Chapter 1 Flashcards
The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations, child labour guidelines, and other employee welfare issues. What type of service is No-Name providing?
assurance
Which of the following is an example of an attestation engagement?
an audit of internal controls over financial reporting
A major type of assurance service performed by large public accounting firms is
auditing.
Which of the following illustrates the objective of auditing with respect to the evidence analysis process?
accumulation and evaluation of evidence regarding assertions
Auditing should be done by a qualified
competent and independent person.
Which of the following illustrates the definition of auditing with respect to the reporting process?
reporting on the degree of correspondence between financial statements and International Financial Reporting Standards/Accounting Standards for Private Enterprises (ASPE/IFRS)
In the audit of historical financial statements by public accountant (PA) firms, the criteria used are
relevant accounting frameworks.
A large public accountant (PA) firm has assessed evidence collected during an engagement. Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS). A high level of assurance was obtained. The type of engagement conducted was
an audit.
It is important for the auditor to be independent because
this will prevent bias in accumulating and evaluating evidence.
As an external auditor is paid a fee by a client company, the auditor
may still be sufficiently independent to conduct an audit.
In the audit of a corporate tax return, the Canada Revenue Agency (CRA) auditor should demonstrate competence in the use of
the Income Tax Act and accompanying regulations.
The purpose of assurance is to provide an opinion on a subject matter. Which of the following are not key elements of assurance engagements?
completing the corporations tax returns in accordance with the income tax act
A bank manager is evaluating an application for a bank loan from a new corporate client. The bank manager decides to request audited financial statements. Which of the following likely informed this decision?
The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk.
What is the most appropriate method for an organization to lower information risk related to its financial statements?
Have an independent financial statement audit conducted.
ZK3 Ltd. is a successful 20-year-old private Canadian family-owned business. The company is owned equally by four siblings who are all involved in managing the daily operations of the company. A private equity company is contemplating an investment in ZK3 and insists on audited financial statements. The following are likely explanations for the private equity company’s request except:
Canada Revenue Agency requirements for audited financial statements.
Information risk can be caused through any one of the following except:
low volume of data.
The underlying conditions that create demand by users for reliable financial information include the fact that
users are separated from accounting records by distance and time.
Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario. Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable chartered professional accountant (CPA) on staff in the Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala’s financial statement auditors assist in addressing?
concerns over remoteness of information
Annual financial statement audits are required for which of the following situations?
public companies and large not-for-profit organizations
How does a financial statement auditor help reduce information risk, and make financial statements more trustworthy and reliable?
By bringing integrity, independence, competence, and knowledge of financial statement reporting to the audit of the financial statements.
A bank manager is evaluating a loan application for Leonard & Ebelle, the private parent company with three subsidiaries in different sectors, including real estate, retail, and banking. The bank manager has received the unaudited consolidated financial statements for Leonard & Ebelle. The bank manager decides to request audited financial statements from Leonard & Ebelle as a precondition for approving the loan. The following could justify the bank manager’s request, except:
audits are mandatory for large private companies.
Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations. An auditing firm has been engaged to assess air quality and compare results to legislated requirements. What type of audit or engagement is the auditor conducting?
compliance
As part of its loan agreement, Big Bank requires that only accounts receivable less than 60 days old be used as collateral. An auditor has been engaged to provide assurance that the accounts receivable on the list provided to the bank are indeed less than 60 days old. What type of engagement is the auditor conducting?
compliance
A review of any part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as
an operational audit.
A typical objective of an operational audit is for the auditor to
evaluate the effectiveness of an internal process.
Which of the following audits can be regarded as being solely “compliance” audits?
Canada Revenue Agency’s examinations of the returns of taxpayers
Which of the following is an example of a financial statement audit?
determining whether ABC’s overall financial statements are stated in conformity with International Financial Reporting Standards (IFRS)
An example of a forensic accounting assignment might be
estimating the value of inventory lost in a warehouse theft.
What is the primary difference between internal and external auditors?
the parties to whom the auditor is responsible
Auditors General are responsible for auditing which types of organizations?
ministries, departments, agencies that report to Government
The extent and the scope of the audits conducted by Auditors General are determined by
legislation in the Auditor General’s jurisdiction.
To operate effectively, an internal auditor must be independent of the
line functions of the organization.
The internal audit group typically reports directly to the
audit committee.
A shareholder of a public Canadian firm can have access to the audited financial statements
on the Internet.
What type of information is available from www.sedar.com (System for Electronic Document Analysis and Retrieval)?
annual reports and management discussion and analysis
A reason for a not-for-profit organization to be audited is to
meet requirements of lenders or funding sources.
Which of the following services provides a moderate level of assurance about the client’s financial statements?
review
Which of the following is an advantage of a review engagement as compared to an audit engagement?
The review engagement requires considerably less work, so is less costly.
The reasoning behind the requirements of the Sarbanes-Oxley Act’s section 404 (attestation on internal control over financial reporting) is that
effective controls reduce the likelihood of future misstatements in the financial statements.
Which of the following services provides no assurance about the client’s financial statements?
compilation
Explain why auditor independence is so important in conducting a financial statement audit.
Auditor independence is fundamental to the conduct of the audit and the auditor’s role in protecting the public interest. In the case of the financial statement audit, when independence is impaired, the credibility of the financial statements, the auditor, and the auditor’s report becomes questionable.
Explain how fair value accounting may increase information risk.
Information risk is the risk that information upon which a business decision is made is inaccurate. Fair value accounting is often based on estimates and requires judgment. Fair value can be estimated using multiple methods with some estimates being more subjective than others. Fair value estimates are made at a point in time, but can also change rapidly, depending on market conditions. All of these factors increase information risk.
How does fair value accounting increase risk for a financial statement auditor?
Fair value accounting is based on estimates and judgement rather than evidence, which increases risk for the auditor.
Public Accountants
Perform audits in accordance with accounting standards of published financial statements prepared in accordance with GAAS or CAS.
Auditor General Auditors
Perform compliance or operational audits in order to assure the Parliament of the expenditure of public funds in accordance with its directives and the law.
CRA Auditors
Perform compliance audits to enforce the federal tax laws as defined by Parliament, interpreted by the courts, and regulated by the Income Tax Act.
Internal Auditors
Perform compliance or operational audits to assure management or the board of directors that controls and policies are properly and consistently developed, applied, and evaluated.
Explain the difference between limited assurance and reasonable assurance.
Reasonable assurance means a high but not absolute level of assurance, while limited assurance provides a more moderate level of assurance.
