the accounts receivable control account
c. Overstating the accounts receivable subsidiary ledger
d. Understating the cash receipts journal
A
10-17 If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only
5.6 times in the current year, it is possible that there were
a. Unrecorded credit sales in the current year
b. Unrecorded cash receipts last year
c. More thorough credit investigations made by the company late last year
d. Fictitious sales in the current year
D
10-18 If the number of days’ sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated?
a. Existence or occurrence
b. Compléteness
c. Rights and obligations
d. Classification
B
10-19
Which of the following is most likely to be detected by an auditor’s review of an entity’s sales cutoff?
a. Unrecorded sales for the year
b. Lapping of year-end accounts receivable
c. Excessive sales discounts
d. Unauthorized goods returned for credit
A
10-20
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively
b. Some recipients may report incorrect balances that require extensive follow-up
c. The auditor cannot infer that all non-respondents have verified their account information
d. Negative confirmations do not produce evidence that is statistically quantifiable
C
10-21
a.
b.
C.
d.
The negative request form of accounts receivable confirmation is useful particularly when:
The Assessed Level of Control Risk Relating to Receivables Is:
Low
Low
High
High
The Number of Small Balances Is:
High
Low
Low
High
Consideration by the Recipient Is:
Likely
Unlikely
Likely
Likely
A
10-22 An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
a. No reply to a positive confirmation request is received
b. No reply to a negative confirmation request is received
c. The collectibility of the receivables is in doubt
d. Pledging of the receivables is probable
A
10-23
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of
a. Existence
b. Valuation and allocation
c. Completeness
d. Rights and obligations
B
11-13
In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is
a. Cancellation of the supporting documents
b. Entry of the cheque amount in the cheque register
c. Entering of the voucher into the voucher register
d. Approval of the voucher for payment
C
11-14
When goods are received, the receiving clerk should match the goods with
a. The purchase order and the requisition form
b. The vendor invoice and the purchase order
c. The vendor shipping document and the purchase order
d. The vendor invoice and the vendor shipping document
C
11-15
Internal control is strengthened when the quantity of merchandise ordered is omitted from the
copy of the purchase order sent to the
a. Department that initiated the requisition
b. Receiving department
c. Purchasing agent
d. Accounts payable department
B
11-16 Which of the following control activities is not usually performed in the accounts payable
department?
a. Matching the vendor’s invoice with the related receiving report
b. Approving vouchers for payment by having an authorized employee sign the vouchers
c. Indicating the asset and expense accounts to be debited
d. Accounting for unused prenumbered purchase orders and receiving reports
D
11-17
In a properly designed purchasing process, the same employee most likely would match vendors’
invoices with receiving reports and
a. Post the detailed accounts payable records
b. Recompute the calculations on vendors’ invoices
c. Reconcile the accounts payroll ledger
d. Cancel vendors’ invoices after payment
B
11-18
For effective internal control purposes, which of the following individuals should be responsible
for mailing signed cheques?
a. Receptionist
b. Treasurer
c. Accounts payable clerk
d. Payroll clerk
B
11-19
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
a. Vendor invoices
b. Purchase orders
c. Receiving reports
d. Cancelled cheques
C
11-20 Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments
b. Reconciliation of vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date
c. Investigation of payables recorded just prior to and just subsequent to the balance sheet date. to determine whether they are supported by receiving reports
d. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
D
11-21
Purchase cutoff procedures should be designed to test whether all inventory
a. Purchased and received before the end of the year was paid for
b. Ordered before the end of the year was received
c. Purchased and received before the end of the year was recorded
d. Owned by the entity is in the possession of the entity at the end of the year
C
11-22 Which of the following procedures is least likely to be performed before the balance sheet date?
a. Test of internal control over cash
b. Confirmation of receivables
c. Search for unrecorded liabilities
d. Observation of inventory
C
11-23
payable, the appropriate population most likely would be
a. Vendors with whom the entity has previously done business
b. Amounts recorded in the accounts payable subsidiary ledger
c. Payees of cheques drawn in the month after year-end
d. Invoices filed in the entity’s open invoice file
A
12-14
During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this change
a. A generalized computer audit program must be used
b. Without paper time sheets, part of the audit trail is altered
c. The potential for payroll-related fraud is diminished
d. Transactions must be processed in batches
B
12-15
Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll?
a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department’s payroll summary.
b. Payroll cheques are prepared by the payroll department and signed by the treasurer.
c. The employee who distributes payroll cheques returns unclaimed payroll cheques to the payroll department.
d. The personnel department sends employees’ termination notices to the payroll department
C
12-16
In meeting the control objective of safeguarding of assets, which department should be responsible for the following?
Distribution of Paycheques
Custody of Unclaimed Paycheques
Treasurer
a. Treasurer
b.
Payroll
Treasurer
c. Treasurer
Payroll
d.
