Chapters 1-7

Question 1

1-17 Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

a. It is difficult to prepare financial statements that fairly present a company’s financial position, operations, and cash flows without the expertise of an independent auditor.
b. It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
c. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
d. It is a customary courtesy that all shareholders of a company receive an independent report on management’s stewardship of the affairs of the business.

Answer 1

c)

Question 2

1-17 Independent auditing can best be described as:

a. A branch of accounting.
b. A discipline that attests to the results of accounting and other functional operations and data.
c. A professional activity that measures and communicates financial and business data.
d. A regulatory function that prevents the issuance of improper financial information

Answer 2

b)

Question 3

1-17 Which of the following professional services is an attestation engagement?

a. A consulting service engagement to provide computer-processing advice to a client.
b. An engagement to report on compliance with statutory requirements.
c. An income tax engagement to prepare federal and provincial tax returns.
d. The preparation of financial statements from a client’s financial records.

Answer 3

b)

Question 4

1-17 Which of the following attributes is likely to be unique to the audit work of public accountants as compared to the work performed by practitioners of other professions?

a. Independence.
b. Competence.
c. Due professional care.
d. Complex body of knowledge.

Answer 4

a)

Question 5

1-18 Which of the following best describes the operational audit?

a. It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company.
b. It concentrates on implementing financial and accounting control in a newly organized company.
c. It attempts and is designed to verify the fair presentation of a company’s results of operations.
d. It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.

Answer 5

d)

Question 6

1-18 Compliance auditing often extends beyond audits, leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and:

a. Accuracy.
b. Adherence to specific rules or procedures.
c. Evaluation.
d. Internal control.

Answer 6

b)

Question 7

2-17 You have been engaged to audit the financial statements of a Canadian public company. Which of the following statements is correct?

a. Your firm must be registered with the CPAB.
b. Your firm will be subject to auditing and quality control standards issued by the provincial securities commission.
c. Your firm must be either a national or Big Four CPA firm.
d. You will be engaged to audit both the quarterly and annual financial statements of your client.

Answer 7

a)

Question 8

2-18 Which of the following best describes what is meant by “Canadian Auditing Standards”?

a. Acts to be performed by the auditor.
b. Measures of the quality of the auditor’s performance.
c. Procedures to be used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.

Answer 8

b)

Question 9

2-18 The Responsibilities principle underlying Canadian Auditing Standards includes a requirement that:

a. The audit be adequately planned and supervised.
b. The auditor’s report states whether or not the financial statements conform to generally accepted accounting standards.
c. Professional judgment be exercised by the auditor.
d. Informative disclosures in the financial statements be reasonable adequate

Answer 9

c)

Question 10

2-18 What is the general character of the responsibilities characterized by the Performance principles?

a. The competence, independence, and professional care of persons performing the audit.
b. Criteria for the content of the auditor’s report on financial statements and related footnote disclosures.
c. The criteria of audit planning and evidence gathering.
d. The need to maintain independence in mental attitude in all matters pertaining to the audit

Answer 10

c)

Question 11

2-19 The nature and extent of a public accounting firm’s quality control policies and procedures depend on:

The PA Firm’s Size (Y/N),
The Nature of the PA Firm’s Practice (Y/N), Cost–Benefit Considerations (Y/N)

(1) Yes Yes Yes
(2) Yes Yes No
(3) Yes No Yes
(4) No Yes Yes

Answer 11

(1)

Question 12

2-19 Which of the following are elements of a PA firm’s quality control that should be considered in establishing its quality control policies and procedures?

Human Resources	(Y/N)
Monitoring (Y/N)	
Engagement Performance (Y/N)

(1) Yes Yes No
(2) Yes Yes Yes
(3) No Yes Yes
(4) Yes No Yes

Answer 12

(2)

Question 13

2-19 One purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:

a. Enable the PA firm to attest to the reliability of the client.
b. Satisfy the PA firm’s duty to the public concerning the acceptance of new clients.
c. Provide reasonable assurance that the integrity of the client is considered.
d. Anticipate before performing any field work whether an unqualified opinion can be issued.

