Auditing midterm 3
Chapter 17
1) The general cash account is considered significant in almost all audits
A) where the ending balance is material.
B) where either the beginning or ending balance is material.
C) even when the ending balance is immaterial.
D) except those of not-for-profit organizations.
2) From an audit perspective, an imprest bank account at a client can
A) require less time for the audit of general cash.
B) increase audit risk.
C) result in an increase in control risk.
D) improve client internal controls.
3) A branch bank account is helpful for
A) limiting the impact of a fraud.
B) improving internal controls.
C) empowering the different branches of the company.
D) building public relations in local communities.
4) When are short-term investments that are readily converted to cash included in the
cash account in the financial statements?
A) if they are held in local currency (i.e., Canadian dollars)
B) when there is little risk of change in value
C) when they are under the control of the treasury department
D) if interest has been paid up to the year end date
B
5) There is a greater risk of defalcation for cash than for other types of assets because
A) it is easier to steal.
B) most other assets must be converted to cash to make them usable.
C) companies usually have weak internal controls surrounding cash.
D) most employees have access to cash.
B
6) The auditor has examined the financial statements, particularly the cash flow
statement, and the notes to the financial statements to determine that all relevant
information is presented clearly. Which audit assertion is associated with this audit test?
A) classification
B) allocation
C) understandability
D) valuation
C
7) During the audit of cash, the focus of the audit is to
A) do substantive tests of payments for supplies.
B) conduct control tests of sales transactions.
C) verify the bank reconciliation.
D) conduct control tests over payments.
C
8) Which of the following misstatements could be detected as part of the tests of a bank
reconciliation?
A) payment of interest to a related party at an incorrect rate
B) exclusion of mortgage interest receivable from the balance sheet
C) deposits recorded as cash receipts at the end of year, but included as outstanding
deposits (deposits in transit)
D) a defalcation of cash by interception of collections before they are recorded
C
9) A significant part of the total audit that relates to cash is the audit of
A) physical inventory on hand using an inventory count.
B) assessment of the accounting policies in use.
C) substantive testing of the ending accounts payable balance.
D) sales and collections, payables payments, and payroll payments.
D
10) Certain types of misstatements that affect cash may be detected in the audit of tests
of controls. Which of the following misstatements would be detected in the audit of the
sales and collection cycle?
A) a defalcation of cash hidden by an unauthorized write-off of a bad debt
B) accidental duplicate payment of a vendor's invoice
C) payment for raw materials that were not received
D) payment to an employee at an incorrect wage rate
A
11) Certain types of misstatements that affect cash may be detected in the audit of tests
of controls. Which of the following misstatements would be detected in the audit of the
acquisition and payment cycle?
A) failure to bill a customer for goods shipped
B) billing a customer at the incorrect price
C) improper reimbursement of an officers' personal expenses
D) paying an employee at the incorrect wage rate
C
12) Which of the following misstatements in the payroll cycle could be detected during
the audit of payroll transactions (but would not be discovered as part of the audit of the
bank reconciliation)?
A) failure to include outstanding payroll cheques on the outstanding cheque list
B) overpayment of Receiver General payments received after the year end but recorded
as cash receipts in the current year
C) unclaimed payroll cheques recorded as a deposit near the end of the year, but
reconciled as deposits in transit
D) payment to fictitious employees that had been set up by the payroll supervisor
3) Toasted Tomato is a restaurant in Ottawa. You walk by this restaurant frequently and
noticed it is usually empty. When you came in to do the audit, you were surprised to see
that they had a large cash balance and high sales. Toasted Tomato might
A) have a going concern issue.
B) be engaging in money laundering.
C) have lower business risk than initially anticipated.
D) have weak internal controls.
B
14) Sandra is analyzing the cash cycle of her audit client. Which of the following could
indicate a liquidity problem?
A) obsolete inventory
B) high level of inventory
C) inventory on consignment
D) backordered inventory
A
15) Which of the following statements best describes the position of cash on the
balance sheet at most organizations that utilize effective cash management practices?
A) Cash is usually immaterial.
B) Cash is usually highly material.
C) Cash is usually dispersed among many different accounts.
D) Cash is usually affected by many different capital asset accounts.
A
16) Because cash is the most desirable asset for people to steal, it has a higher
A) inherent risk.
B) control risk.
C) detection risk.
D) materiality.
A
17) Which of the following is an essential internal control in the cash cycle?