Payroll
Payroll
D
12-17
For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to
a. The treasurer’s department
b. General accounting
c. Payroll accounting
d. The timekeeping department
B
12-18 The purpose of segregating the duties of hiring personnel and distributing payroll cheques is to separate the
a. Human resource function from the controllership function
b. Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody-related assets
d. Operational responsibility from the record-keeping responsibility
C
12-19
An auditor who is testing IT controls in a payroll system would would most likely use test data (discussed in Chapter 7 under “ Using Technology in the Audit of ICFR”) that contain conditions such as
a. Deductions nor authorized by employees
b. Overtime not approved by supervisors
c. Time sheets with invalid job numbers
d. Payroll cheques with unauthorized signatures
C
12-20 It would be appropriate for the payroll department to be responsible for which of the following functions?
a. Approval of employee time records
b. Preparation of periodic governmental reports as to employees’ earnings and withholding taxes
c. Maintenance of records of employment, discharges, and pay increases
d. Distribution of paycheques to employees
B
12-21
Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions?
a. Trace a sample of time sheets to the payroll register
b. Recompute the mathematical accuracy of a sample of payroll cheques
c. Trace a sample of payroll cheques to the approved time sheet summary and the master employee list to verify validity
d. Test a sample of time sheets for the presence of authorization
C
12-22
Effective control activities over the payroll function may include
a. Reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs
b. Verification of agreement of job time sheets with employee recorded hours by a payroll department employee
c. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department
d. Custody of rate authorization records by the supervisor of the payroll department
B
12-23
An auditor is most likely to perform substantive tests of details on payroll transactions and balances when
a. Cutoff tests indicate a substantial amount of accrued payroll expense
b. The level of control risk relative to payroll transactions is set at low
c. Substantive analytical procedures indicate unusual fluctuations in recurring payroll entries
d. Accrued payroll expense consists primarily of unpaid commissions
C
13-14
The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that
a. Independent internal verification of activity reports is established
b. Transfers to the finished goods department are documented by a completed production report and a quality control report
c. Production orders are prenumbered and signed by a supervisor
d. Custody of work in process and finished goods is properly maintained
D
13-15
Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions?
a. Inventory manager does not have ability to record inventory transactions.
b. Summary of the receiving reports is independently compared to the inventory status report
c. Inventory is periodically reviewed for slow-moving or obsolete items, which may require a write-down
d. Subsidiary ledgers are periodically reconciled with inventory control accounts
A
13-16
Which of the following would most likely be an internal control activity designed to detect errors and
fraud concerning the custody of inventory?
a. Periodic reconciliation of work in process with job cost sheets
b. Segregation of functions between general accounting and cost accounting
c. Independent comparisons of finished goods records with counts of goods on hand
d. Approval of inventory journal entries by the storekeeper
C
13-17 Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who
a. Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued
b. Compare records of goods on hand with physical quantities do not maintain the records or have custody of the inventory
c. Obtain receipts for the transfer of completed work to finished goods prepare a completed production report
d. Are independent of issuing production orders update records from completed job cost sheets and production cost reports on a timely basis
B
13-18 An auditor’s tests of controls over the issuance of raw materials to production would most likely include
a. Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances
b. Inquiry of the custodian about the procedures followed when defective materials are received from vendors
c. Observation that raw materials are stored in secure areas and that storeroom security is supervised by a responsible individual
d. Examination of materials requisitions and reperformance of entity controls designed to process and record issuances
D
13-19
Which of the following internal control activities is most likely to address the completeness assertion for inventory?
a. The work-in-process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting personnel
C
13-20 An entity maintains perpetual inventory records in both quantities and dollars. If the level of control 13-12 risk were set at high, an auditor would probably
a. Insist that the entity perform physical counts of inventory items several times during the year
b. Apply gross profit tests to ascertain the reasonableness of the physical counts
c. Increase the extent of tests of controls of the inventory system
d. Request that the entity schedule the physical inventory count at the end of the year
D
13-21 After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items
a. Included in the listing have been counted
b. Represented by inventory tags are included in the listing
c. Included in the listing are represented by inventory tags
d. Represented by inventory tags are bona fide
B
13-22 When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
a. All goods purchased before year-end are received before the physical inventory count
b. No goods held on consignment for customers are included in the inventory balance
c. Goods observed during the physical count are pledged or sold
d. All goods owned at year-end are included in the inventory balance
D
13-23 Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of
a. Completeness
b. Existence
c. Presentation
d. Valuation
D
13-24
Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates?
a. Complete recounts are performed by independent teams.
b. Perpetual inventory records are maintained.
c. Unit-cost records are integrated with production-accounting records.
d. Inventory balances are rarely at low levels
B
13-25
An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file?
a. Economic reorder quantity
b. Warehouse location
c. Date of last purchase
d. Quantity sold
A
13-26
Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory?
a. Tracing of test counts noted during the entity’s physical count to the entity’s summarization of quantities
b. Inquiry of management to determine whether there are significant purchase commitments that should be considered for disclosure
c. Selection of the last few shipping advices used before the physical count and determination of whether the shipments were recorded as sales
d. During physical observation of inventory, verification that “bill and hold” inventory is segregated and not included in the ending inventory count.