Answer 13

c)

Question 14

3-14 An auditor strives to achieve independence in appearance to:

a. Comply with the auditing standards of fieldwork.
b. Become independent in fact.
c. Maintain public confidence in the profession.
d. Maintain an unbiased mental attitude.

Answer 14

d)

Question 15

3-15 In which one of the following situations would a Chartered Professional Accountant be in violation of the Code of Professional Conduct in determining the audit fee?

a. A fee is based on whether the CPA’s report on the client’s financial statements results in the approval of a bank loan.
b. A fee is based on the outcome of a bankruptcy proceeding.
c. A fee is based on the nature of the service rendered and the Chartered Professional Accountant’s expertise instead of the actual time spent on the engagement.
d. A fee is based on the fee charged by the prior auditor.

Answer 15

a)

Question 16

3-16 A single-partner Chartered Professional Accountant firm took on a new client in the uranium mining industry. Most of the firm’s clients operate in the retail service sector and the firm had until then never dealt with any business operating in the uranium sector. The audit fees for the new client are significant and the partner has indicated that “the staff assigned to the audit should be quickly able to learn the ins and outs of uranium and be able to perform a quality audit.”

Which Rule of Professional Conduct has most likely been violated in the following situation?

a. Association with false and misleading information.
b. Contingent fees.
c. Advertising and solicitation.
d. Competence

Answer 16

d)

Question 17

3-17 Which of the following is not a safeguard to independence?

a. A qualified, independent audit committee.
b. Firm policies that limit direct communication between junior staff and the client’s senior executives.
c. Tone at the top encouraging high-quality auditing and professional skepticism.
d. Periodic rotation of senior members on the engagement.

Answer 17

b)

Question 18

3-18 Which of the following best defines the “expectations gap”?

a. The difference between auditors and shareholders in their understanding of the financial statements of a specific company.
b. The difference between what the company’s directors know about the current affairs and future plans of the company and what information is shared with the auditors.
c. The difference between what the company reports to the public and what the auditors state in their report.
d. The difference between what the public believes the auditors performed as part of the audit and what actual work was conducted following the auditing standards.

Answer 18

d)

Question 19

4-20 Which of the following best describes the reason why an independent auditor reports on financial statements?

a. A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.
b. Different interests may exist between the company preparing the statements and the persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.
d. Poorly designed internal controls may be in existence.

Answer 19

b)

Question 20

4-20 Because of the risk of material misstatement, an audit should be planned and performed with an attitude of:

a. Objective judgment.
b. Independent integrity.
c. Professional skepticism.
d. Impartial conservatism.

Answer 20

c)

Question 21

4-21 What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?

 Errors	                    Fraud

(1) Limited Negative
(2) Reasonable Reasonable
(3) Limited Limited
(4) Reasonable Limited

Answer 21

2)

Question 22

4-22 An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of:

a. Occurrence.
b. Completeness.
c. Accuracy.
d. Classification.

Answer 22

b)

Question 23

4-22 In the audit of accounts payable, an auditor’s procedures will most likely focus primarily on management’s assertion about account balances of:

a. Existence.
b. Completeness.
c. Valuation and allocation.
d. Classification and understandability.

Answer 23

b)

Question 24

5-18 Which of the following types of documentary evidence should the auditor consider to be the most reliable?

a. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
b. Confirmation of an account payable balance mailed by and returned directly to the auditor.
c. A cheque, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor.
d. An audit schedule prepared by the client’s controller and reviewed by the client’s treasurer.

Answer 24

b)

Question 25

5-19 Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

a. Vendor’s invoice.
b. Bank statement obtained from the client.
c. Computations made by the auditor.
d. Pre-numbered sales invoices.

