Quiz 1-4 Flashcards
Which of the following services provides a moderate level of assurance about the client’s financial statements?
A.compliance
B.audit
C.review
D.forecasts and projections
c)
Which of the following is an example of accounting rather than auditing?
a. entering sales transactions into the sales order system
b.gathering evidence about the quality of accounts receivable
C.comparing bank deposit documents to the recorded cash received
D.reviewing sales invoices to see if they have been calculated correctly
a)
The Sarbanes-Oxley Act requires the auditor to attest to the
A. compliance of the company with the generally accepted accounting framework.
B. effectiveness of internal controls.
C.efficiency of the internal controls in financial reporting.
D. accuracy of the financial statements.
b)
Which of the following terms best describes the increased likelihood that unreliable information will be provided to decision makers?
A. inherent risk
B. information risk
C.audit risk
D.business risk
b)
Auditing should be done by a qualified
A.certified management accountant.
B.competent and independent person.
C.professional accountant.
D.chartered accountant.
b)
Which of the following is not a cause of information risk?
A.voluminous data
B.biases and motives of the provider
C.simple exchange transactions
D.remoteness of information
c)
In the audit of historical financial statements by PA firms, the criteria used are
A.relevant accounting frameworks.
B.generally accepted auditing standards.
C.regulations of the Canada Revenue Agency.
D.regulations of the provincial securities commissions.
a)
The extent and the scope of the audits conducted by Auditors General are determined by
A.legislation in the Auditor General’s jurisdiction.
B.the Auditor General and his/her staff.
C.audit partner planning and audit program development.
D.the financial statement auditors of the client.
a)
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?
A.review
B.financial statement
C.operational
D.compliance
d)
Auditors General are responsible for auditing which types of organizations?
A.ministries, departments, agencies that report to Government
B.public companies with shares issued to investors
C.any organization that submits tax returns to the tax authorities
D.private companies that have loans outstanding to banks or other creditors
a)
Which of the following illustrates the definition of auditing with respect to the evidence analysis process?
A.learning about different types of computing technology, such as mainframes
B.making sure that the auditor is competent and understands evidence gathering
C.accumulation and evaluation of evidence regarding assertions
D.writing an operational audit report that is tailored to the client’s situation
c)
Which of the following illustrates the definition of auditing with respect to the reporting process?
A.making sure that the auditor is competent and understands evidence gathering
B.reporting on the degree of correspondence between financial statements and ASPE/IFRS
C.accumulation and evaluation of evidence about balance sheet accounts
D.writing an operational audit report that is tailored to the client’s situation
b)
How does a financial statement audit affect a bank manager’s decisions in providing loans to a corporate client?
A.The bank manager will lower the risk-free interest rate that applies to the corporation.
B.Information risk is reduced and the bank manager can lower the interest rate charged.
C.The business risk for the client will be increased, so the borrowing costs will be lowered.
D.The business risk for the client will be reduced, so the borrowing costs will decline.
b)
Information risk can be reduced through any one of the following except
A.having the user share information risk with management.
B.having the chief financial officer certify and sign-off on the financial statements.
C.providing audited financial statements to users.
D.having the user verify the information.
b)
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?
A.compliance
B.financial statement
C.review
D.operational
a)
The underlying conditions that create demand by users for reliable financial information include the fact that
A.there is a need for the expression of an opinion as to the fairness of financial statements.
B.governments rely on such information to create tax policies.
C.users are separated from accounting records by distance and time.
D.more reliable information will allow investors to calculate the rate of return on their investment.
c)
What is the most appropriate method for an organization to lower information risk related to its financial statements?
A.Have an independent financial statement audit conducted.
B.Have an independent operational audit conducted on effectiveness.
C.Use a high quality software package to keep track of information.
D.Have good bookkeeping work completed on the accounts.
a)
What impact is the presence of factors such as real-time information (such as via the Internet) expected to have upon the demand for assurance services?
A.Demand is expected to decline due to the lack of adequate resources.
B.Demand is expected to decline as small businesses use the Internet more.
C.Demand is expected to grow due to the need for forward-looking information.
D.Demand is expected to grow due to the increase in large corporations.
c)
An example of a forensic accounting assignment might be
A.ensuring compliance with specific legislation.
B.determining whether overall financial statements are stated in conformity with IFRS.
C.evaluating the effectiveness of an internal process.
D.estimating the value of inventory lost in a warehouse theft.
d)
Joe is recording sales transactions in the accounting system so that they can be summarized in a logical manner for the purpose of providing financial information for decision-making. Joe is performing
A.management consulting.