D
14-12
When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n)
a. Insurance premium due but not recorded
b. Fictitious piece of equipment
c. Third-party lien holder with a secured interest in the equipment
d. Understatement of insurance expense
C
14-13
Which of the following internal controls is most likely to justify a reduction of control risk concerning plant and equipment acquisitions?
a. Periodic physical inspection and reconciliation of plant and equipment to the detailed accounting records by the internal audit staff
b. Comparison of current-year plant and equipment account balances with prior-year actual balances
c. Review of prenumbered purchase orders to detect unrecorded trade-ins
d. Approval of periodic depreciation entries by a supervisor independent of the accounting department
A
14-14
To strengthen control over the custody of heavy mobile equipment, the entity would most likely institute a policy requiring a periodic
a. Increase in insurance coverage
b. Inspection of equipment and reconciliation with accounting records
c. Verification of liens, pledges, and collateralizations
d. Accounting for work orders
B
14-15
Due to a weakness observed in an entity’s control over recording retirement of equipment, the auditor may decide to
a. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used
b. Select certain items of equipment from the accounting records and locate them in the plant
c. Inspect certain items of equipment in the plant and trace those items to the accounting records
d. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year
B
14-16
Which of the following procedures is most likely to prevent the improper disposition of equipment?
a. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
b. The use of serial numbers to identify equipment that could be sold
c. Periodic comparison of removal work orders to authorizing documentation
d. Periodic analysis of the scrap sales and the repairs and maintenance accounts
A
14-17
Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control system that provides for
a. Investigation of variances within a formal budgeting system
b. Review and approval of the monthly depreciation entry by the plant supervisor
c. Segregation of duties of employees in the accounts payable department
d. Examination by the internal auditor of vendor invoices and cancelled cheques for property acquisitions
A
14-18
Which of the following situations would not support the auditor’s decision to reduce control
risk below maximum for the audit of intangible assets?
a. The entity employs a qualified specialist who reviews the value of the intangible assets on an annual basis for impairment.
b. The auditor documented, tested, and developed an understanding of the acquisition process and found the key controls to be effective.
c. The IT system that maintains the records for intangible assets has adequate controls to prevent unauthorized access.
d. The company has made no acquisitions of intangibles during the fiscal year under audit
D
14-19 Which of the following control activities would most likely allow for a reduction in the scope of
the auditor’s tests of depreciation expense?
a. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation
b. Comparison of equipment account balances for the current year with the current-year budget and prior-year actual balances
c. Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment
d. Authorization of payment of vendor’s invoices by a designated employée who is independent of the equipment-receiving function
A
14-20
When there are numerous property and equipment transactions during the year, an auditor who plans to set the control risk at a low level usually performs
a. Substantive analytical procedures for property and equipment balances at the end of the year
b. Tests of controls and extensive tests of property and equipment balances at the end of the year
c. Substantive analytical procedures for current-year property and equipment transactions
d. Tests of controls and limited tests of current-year property and equipment transactions
D
14-21 An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense
b. Expenditures for property and equipment have not been charged to expense
c. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period
d. Expenditures for property and equipment have been recorded in the proper period
B
14-22
Which of the following combinations of procedures would an auditor be most likely to perform to obtain evidence about fixed-asset additions?
a. Inspecting documents and physically examining assets
b. Reperforming calculations and obtaining written management representations
c. Observing operating activities and comparing balances to prior-period balances
d. Confirming ownership and corroborating transactions through inquiries of entity personnel
A
15-11 Which of the following questions would an auditor most likely include on a control questionnaire for notes payable?
a. Are assets that collateralize notes payable critically needed for the entity’s continued existence?
b. Are two or more authorized signatures required on cheques that repay notes payable?