Answer 25

d)

Question 26

5-20 Which of the following presumptions is correct about the reliability of audit evidence?

a. Information obtained indirectly from outside sources is the most reliable audit evidence.
b. To be reliable, audit evidence should be convincing rather than merely persuasive.
c. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
d. Effective internal control provides more assurance about the reliability of audit evidence

Answer 26

d)

Question 27

5-21 Which of the following statements concerning audit evidence is true?

a. To be appropriate, audit evidence should be either persuasive or relevant, but need not be reliable.
b. The measure of the quantity and quality of audit evidence lies in the auditor’s judgment.
c. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.
d. A client’s accounting records can be sufficient audit evidence to support the financial statements.

Answer 27

b)

Question 28

5-22 Which of the following is not a primary purpose of audit documentation?

a. To coordinate the audit.
b. To assist in preparation of the audit report.
c. To support the financial statements.
d. To provide evidence of the audit work performed.

Answer 28

a)

Question 29

5-22 During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be:

a. A client-owned record of conclusions reached by the auditors who performed the engagement.
b. Evidence supporting financial statements.
c. Support for the auditor’s representations as to compliance with auditing standards.
d. A record to be used as a basis for the following year’s engagement.

Answer 29

b)

Question 30

6-26 When approached to perform an audit for the first time, the CPA (Chartered Professional Accountant) should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether:

a. The predecessor’s work should be used.
b. The company follows the policy of rotating its auditors.
c. In the predecessor’s opinion, internal control of the company has been satisfactory.
d. The engagement should be accepted.

Answer 30

d)

Question 31

6-26 A successor would most likely make specific inquiries of the predecessor auditor regarding:

a. Specialized accounting principles of the client’s industry.
b. The competency of the client’s internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.

Answer 31

d)

Question 32

6-26 Which of the following circumstances would most likely pose the greatest risk in accepting a new audit engagement?

a. Staff will need to be rescheduled to cover this new client.
b. There will be a client-imposed scope limitation.
c. The firm will have to hire a specialist in one audit area.
d. The client’s financial reporting system has been in place for 10 years.

Answer 32

b)

Question 33

6-27 Analytical procedures used in planning an audit should focus on identifying:

a. Material weaknesses in internal control.
b. The predictability of financial data from individual transactions.
c. The various assertions that are embodied in the financial statements.
d. Areas that may represent specific risks relevant to the audit.

Answer 33

d)

Question 34

6-28 A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?

a. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
b. The financial statements do not conform with generally accepted accounting principles (GAAP).
c. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
d. The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.

Answer 34

a)

Question 35

7-22 Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?

a. The entity’s management places no emphasis on meeting publicized earnings projections.
b. Significant differences between the physical inventory count and the accounting records are not investigated.
c. Monthly bank reconciliations ordinarily include several large outstanding cheques.
d. Cash transactions are electronically processed and recorded, leaving no paper audit trail.

Answer 35

b)

Question 36

7-22 Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
d. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

Answer 36

a)

Question 37

7-22 Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?

a. Presumptive
b. Judgmental
c. Criticizing
d. Questioning

Answer 37

d)

Question 38

7-23 Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as:

a. Audit risk.
b. Detection risk.
c. Inherent risk.
d. Sampling risk

Answer 38

c)

Question 39

7-24 Which of the following does not increase the need for sufficient appropriate audit evidence?

a. A lower acceptable level of detection risk.
b. An increase in the assessed control risk.
c. A lower acceptable audit risk.
d. A decrease in the assessed inherent risk.

Answer 39

d)

Question 40

7-24 As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:

a. Find smaller misstatements.
b. Find larger misstatements.
c. Increase the performance materiality in the accounts.
d. Increase inherent risk in the accounts

Answer 40

a)

Question 41

7-24 Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could:

a. Decrease detection risk.
b. Increase materiality levels.
c. Decrease substantive testing.
d. Increase inherent risk.

Answer 41

a)