A) use of two signatures on payroll cheques and payables cheques
B) independent receipt of the bank statement from the bank
C) careful accounting of the continuity of cheques returned from the bank
D) independent preparation of bank reconciliations
D
18) What is an important benefit of independent preparation of bank reconciliations?
A) an opportunity to independently check that cheques have two signatures
B) the client being able to check that the bank is processing transactions correctly
C) the ability to internally verify cash receipt and disbursement transactions
D) the best time to carefully account for cheques issued
C
19) What is the best way to prevent potential alteration, deletion, or addition of
cancelled cheques, duplicate deposit slips, or other documents provided with the bank
statement?
A) Have the bank statements be provided unopened to an independent reconciler.
B) Have the person responsible for recording cash receipts do the bank reconciliation.
C) Have the signing officer(s) review the bank reconciliation.
D) Have the bank statements provided to the accounts payable supervisor.
A
20) Which of the following situations would indicate a susceptibility to fraud that pertains
to theft of cash?
A) lack of segregation of duties between the handling of cash and the recording of cash
B) cash disbursement cheques requiring only one authorizing signature
C) payroll rates being approved by the corporate controller
D) customer master file changes being handled by the controller's executive assistant
A
21) Electronic data interchange (EDI) represents the electronic transfer of
A) funds.
B) business documents.
C) data between accounting systems of the company's entities.
D) information between the bank and the company.
B
22) The most important internal control for petty cash is
A) the use of an imprest fund that is the responsibility of one individual.
B) keeping it in a safe or locked drawer.
C) keeping the amount of cash to a minimum.
D) accessibility so that cheques won't have to be written for small amounts.
A
23) Which of the following is a common analytical procedure that may detect
misstatements in cash?
A) calculation of inventory turnover and gross profit
B) review of amounts included in the earnings-per-share calculations
C) comparison of outstanding cheques and deposits in transit with the prior year bank
reconciliation
D) comparison of gross sales on a month by month basis with the prior year
C
24) Bank reconciliations are normally verified on a 100-percent basis. Testing the
reasonableness of the cash balance is therefore
A) less important than for most other audit areas.
B) more important than for other audit areas.
C) equally as important as other audit areas.
D) less important than for the audit of other assets but more important than the audit of
liabilities.
A
25) The starting point for the verification of the balance in the general bank account is to
obtain
A) the client's December bank statement and reconcile it.
B) a bank reconciliation from the client.
C) a cutoff bank statement directly from the bank.
D) the client's cash account balance from the general ledger.
B
26) After the bank confirmation has been received by the auditor, the auditor should
A) recalculate the bank reconciliation in its entirety.
B) verify that cash cutoff was correct for that bank account.
C) trace the general ledger cash account balance to the amount confirmed.
D) trace the bank reconciliation cash amount to the amount confirmed.
D
27) A partial-period bank statement and the related cancelled cheques, duplicate
deposit slips, and other documents included in bank statements, mailed by the bank
directly to the public accounting firm's office, is called a
A) four-column proof of cash.
B) bank statement.
C) cutoff bank statement.
D) short-period bank statement.
C
28) The reason for testing the client's bank reconciliation is to verify whether the client's
recorded bank balance is the same amount as the actual cash in the bank, except for
deposits in transit, cheques outstanding, and other reconciling items. The information
needed to complete the tests of the reconciliation are provided by the
A) client's journals and ledgers for the year under audit.
B) cutoff bank statement.
C) client's journals and ledgers for the subsequent year.
D) cancelled cheques for the year under audit.
B
29) An auditor who is engaged to examine the financial statements of a business
enterprise will request a cutoff bank statement primarily in order to
A) verify the cash balance reported on the bank confirmation inquiry form.
B) verify reconciling items on the client's bank reconciliation.
C) detect lapping.
D) detect kiting.
B
30) In an effort to satisfy the completeness objective, the auditor could perform which of
the following test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding cheques to subsequent period bank statements.
C) Obtain and test a cutoff bank statement.
D) Review financial statements to make sure that material savings accounts and
certificates of deposit are disclosed separately.
C
31) If the auditor does not obtain a cutoff statement directly from the bank for testing, an
alternative procedure that the auditor can use is to
A) account for a continuity of cheques that covers the year end.
B) reconcile cash paid to the cash disbursements journal for the last month of the year.
C) reconcile cash received to the cash receipts journal for the last month of the year.
D) prove the bank statement for the period after the year end.
D
32) The test of details for cash balances procedure that requires the auditor to trace the
unadjusted book balance on the reconciliation to the general ledger is an attempt to
satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) accuracy.