c. Are the proceeds from notes payable used to purchase noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of directors
D
15-12
An auditor’s primary purpose in examining a letter received from the bank shortly after the balance sheet date that renews and extends an entity’s note payable is most likely to obtain evidence concerning management’s assertions about
a. Existence
b. Presentation and disclosure-classification
c. Accuracy
d. Valuation and allocation
B
15-13 An audit program for long-term debt would most likely include steps that require
a. Comparing the carrying amount of the debt to its year-end market value
b. Correlating the interest expense recorded for the period with the debt outstanding for the period
c. Verifying the existence of the holders of the debt by direct confirmation
d. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt
B
15-14 An entity has established a bond sinking fund to repurchase a portion of the outstanding bonds each year. The auditor can best verify the entity’s bond sinking fund transactions and year-end bond balance by
a.. Confirmation of retired bonds with individual holders
b. Confirmation with the bond trustee
c. Recomputation of interest expense, interest payable, and amortization of bond discount or premium
d. Examination and count of the bonds retired during the year
B
15-15
When an entity does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends
b. The number of shares issued and outstanding
c. Guarantees of preferred shares liquidation value
d. The number of shares subject to agreements to repurchase
B
15-16 The primary responsibility of a bank acting as a registrar of capital share is to
a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation
b. Account for share certificates by comparing the total shares outstanding to the total in the shareholders’ subsidiary ledger
c. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury shares
d. Verify that shares were issued in accordance with the authorization of the board of directors and the articles of incorporation
D
15-17 To obtain evidence on the authorization assertion, an auditor should trace corporate share
issuances and treasury share transactions to the
a. Numbered share certificates
b. Articles of incorporation
c. Transfer agent’s records
d. Minutes of the board of directors
D
15-18 Although the quantity and content of audit working papers vary with each particular engagement. an auditor’s permanent files most likely include
a. Schedules that support the current year’s adjusting entries
b. Prior years accounts receivable confirmations that were classified as exceptions
c. Documentation indicating that the audit work was adequately planned and supervised
d. Information regarding the different classes of shares and the number of shares of each class that are authorized to be issued
D
15-19 An auditor compares the current-year revenues and expenses with those of the prior year and investigates all changes exceeding 5 percent. By this procedure, the auditor would be most likely to learn that
a. Fourth-quarter payroll taxes in the current year were not paid
b. The entity changed its capitalization policy for small tools in the current year
c. A current-year increase in property tax rates has not been recognized in the entity’s accrual
d. The current-year provision for uncollectible accounts is inadequate because of worsening economic conditions
B
15-20 Which of the following comparisons would be most useful to an auditor in evaluating the overall financial results of an entity’s operations?
a. Prior-year accounts payable to current-year accounts payable
b. Prior-year payroll expense to budgeted current-year payroll expense
c.. Current-year revenue to budgeted current-year revenue
d. Current-year warranty expense to current-year contingent liabilities
C
16-12
The tick mark most likely indicates that the amount was traced to the
a. December cash disbursements journal
b. Outstanding cheque list of the applicable bank reconciliation
c. January cash disbursements journal
d. Year-end bank confirmations
B
16-13
The tick mark most likely indicates that the amount was traced to the
a. Deposit in transit of the applicable bank reconciliation
b. December cash receipts journal
c. January cash receipts journal
d. Year-end bank confirmations
A
16-14 An auditor ordinarily sends a standard confirmation request to all banks with which the entity has done business during the year under audit, regardless of the year-end balance. One purpose of this procedure is to
a. Provide the data necessary to prepare a proof of cash
b. Request that a cutoff bank statement and related cheques be sent to the auditor
c. Detect kiting activities that may otherwise not be discovered
d. Seek information about loans from the banks
D
16-15 The primary evidence regarding year-end bank balances is documented in the
a. Standard bank confirmations
b. Outstanding cheque listing
c. Interbank transfer schedule
d. Bank deposit lead schedule
A
16-16
On receiving the cutoff bank statement, the auditor should vouch
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal
b. Cheques dated before year-end listed as outstanding on the year-end bank reconciliation to the cutoff statement
c. Deposits listed on the cutoff statement to deposits in the cash receipts journal
d. Cheques dated after year-end to outstanding cheques listed on the year-end bank reconciliation and to the cutoff statement
B
16-17
Which of the following cash transfers results in a misstatement of cash at December 31?
Bank Transfer Schedule
Disbursing Bank Account
Receiving Bank Account
Transfer
a.
b.
c.
d.
Recorded in Client’s Books
Paid by Bank
1/4
1/5
1/5
Recorded in Client’s Books
Received by Bank
12/31
1/4
12/31
12/31
1/4
1/4
1/4
12/31
1/4
12/31
12/31
1/4
B
16-18
Which of the following controls would most effectively ensure that the proper custody of assets in the investing process is maintained?
a. Direct access to securities in the safe-deposit box is limited to one corporate officer
b. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger
c. Purchase and sale of investments are executed on the specific authorization of the board of directors
d. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel
D
16-19
An auditor testing long-term investments would ordinarily use substantive analytical procedures to ascertain the reasonableness of the
a. Existence of unrealized gains or losses in the portfolio
b. Completeness of recorded investment income
c. Classification between current and noncurrent portfolios
d. Valuation of marketable equity securities
B
16-20
To establish the existence and rights of a long-term investment in the common shares of a publicly traded company, an auditor ordinarily performs a security count or
a. Relies on the entity’s internal controls if the auditor has reasonable assurance that the control activities are being applied as prescribed
b. Confirms the number of shares owned that are held by an independent custodian
c. Determines the market price per share at the balance sheet date from published quotations
d. Confirms the number of shares owned with the issuing company
B
16-21
Which of the following is likely to be the most effective audit procedure for verifying dividends earned on investments in publicly traded equity securities?