B.accounting.
C.review.
D.auditing
b)
The third step of performance responsibility standard in the financial statement audit using a risk assessment approach is to
A.ensure adequate planning and supervision.
B.evaluate audit evidence.
C.determine and apply materiality levels.
D.identify risks of material misstatement
d)
Farah is currently auditing Software Synx, a public company. After a long day of work, Farah goes for a drink with her friend John who mentions that he owns shares of Software Synx. Farah indicates that John should hold on to his shares as they will go up next week when the financial statements are released and show an increase of 12% for revenues. Which element of quality control is compromised by Farah?
A.relevant ethical requirements
B.human resources
C.independence
D.engagement performance
a)
During which phases of the financial statement audit does the auditor “conduct quality control” when using a risk assessment approach?
A.the risk assessments
B.the reporting process
C.the risk responses
D.performance and reporting phases
d)
When the CPA Canada Handbook is silent on an auditing issue, which of the following is the best of the other authoritative sources that the auditor could use?
A. audit firm practice manuals B. Assurance and Related Services Guidelines (AuG) C. past practice at the client D. the PA firm's audit standards partner
b)
Who do the external auditors and the internal auditors usually report to?
A. senior management B. chief executive officer C. audit committee D. director of internal audit
c)
Canadian Auditing Standards (CASs) require that an audit be conducted using
A. a risk-assessment approach. B. a controls-testing approach. C. a standard approach. D. a substantive approach.
a)
Professional skepticism during the financial statement audit requires an appropriate state of mind: being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind?
A.
not having any ownership in the client’s shares or being a debt-holder
B.
matching documents to make sure that they are accurate and fair
C.
carefully assessing documents and not being the company’s advocate
D.
being aware that there could be material misstatements in the financial statements
d)
According to Canadian Standards on Quality Control (CSQC), which of the following is not one of the elements of quality control?
A. monitoring B. leadership responsibilities C. consistency with prior years D. engagement performance
c)
Jessica is a summer junior at Branes & Castle, a PA firm. Jessica has only completed three accounting courses in university and has not yet taken her auditing class. A team of auditors from Branes & Castle are starting an audit and Jessica was sent to help them. Jessica
A.
can perform work for the audit engagement on cycles where risk was assessed as low.
B.
can perform work for the audit engagement as long as she is supervised and proper review of her work is performed.
C.
should be limited to assisting the audit team with support functions such as photocopying and file assembly.
D.
should not perform any work pertaining to the audit engagement since she doesn’t have sufficient knowledge.
b)
When the criteria to be used in the financial statement audit are established, the auditor’s responsibility is to
A. evaluate the reporting framework used. B. create and document the framework used. C. make a recommendation to management for selecting the framework. D. select the acceptable financial reporting framework
a)
A PA firm has an organizational structure that assures the technical review of every engagement by a partner who has expertise in the client’s industry. This is an example of good
A. quality controls. B. adherence to professional standards. C. business risk management. D. entity-level controls.
a)
The reason for adopting the CASs is to
A.
be consistent with the international standards of auditing.
B.
respond to the increased litigation risks faced by auditors.
C.
comply with requirements in the Canada Business Corporations Act.
D.
simplify the auditing process.
a)
Adequate technical training and proficiency in auditing is a requirement of which category of generally accepted auditing standards?
A. personal B. examination C. reporting D. quality control
a)
Which standards relate to public accounting firms’ systems of quality control?
A. Canadian auditing standards. B. Assurance and related services guidelines. C. Provincial securities commissions standards. D. Canadian standards on quality control.
d)
The most authoritative requirements for public accountants performing financial statement audits in Canada are the
A. standards used by the client. B. industry specific standards. C. assurance guidelines. D. CPA Canada Handbook requirements.
d)
For a CPA working as a sole practitioner or working in a small public accounting office, the provincial practice inspectors will likely come to review audit files
A. every five years. B. every year. C. every three years. D. never: files are not reviewed in person.
c)
CAS 200 explains that as part of general qualifications and conduct, the auditor should be professionally competent. Which of the following help the auditor achieve competence?
A.
having an objective state of mind and independence from the client
B.
using due care in the performance of all aspects of auditing
C.
conducting the audit using a risk-based approach and being skeptical
D.
having formal education and practical experience, and pursuing continuing education
d)
A PA firm is conducting an audit of a public company that has operations in both Canada and Finland. There is a conflict between ISAs (International Statements on Auditing) and CASs (Canadian Auditing Standards) for the foreign operations that will be consolidated with the Canadian operations. Which reporting standards should the PA firm follow?