D
33) The audit procedure that requires the auditor to record the last cheque number used
on the last day of the year and subsequently trace to the outstanding cheques and the
cash disbursements journal is performed to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) allocation.
D
34) During his examination of a January 19, 2019 cutoff bank statement, an auditor
noticed that the majority of cheques listed as outstanding at December 31, 2018 had not
cleared the bank. This would indicate
A) a high probability of lapping.
B) a high probability of kiting.
C) that the cash disbursements journal had been held open past December 31, 2018.
D) that the cash disbursements journal had been closed prior to December 31, 2018.
C
35) The auditor has determined exchange rates used by the client to present cash in
foreign currencies and has recalculated the amounts. Which audit assertion is
associated with this audit procedure?
A) existence
B) valuation
C) allocation
D) classification
B
36) When examining the bank reconciliation for the imprest payroll account, it is normal
for the only reconciling item to be
A) outstanding cheques.
B) direct deposits from customers.
C) outstanding deposits.
D) corrections to payroll amounts.
A
37) After testing the bank reconciliation and inspecting the cutoff bank statement
received from the bank, the auditor has determined that there are two outstanding
cheques from the list on the bank reconciliation that have still not cleared the bank. The
auditor's next step should be to
A) trace the details of the two cheques to the cash disbursements journal.
B) trace the details of the two cheques to their associated expense accounts.
C) reperform the calculations in the bank reconciliation.
D) compare the total of the bank reconciliation to the bank confirmation.
A
38) Stella is auditing the electronic receipts and payments. The extent of her audit work
conducted on the bank reconciliation will
A) be less extensive than if the company did not engage in electronic receipts and
payments.
B) be more extensive than if the company did not engage in electronic receipts and
payments.
C) depend on the assessed quality of internal controls.
D) be significantly diminished if Stella can determine that the receipts and payments
come from a reputable bank with proper internal controls.
C
40) A major consideration in the audit of the general cash balance is the possibility of
fraud. The auditor must extend his or her procedures in the audit of year-end cash to
determine the possibility of a material fraud when there are
A) large cash balances at the end of the year.
B) large cash receipts and disbursements during the year.
C) no imprest accounts used for payroll.
D) material internal control weaknesses.
D
41) Jane works for Middle Co. She is responsible for opening the mail and preparing the
bank deposit for cheques received, which she then gives to the owner. After the owner
has deposited the cash, he gives Jane the stamped bank deposit slip, which she uses
to record the cash received in the accounts receivable records. How does this allocation
of responsibilities affect the audit process?
A) The auditor should increase control testing with respect to the accuracy assertion.
B) The auditor should do substantive tests (compare the deposit slips to the accounts
receivable records).
C) The auditor should consider the possibility of material fraud.
D) The auditor should increase control testing with respect to the completeness
assertion.
C
42) What is the purpose of an extended test of the bank reconciliation?
A) to verify whether all transactions included in the journals for the last month of the
year were correctly allocated to the bank reconciliation
B) to compensate for material weaknesses in internal control with respect to
segregation of duties
C) to increase detection risk for the audit of cash
D) to verify whether specific transactions that flowed through the cash account were
correctly recorded
A
43) Which of the following audit tests pertains to the accuracy assertion?
A) prepare proof of cash
B) test a cutoff bank statement
C) examine minutes and loan agreements
D) read the notes to the financial statements
A
44) Under what circumstances would an auditor prepare a proof of cash?
A) When the client has material internal control weaknesses in cash.
B) When control risk is set at minimum.
C) When inherent risk in cash is considered to be low.
D) When an enterprise resource system is in use for processing of cash transactions.
A
45) A four-column proof of cash can be performed for
A) one or more interim months.
B) the entire year.
C) the last month of the year.
D) any specified time period for which bank statements are available and which the
auditor chooses to designate.
D
46) The auditor uses a proof of cash to determine whether
A) internal controls over cash have been functioning effectively in the period under
audit.
B) all recorded cash receipts were deposited and whether all recorded cash
disbursements were paid by the bank.
C) accounts receivable was properly recorded and whether cash receipts transactions
were properly recorded.
D) accounts payable was properly recorded and whether cash disbursement
transactions were properly recorded.
B
47) What type of audit test is a proof of cash?
A) test of control
B) test of details
C) dual-purpose
D) analytical review
C
48) The process of transferring money from one bank account to another and
improperly recording the transaction in both accounts is called
A) lapping.
B) embezzling.
C) kiting.
D) a scam.