a. Trace deposits of dividend cheques to the cash receipts book
b. Reconcile recorded earnings with the dividend earnings reported in the investment broker statement
c. Compare the amounts received with prior-year dividends received
d. Recompute selected extensions and footings of dividend schedules and compare totals to the general
ledger
B
16-22
An auditor would most likely verify the interest earned on bond investments by
a. Vouching the receipt and deposit of interest cheques
b. Confirming the bond interest rate with the issuer of the bonds
c. Recomputing the interest earned on the basis of face amount, interest rate, and period held.
d. Testing the controls over cash receipts
C
16-23
The audit firm’s valuation specialist would likely be brought in to assist in the audit of fair value measurements at an entity when the following is present:
a. The entity is a new audit client.
b. Significant uncertainty exists in key inputs to the entity’s valuation models.
c. The entity has a financial instrument with a Level 2 input.
d. The entity owns a large and diverse portfolio of publicly traded shares.
B
17-13
An auditor would be most likely to identify a contingent liability by obtaining a(n)
a. Accounts payable confirmation
b. Bank confirmation of the entity’s cash balance
c. Letter from the entity’s general legal counsel
d. List of subsequent cash receipts
C
17-14 An auditor should request that an audited entity send a letter of inquiry to those lawyers who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide
a. The opinion of a specialist as to whether loss contingencies are possible, probable, or remote
b. A description of litigation, claims, and assessments that have a reasonable possibility of unfavourable outcome
c. An objective appraisal of management’s policies and procedures adopted for identifying and evaluating legal matters
d. Corroboration of the information furnished by management concerning litigation, claims, and assessments
D
17-15
An auditor issued an audit report that was dual dated for a subsequent event occurring after the date on which the auditor has obtained sufficient appropriate audit evidence but before issuance of the financial statements. The auditor’s responsibility for events occurring subsequent to the date on which the auditor has obtained sufficient appropriate audit evidence was
a. Limited to the specific event referenced
b. Extended to include all events occurring since the date on which the auditor has obtained sufficient appropriate audit evidence
c. Extended to subsequent events occurring through the date of issuance of the report
d. Limited to events occurring up to the date of the last subsequent event referenced
A
17-16
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of any changes in internal control that might affect financial reporting between the end of the reporting period and the date of the auditor’s report?
a. Review a fire insurance settlement during the subsequent period
b. Examine relevant internal audit reports issued during the subsequent period
c. Inquire of the entity’s legal counsel.concerning litigation, claims, and assessments arising after year end
d. Confirm bank accounts established after year end
B
17-17 Final analytical procedures are generally intended to
a. Provide the auditor with a final, overall evaluation of the relationships among financial statement balances
b. Test transactions to corroborate management’s financial statement assertions
c. Gather evidence concerning account balances that have not yet been investigated
d. Retest control activities that appeared to be ineffective during the assessment of control risk
A
17-18 Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
a. Review compliance with the terms of debt agreements
b. Review management’s plans to dispose of assets
c. Evaluate management’s plans to borrow money or restructure debt
d. Consider management’s plans to reduce or delay expenditures
A
17-19 Auditing standards primarily encourage which of the following conversations between the auditor and another party about financial reporting?
a. A conversation with those charged with governance to discuss matters pertaining to financial reporting
b. A conversation with only management to discuss matters pertaining to financial reporting
c. A conversation with the head of the entity’s internal audit department and those charged with governance to discuss matters pertaining to financial reporting
d. A conversation in which those charged with governance report on management’s views on matters pertaining to financial reporting
A
17-20
Which of the following matters should an auditor communicate to those charged with governance?
Significant Audit Adjustments
Yes
Yes
No
No
Management’s Consultations with Other Accountants
Yes
No
Yes
No
a.
b.
c.
d.
A
17-21 Which of the following events occurring after the issuance of a set of financial statements and the accompanying auditor’s report would be most likely to cause the auditor to make further inquiries about the financial statements?
a. A technological development in the industry that could affect the entity’s future ability to continue as a going concern
b. The entity’s sale of a subsidiary that accounts for 30 percent of the entity’s consolidated sales
c. The discovery of information regarding a contingency that existed before the financial statements were issued
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
C
18-10
In which of the following situations would an auditor ordinarily issue an unqualified/unmodified financial statement audit opinion with no explanatory (or emphasis-of-matter) paragraph?
a. The auditor wishes to emphasize that the entity had significant related-party transactions.
b. The auditor decides not to refer to the report of another auditor as a basis, in part, for the auditor’s opinion.
c. The entity issues financial statements that present financial position and results of operations but omits the statement of cash flows.
d. The auditor has substantial doubt about the entity’s ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.
