Chapter 1

Question 1

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?

Answer 1

assurance

Question 2

Which of the following is an example of an attestation​ engagement?

Answer 2

an audit of internal controls over financial reporting

Question 3

A major type of assurance service performed by large public accounting firms is

Answer 3

auditing.

Question 4

Which of the following illustrates the objective of auditing with respect to the evidence analysis​ process?

Answer 4

accumulation and evaluation of evidence regarding assertions

Question 5

Auditing should be done by a qualified

Answer 5

competent and independent person.

Question 6

Which of the following illustrates the definition of auditing with respect to the reporting​ process?

Answer 6

reporting on the degree of correspondence between financial statements and International Financial Reporting​ Standards/Accounting Standards for Private Enterprises​ (ASPE/IFRS)

Question 7

In the audit of historical financial statements by public accountant​ (PA) firms, the criteria used are

Answer 7

relevant accounting frameworks.

Question 8

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

Answer 8

an audit.

Question 9

It is important for the auditor to be independent because

Answer 9

this will prevent bias in accumulating and evaluating evidence.

Question 10

As an external auditor is paid a fee by a client​ company, the auditor

Answer 10

may still be sufficiently independent to conduct an audit.

Question 11

In the audit of a corporate tax​ return, the Canada Revenue Agency​ (CRA) auditor should demonstrate competence in the use of

Answer 11

the Income Tax Act and accompanying regulations.

Question 12

The purpose of assurance is to provide an opinion on a subject matter. Which of the following are not key elements of assurance​ engagements?

Answer 12

completing the corporations tax returns in accordance with the income tax act

Question 13

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?

Answer 13

The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk.

Question 14

What is the most appropriate method for an organization to lower information risk related to its financial​ statements?

Answer 14

Have an independent financial statement audit conducted.

Question 15

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​:

Answer 15

Canada Revenue Agency requirements for audited financial statements.

Question 16

Information risk can be caused through any one of the following except​:

Answer 16

low volume of data.

Question 17

The underlying conditions that create demand by users for reliable financial information include the fact that

Answer 17

users are separated from accounting records by distance and time.

Question 18

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?

Answer 18

concerns over remoteness of information

Question 19

Annual financial statement audits are required for which of the following​ situations?

Answer 19

public companies and large​ not-for-profit organizations

Question 20

How does a financial statement auditor help reduce information​ risk, and make financial statements more trustworthy and​ reliable?

Answer 20

By bringing​ integrity, independence,​ competence, and knowledge of financial statement reporting to the audit of the financial statements.

Question 21

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​:

Answer 21

audits are mandatory for large private companies.

Question 22

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?

Answer 22

compliance

Question 23

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?

Answer 23

compliance

Question 24

A review of any part of an​ organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as

Answer 24

an operational audit.

Question 25

A typical objective of an operational audit is for the auditor to

Answer 25

evaluate the effectiveness of an internal process.

Question 26

Which of the following audits can be regarded as being solely​ "compliance" audits?

Answer 26

Canada Revenue​ Agency's examinations of the returns of taxpayers

Question 27

Which of the following is an example of a financial statement​ audit?

Answer 27

determining whether​ ABC's overall financial statements are stated in conformity with International Financial Reporting Standards​ (IFRS)

Question 28

An example of a forensic accounting assignment might be

Answer 28

estimating the value of inventory lost in a warehouse theft.

Question 29

What is the primary difference between internal and external​ auditors?

Answer 29

the parties to whom the auditor is responsible

Question 30

Auditors General are responsible for auditing which types of​ organizations?

Answer 30

ministries, departments, agencies that report to Government

Question 31

The extent and the scope of the audits conducted by Auditors General are determined by

Answer 31

legislation in the Auditor​ General's jurisdiction.

Question 32

To operate​ effectively, an internal auditor must be independent of the

Answer 32

line functions of the organization.

Question 33

The internal audit group typically reports directly to the

Answer 33

audit committee.

Question 34

A shareholder of a public Canadian firm can have access to the audited financial statements

Answer 34

on the Internet.

Question 35

What type of information is available from www.sedar.com​ (System for Electronic Document Analysis and​ Retrieval)?

Answer 35

annual reports and management discussion and analysis

Question 36

A reason for a​ not-for-profit organization to be audited is to

Answer 36

meet requirements of lenders or funding sources.

Question 37

Which of the following services provides a moderate level of assurance about the​ client's financial​ statements?

Answer 37

review

Question 38

Which of the following is an advantage of a review engagement as compared to an audit​ engagement?

Answer 38

The review engagement requires considerably less​ work, so is less costly.

Question 39

The reasoning behind the requirements of the ​Sarbanes-Oxley Act's section 404​ (attestation on internal control over financial​ reporting) is that

Answer 39

effective controls reduce the likelihood of future misstatements in the financial statements.

Question 40

Which of the following services provides no assurance about the​ client's financial​ statements?

Answer 40

compilation

Question 41

Explain why auditor independence is so important in conducting a financial statement audit.

Answer 41

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.

Question 42

Explain how fair value accounting may increase information risk.

Answer 42

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.

Question 43

How does fair value accounting increase risk for a financial statement​ auditor?

Answer 43

Fair value accounting is based on estimates and judgement rather than evidence, which increases risk for the auditor.

Question 44

Public Accountants

Answer 44

Perform audits in accordance with accounting standards of published financial statements prepared in accordance with GAAS or CAS.

Question 45

Auditor General Auditors

Answer 45

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.

Question 46

CRA Auditors

Answer 46

Perform compliance audits to enforce the federal tax laws as defined by Parliament, interpreted by the courts, and regulated by the Income Tax Act.

Question 47

Internal Auditors

Answer 47

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.

Question 48

Explain the difference between limited assurance and reasonable assurance.

Answer 48

Reasonable assurance means a high but not absolute level of​ assurance, while limited assurance provides a more moderate level of assurance.