A. Canadian reporting standards B. the best of Canadian or international standards C. Finnish reporting standards D. international financial reporting standards
d)
Communicating the findings of the audit in accordance with CASs is a requirement of which category of generally accepted auditing standards?
A. general B. performance C. reporting D. quality
c)
The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies’ auditors and develop audit standards. The impact of this requirement in Canada was
A.
additional training requirements for becoming an auditor.
B.
the creation of the CPAB to oversee Canadian audit professionals.
C.
the creation of new auditing standards to ensure better quality control for audits.
D.
revision to the rules of professional conduct for CPAs.
b)
The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests
A. with the auditor. B. equally with management and the auditor. C. with the internal audit department. D. with management.
d)
The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to
A.
be an insurer of the fairness in the statements.
B.
provide reasonable assurance that material misstatements will be detected.
C.
be equally responsible with management for the preparation of the financial statements.
D.
be a guarantor of the fairness in the statements.
b)
Your PA firm has just obtained a new client and you have been assigned the task of preparing the knowledge of business section of the file. Which of the following best describes the process of gathering the knowledge of business for a client?
A.
gathering information about the industry and regulatory environment
B.
examining the legal expenses file for possible regulatory infractions
C.
understanding the client’s business, industry, and regulatory environment
D.
discussing processes and business objectives with company employees
c)
What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?
A. call the police B. consult with a lawyer C. inform the Board of Directors D. resign from the audit
b)
Often, numerous classes of transactions affect the ending balance of a particular general ledger account. This is handled during the audit engagement by
A.
testing only the ending balance, as this is the significant amount on the financial statements.
B.
using a combination of assurance for each class of transactions and for the ending balance.
C.
obtaining a high level of assurance for at least one of the transaction types.
D.
ensuring that tests are conducted for each class of transactions.
b)
The reason auditors accumulate evidence is to
A.
defend themselves in the event of a lawsuit.
B.
justify the conclusions they have otherwise reached.
C.
satisfy the requirements of the relevant provincial securities regulations.
D.
enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.
d)
Which of the following is an example of fraudulent financial reporting (management fraud)?
A.
the purchasing manager submitting travel expenses twice (i.e. duplicate payment)
B.
intentional overstatement of sales to increase reported earnings
C.
managers or others taking bribes from accounts payable suppliers
D.
a clerk taking cash at the time a sale is made and not recording the sale
b)
There is agreement within the auditing profession and the courts that the auditor is
A.
an insurer but not a guarantor of financial statements.
B.
a guarantor but not an insurer of financial statements.
C.
both a guarantor and an insurer of financial statements.
D.
not a guarantor or insurer of financial statements.
d)
CAS 330, the auditor’s response to assessed risks, explains that the auditor needs to link completed audit work to the assessed risks at the assertion level and
A.
perform substantive procedures in areas where there is a high risk of fraud.
B.
ensure that they test the entire population for areas that are considered to have a high risk of errors.
C.
have the reviewing partner sign off on the assessed risk.
D.
document the conclusions and results of the audit procedures.
d)
Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
A.
no assurance that they will be detected.
B.
the same reasonable assurance provided for other items.
C.
assurance that they will be detected, if highly material.
D.
assurance that they will be detected, if material
a)
The requirement for an attitude of skepticism means that the auditor should
A.
not be blind to evidence that suggests the documents, books, or records have been altered or are incorrect.
B.
perform additional tests of controls to increase the probability of discovering fraud or errors.
C.
plan and conduct the audit with an attitude of distrust in management.
D.
not consider management’s explanation as evidence on any subject.
a)
During the audit process steps, when will the auditor conduct tests of controls?
A. if the auditor plans to rely upon them B. when a substantive audit approach is selected C. when there are low risks of material error D. when there are poor internal controls
a)
If the auditor were responsible for making certain that all the assertions of management in the statements were correct,
A. audits would not be economically practical. B. audits would be much easier to complete. C. bankruptcies would be reduced to a very small number. D. bankruptcies could no longer occur.
a)
The purpose of the financial statement audit is to express an opinion on
A. the accuracy of the financial statements. B. the annual report. C. the balance sheet and income statement. D. the fairness of the financial statements.
d)
The audit process has seven categories of audit phases: the first two categories of the audit process are?