B
18-11
A public entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements but is reasonably certain to have a substantial effect in later years. The client’s financial statements contain no material misstatements and the auditor concurs that this change is justified. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)
a. “Except for,” qualified opinion
b. Adverse opinion
c. Unqualified opinion
C
18-12
An auditor includes a separate paragraph in an otherwise unmodified financial statement audit report to emphasize that the entity being reported upon had significant transactions with related parties. The inclusion of this separate paragraph
a. Is appropriate and would not negate the unmodified opinion
b. Is considered an “except for” qualification of the opinion
c. Violates auditing standards if this information is already disclosed in footnotes to the financial statements
d. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation”
A
18-13
Eagle Company, a public company, had a computer failure and lost part of its financial data. As a result, the auditor was unable to obtain sufficient audit evidence relating to Eagle’s inventory account. Assuming the inventory account is at least material, the auditor would most likely choose either
a. A qualified opinion or a disclaimer of opinion
b. A qualified opinion or an adverse opinion
c. An unqualified opinion with no explanatory paragraph or an unqualified opinion with an explanatory paragraph
d. A qualified opinion with no explanatory paragraph or a qualified opinion with an explanatory paragraph
A
18-14 Tech Company has appropriately disclosed an uncertainty due to pending litigation. However, the auditors were unable to satisfy themselves that all pending litigation had been identified. The auditors’ decision to issue a qualified opinion on Tech’s financial statements would most likely result from
a. A lack of sufficient evidence
b. An inability to estimate the amount of loss
c. The entity’s lack of experience with such litigation
d. A lack of insurance coverage for possible losses from such litigation
A
18-15
In which of the following circumstances would an auditor usually choose between issuing a on a client’s financial statements? qualified opinion or a disclaimer of opinion on a c
a. Departure from generally accepted accounting principles
b. Inadequate disclosure of accounting policies
c. Inability of the auditor to obtain sufficient appropriate evidence
d. Unreasonable justification for a change in accounting principle
C
18-16
King, CPA, was engaged to audit the financial statements of Chang Company, a private company. after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors but was satisfied that both were fairly stated after applying appropriate alternative procedures. King’s financial statement audit report most likely contained a(n)
a. Qualified opinion
b. Disclaimer of opinion
c. Unmodified opinion
d. Unmodified opinion with an emphasis-of-matter paragraph
C
18-17
Comparative financial statements for a public company include the prior year’s financial statements, which were audited by a predecessor auditor. The predecessor’s report is not presented along with the comparative financial statements. If the predecessor’s report was unqualified, the successor should
a. Express an opinion on the current year’s statements alone and make no reference to the prior year’s statements
b. Indicate in the auditor’s report that the predecessor auditor expressed an unmodified opinion
c. Obtain a letter of representations from the predecessor concerning any matters that might affect the successor’s opinion
d. Disclaim an opinion
B
18-18
When reporting on comparative financial statements, which of the following circumstances should ordinarily cause the auditor to change the previously issued opinion on the prior year’s financial statements?
a. The prior year’s financial statements are restated following the purchase of another company in the current year.
b. A departure from generally accepted accounting principles caused an adverse opinion on the prior year’s financial statements, and those statements have have been t properly restated.
c. A change in accounting principle causes the auditor to make a consistency modification in the current year’s audit report.
d. A scope limitation caused a qualified opinion on the prior year’s financial statements, but the current year’s opinion is properly unqualified
B
18-19 Which of the following best describes the auditor’s responsibility for “other information™ included in the annual report to shareholders that contains financial statements and the auditor’s report?
a. The auditor has no obligation to read the “other information.”
b. The auditor has no obligation to corroborate the “other information” but should read the “other information” to determine whether it is materially consistent with the financial statements.
c. The auditor should extend the examination to the extent necessary to verify the “other information.”
d. The auditor must modify the auditor’s report to state that the other information “is unaudited” or “is not covered by the auditor’s report.”
B
18-20 When reporting on finažicial statements prepared on the basis of accounting used for income tax
purposes, the auditor should include in the report a paragraph that
a. Emphasizes that the financial statements have not been examined in accordance with generally accepted auditing standards
b. Refers to a tutorial that explains the income tax basis of accounting
c. States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles
d. Justifies the use of the income tax basis of accounting
C
18-21 When an auditor is asked to express an opinion on an entity’s rent and royalty revenues, they may
a. Not accept the engagement because to do so would be tantamount to agreeing to issue a piecemeal opinion
b. Not accept the engagement unless also engaged to audit the full financial statements of the entity
c. Accept the engagement, provided the auditor’s opinion is expressed in a special report that clearly states that only these specific accounts were audited
d. Accept the engagement, provided distribution of the auditor’s report is limited to the entity’s management
C
19-14
Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance?
a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
b. Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character.
c. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviours are acceptable, and so that discipline can be applied when necessary.
d. A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues.
C
19-15
All of the following non-assurance services are identified as generally impairing an auditor’s independence with respect to an audited entity except
a. Information systems design and implementation
b. Human resource services
c. Management functions
d. Some specific tax services
c. All of the above are seen as impairing independence
D
19-16
Which one of the following situations would be considered an exception, in which independence is not impaired?
a. Jane is a CPA student, whose father is the CFO of the firm’s major client. Jane, being familiar with the client’s operations, has been selected to work on the assurance engagement.
b. Towers is a pension trust company offering services to many businesses downtown. Their auditor is Lyne, Laura, and Kale, a large public accounting firm. The husband of one of the audit firm’s managers has a pension due to being employed by Mountain Inc. Mountain Inc. uses Towers for their pension management.
c. Chester has just received the CPA designation. The audit firm gave Chester a promotion and a raise. With the additional money Chester is looking to invest in a business. Working on an assurance engagement and seeing positive growth for the client, Chester decides to invest in them.
d. The lead partner on the assurance engagement of Sylvester Equipment Co. is a sibling of the CFO of Sylvester The company chose that audit firm because they knew the partner
c. All of the above are seen as impairing independence.
B
19-17 The CPA Rules of Professional Conduct contain both general ethical principles that are aspirational in character and one of the following:
a. A list of violations that would cause the automatic suspension of a CPA’s licence
b. A set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain
c. A description of a CPA’s procedures for responding to an inquiry from a trial board
d. A complete list of all the different kinds of crimes that would be considered acts discreditable to the profession
B
19-18
In which of the following situations would a CPA’s independence be considered impaired according to the Rules of Professional Conduct?
- The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers.
- The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust.
- The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA.
a. 1 and 2
b. 2 and 3
c. 1 and 3
d. 1, 2, and 3
B
19-19
An audited company has not paid its 2023 audit fees. According to the CPA Rules of Professional Conduct, for the auditor to be considered independent with respect to the 2024 audit, the 2023 audit fees must be paid before the
a. 2023 report is issued.
b. 2024 fieldwork is started.
c. 2024 report is issued.
d. 2025 fieldwork is started.
C
19-20
Which of the following legal situations would be considered to impair the auditor’s independence?
a. An expressed intention by the present management to management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, entity, although the auditor considers that there is only a remote possibility that such a claim will be filed
b. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity entity arising out of disputes as to billings for management advisory services
c. Actual litigation by the auditor against the present management, alleging management fraud or deceit
d. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services
C
19-21 A violation of the profession’s ethical standards is least likely to occur when a CPA does which of the following?
a. Purchases another CPA’s accounting practice and bases the price on a percentage of the fees aceruing from entities over a three-year period.
b. Receives a percentage of the amounts invested by the CPA’s audit entities in a tax shelter with the entities’ knowledge and approval.
c. Has a public accounting practice and is president and sole shareholder of a corporation that ges in data processing services for the public. The CPA often refers their attest entities to engages the data processing company.
d. Forms an association-not a legally binding partnership-with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs.
A
19-22 Rick, an independent CPA, must make an ethical judgement related to the audit of an entity. If Rick primarily focuses on whether the judgement might yield unfair advantages for some at the expense of others, they are using
a. A utilitarian perspective
b. A rights-based approach
c. A justice-based perspective
d. A rule-based CPA guidelines
C
19-23 During the audit of Moon Co., the auditor disagrees with management’s estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance?
a. Moon management has the right to make company estimates.
b. Requiring an adjustment to the allowance for doubtful accounts would give shareholders access to fair and adequate information.
c. There is a small but reasonable chance that accounts receivable as stated by Moon Co. might turn out to be fully collectible.
d. The interests of Moon Co., the auditor, and the public should be weighed equally in the decision.
B
19-24 Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n)
a. Authorized quality control review board
b. Successor CPA firm that has been engaged to audit the former audit entity
c. Federal court that has issued a valid subpoena
d. Disciplinary body created under state statute
B
19-25 One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
a. A system of quality control
b. A system of peer review
c. Continuing professional education
d. Compliance with generally accepted reporting standards
A
19-26
In connection with the element of engagement performance, a CPA firm’s system of quality control should ordinarily include procedures covering all of the following except
a. Performance evaluation
b. Consistent, high-quality engagement performance
c. Supervision responsibilities
d. Review responsibilities
A
20-14
Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial nancial statements. Though the financial statements Drake audited included a materially overstated accounts receivable balance. Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss.