A. client risk profile and plan the audit B. client acceptance and audit planning C. preplanning and tests of control D. preplanning and further audit procedures
b)
Independence is assessed in the eyes of external users and regulators. Which of the following is a tool that helps the auditor identify whether the auditor is independent for a particular audit engagement?
A.
an audit risk model assessment for each engagement
B.
professional skepticism when assessing control risks
C.
completion of independence forms at time of employment
D.
an independence threat analysis
d)
An investor suing an auditor for not discovering that the financial statements of a company were materially misstated is an example of
A. fiduciary duty. B. third party liability. C. liability to client under common law. D. criminal liability.
b)
The confidential relationship will be violated if, without the client’s permission, the public accountant provides working papers about a client to
A.
an investigative or disciplinary body of the relevant provincial institute that is conducting a review of the public accountant’s practice.
B.
the relevant provincial institute as part of a practice inspection.
C.
a court of law that subpoenas them.
D.
another public accounting firm that has just purchased the public accountant’s entire practice
d)
Which of the following lawsuits resulted in a decision that shareholders could not sue the auditors for the loss in the value of their shares?
A. Haig v. Bamford et al.(1976) B. Hercules Management Ltd. v. Ernst & Young (1997) C. Ultramers Corporation v. Touche (1931) D. United States v. Anderson (2002)
b)
When should a PA assess the five threats to independence with respect to an audit engagement?
A.
after a discussion with the Board of Directors
B.
after the completion of this year’s audit, before starting the next engagement
C.
after signing the engagement letter and before commencing field work
D.
when deciding to accept a client or whether to continue an existing engagement
d)
PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review engagement. The financial statements are used primarily by the shareholders, management, and by the bank. Recently, an employee was fired for stealing computer parts, primarily chips and boards that could easily be placed in a pocket. MDL is suing PA because they believed that audit procedures, such as counting inventory, would have detected this fraud. What is PA’s best defence?
A. contributory negligence B. absence of causal connection C. lack of negligence D. duty of care not required
d)
When the users of financial statements have confidence in the independence of the public accountant, it is referred to as independence in
A. fact. B. total. C. conduct. D. appearance.
d)
The leading precedent-setting case in third-party liability was a 1931 U.S. case, Ultramares v. Touche. What is the key aspect of this case?
A.
There is no general auditor liability to shareholders, since the loss of equity was suffered by the company.
B.
To succeed, claimants must be foreseeable users of the audited financial statements that are part of the claim process.
C.
Ordinary negligence is insufficient for liability to third parties because of lack of privity of contract.
D.
The auditor must have actual knowledge of the users of the financial statements to establish privity.
c)
A bank sues an auditor after having lost a significant amount of money from a loan granted to a client based on the financial statements that contained a material error. The source of the legal liability is
A. liability under provincial securities law. B. known third party liability. C. criminal liability. D. client liability.
b)
Formal frameworks have been developed to help people resolve ethical dilemmas. After obtaining the relevant facts and identifying the ethical issues from the facts, what is the next step in the five-step ethical framework described in the chapter?
A.
Identify who is affected and how each is affected.
B.
Identify the alternatives available to the person who must resolve the dilemma.
C.
Decide on the appropriate action to be taken in resolving the ethical dilemma.
D.
Identify the likely consequences of actions that will be taken.
a)
”Independence” in auditing means
A. not being financially dependent on the client. B. being an advocate for the client. C. impartiality in performing professional services. D. remaining aloof from the client.
c)
When public accountants are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in
A. total. B. conduct. C. appearance. D. fact.
d)
A public accountant would be facing an ethical dilemma when deciding whether or not to
A.
accept an invitation from the client to go golfing in order to maintain a good client relationship.
B.
participate in a charitable activity organized by the client.
C.
overlook a nonminusmaterial error in the financial statements.
D.
overlook a material overstatement of revenues to maintain a good client relationship.
d)
Ethical dilemmas occur when
A.
a choice must be taken about appropriate behaviour.
B.
you know what you want to do but the rules say otherwise.
C.
a person chooses to act in his/her own interest.
D.
businesses disregard the laws and engage in illegal behaviour.
a)
The Ultramares doctrine is that ordinary negligence is insufficient for liability of auditors to third parties because of the lack of privity of contract between the third party and the auditor. What type of behavior on the part of an auditor would result in liability to more general third parties according to this doctrine?
A.
completing work in accordance with a contract that was signed with the client.
B.
fraud or constructive fraud with respect to the working papers.
C.
conducting an audit engagement when a review engagement had been contracted.
D.
deliberate misstatement of the financial statements by management remaining undetected.
b)