If Cable sues Drake for negligence in failing to discover the overstatement, Drake’s best defence would be that Drake did not
a. Have privity of contract with Cable
b. Sign an engagement letter
c. Perform the audit recklessly or with an an intent to deceive
d. Violate generally accepted auditing standards in performing the audit
D
20-15
Which of the following best describes whether a CPA has met the required standard of care in auditing an entity’s financial statements?
a. Whether the client’s expectations are met with regard to the accuracy of audited financial statements
b. Whether the statements conform to generally accepted accounting principles
c. Whether the CPA conducted the audit with the same skill and care expected of an ordinarily prudent CPA under the circumstances
d. Whether the audit was conducted to investigate and discover all acts of fraud
C
20-16
Jenna Corporation approved a merger plan with Cord Corporation. One of the determining factors in approving the merger was the financial statements of Cord, which had been audited by & Company, CPAs. Jenna had engaged Frank to audit Cord’s financial statements. While Frank & Company. Frank failed to discover fraud that later caused Jenna to suffer substantial performing the audit. Frank failed to losses. For Frank to be liable under common-law negligence, Jenna at minimum must prove that Frank
a. Knew of the fraud
b. Failed to exercise due care
c. Was grossly negligent
d. Acted with scienter
B
20-17
Brown & Company, CPAs, issued an unqualified opinion on the financial statements of its client King Corporation. Based on the strength of King’s financial statements, Safe Bank loaned King $500,000. Brown was unaware that Safe would receive a copy of the financial statements or that they would be used by King in obtaining a loan. King defaulted on the loan.
If Safe commences an action for ordinary negligence against Brown, and Brown believes it will be able to prove that it conducted the audit in conformity with CAS, Brown will
a. Be liable to Safe, because Safe relied on the financial statements
b. Be liable to Safe, because the statute of frauds has been satisfied
c. Not be liable to Safe, because there is a conclusive legal presumption that following CAS is the equivalent of acting reasonably and with due care
d. Not be liable to Safe, because there was a lack of prisity of contract
D
20-18 Which of the following best describes the regulation of securities in Canada?
a. Regulation of securities is determined at the federal level by the National Securities Administration.
b. Regulation of securities is the responsibility of the individual stock exchanges.
c. Provincial security organizations regulate the securities of publicly listed companies with the National Securities Administration acting as an umbrella organization to create harmony.
d. The SEC is responsible for the regulation of securities in Canada.
C
20-19 What is the purpose of the Investment Industry Regulatory Organization of Canada, also known
as IIROC?
a. Protection of auditors in Canada’s debt and equity marketplaces
b. Oversight of all investment dealers and trading activity on Canada’s debt and equity marketplaces
c. Protection of corporations against investors in financial marketplaces
d. Management of people’s investments
B
20-20 Which of the following is not an auditor’s defence?
a. The client was negligent (contributory negligence, comparative negligence, or management fraud).
b. The auditor’s work was not performed in accordance with professional standards.
c. The client suffered no loss.
d. The alleged auditor negligence did not substantially contribute to the client’s loss (lack of causal connection).
B
20-21 Duty of care involves the CPA providing the following?
a. A copy of their qualifications at the beginning of each audit engagement
b. A report of the professional standings of all audit team members
c. Completion of work with integrity and in accordance with Canadian auditing standards
d. Ensuring that all third parties’ objectives are met
C
20-22 Canada’s response to the U.S. Racketeer Influenced and Corrupt Organizations (RICO) Act was:
a. To introduce a new criminal code
b. To ignore the Act as that type of behaviour does not exist in Canada
c. To implement Bill C22 and amend the criminal code
d. To create their own Racketeer Influenced and Corrupt Organizations Act
C
20-23 Canada implemented Bill 198 for what purpose?
a. Help the economy by requiring companies to spend more money on assurance engagements
b. Ensure compliance with regulation of Canadian companies by creating the Multilateral Instrument 52-109
c. Ensure that U.S. companies had the appropriate internal controls
d. Make auditors more responsible in terms of due diligence
B
20-24 Which of the following is not a provision of the Sarbanes-Oxley Act?
a. A requirement to retain audit workpapers for at least five years
take any harmful action in retaliation against anyone who b. Making it a criminal offence to take any voluntarily comes forward to report a suspected accounting or securities fraud.
c. Broad investigative and disciplinary authority over registered public accounting firms granted to the Public Company Accounting Oversight Board
d. The statute of limitations for actions under Section 10(b) and Rule 10b-5 reduced to one year from the discovery of fraud and five years after the fraud occurred
D
20-25 In which of the following scenarios could an auditor be charged under the criminal code?
a. Lucas and Jameson CPA completed the financial statements of Sanione Ltd. After the statements were released, the company was found to have some errors that needed to be adjusted.
b. Lucas and Jameson CPA provided an unqualified audit report on Sanione Ltd. financial statements after discovering the company’s ties with illegal activities. The company was a long- time client.
c. Lucas and Jameson CPA failed to follow Canadian Auditing Standards, resulting in their client’s bank losing $500,000.
d. Lucas and Jameson CPA provided a qualified audit report when they identified an account where the client was not in accordance with IFRS and would not adjust their books.
B