C
49) Testing to ensure that bank transfers are recorded in both the receiving and
disbursing banks helps to detect evidence
A) that would reduce inherent risk to a minimum.
B) associated with an attempt to conceal a theft of cash.
C) that increases reliability with respect to the accuracy of the transfer schedule.
D) that would warrant decreasing control risk to a minimum.
B
51) On the last day of the fiscal year, the cash disbursements clerk drew a company
cheque on bank A and deposited the cheque in the company account in bank B to cover
a previous theft of cash. The disbursement had not been recorded. The auditor will best
detect this form of kiting by
A) comparing the detail of cash receipts as shown by the cash receipts records with the
detail on the confirmed duplicate deposit tickets for three days prior to and subsequent
to year-end.
B) preparing from the cash disbursements book a summary of bank transfers for one
week prior to and subsequent to year-end.
C) examining the composition of deposits in both bank A and B subsequent to year-end.
D) examining paid cheques returned with the bank statement of the next account period
after year-end.
D
52) Disbursements on the bank transfer schedule should be correctly included in or
excluded from year-end bank reconciliations as outstanding cheques. Understating
outstanding cheques on the bank reconciliation indicates
A) the possibility of kiting.
B) a cutoff error in the bank account.
C) an understatement of the bank balance.
D) an increase in inherent risks associated with cash.
A
53) What audit objective is associated with the comparison of disbursement and receipt
information on a bank transfer schedule to the cash disbursements and cash receipts
journals?
A) accuracy
B) classification
C) occurrence
D) completeness
A
54) In addition to the possibility of kiting, inaccurate handling of bank transfers could
result in
A) a misclassification between cash and accounts receivable.
B) an incorrect balance in the accounts receivable account.
C) a misclassification between cash and accounts payable.
D) an incorrect balance in the bank loan account.
C
55) Petty cash tests can ordinarily be performed at any time during the year, but as a
matter of convenience they are typically done
A) on the balance sheet date.
B) near the end of the field work.
C) at the same time as the observation of inventory, since both auditor and client must
be present at that time.
D) on any interim date.
D
50) On a bank transfer schedule, if a cash disbursement was recorded in the current
fiscal year and the receipt in the subsequent fiscal year, this might be
A) the best way to record this type of transaction.
B) an indication of increased inherent risk with respect to cash.
C) an attempt to cover a cash shortage.
D) an indication of an error in recording information by the bank.
C.
Chapter 18
1) Which level of risk does the auditor normally assign to the presentation and
disclosure-related assertion of completeness for contingent liabilities and subsequent
events?
A) low risk for inherent risks that required information may not be disclosed in the notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high risk that all required information may not be disclosed in the notes
D
2) Which of the following is a required condition for a contingent liability to exist?
A) There is a potential liability to an employee of the client.
B) The amount of the future payment is known.
C) The liability resulted from known events.
D) The outcome has been resolved by a current event.
C
3) What situation represents a contingent liability for a company?
A) A candy company's monthly production requires 1000 kg of chocolate. The company
entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over
the next six months at the market price.
B) A bike company learned that a racer using its bike was seriously injured in an
accident on December 30, 2018, as the front wheel of the bike was released as the
result of a manufacturing defect. The company had not received a claim at December
31, 2018, but management expects to receive a claim.
C) A restaurant received a $10 000 claim from a customer for emotional damages as a
result of poor service. The legal counsel of the restaurant indicated that the claim was
not supported and there was less than a 5% chance that the restaurant would have to
pay.
D) A hotel chain was found guilty by a judge for not refunding customers who had online
reservations. The hotel chain will have to pay $50 000 to various customers in the
following year.
B
4) When the proper disclosure in the financial statements of material contingencies is
through footnotes, the footnote should describe the nature of the contingency to the
extent it is known and
A) the auditor's opinion as to the expected outcome.
B) the opinion of legal counsel or management as to the expected outcome.
C) an estimate of the amount or a statement that the amount cannot be estimated.
D) the steps the client has taken to ensure that it doesn't recur.
C
5) If the amount of a probable loss on a contingent liability is not determinable, the
liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
B
6) If the amount of a probable loss on a contingent liability cannot be estimated but the
event is likely, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
B
7) If a potential loss on a contingent liability is likely and the amount of the loss can be
reasonably estimated, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
A
8) Which of the following scenarios regarding a lawsuit filed against a client by a third
party would qualify as a "contingent liability"?
A) A lawsuit has been filed but not yet resolved.
B) A lawsuit was filed and concluded with the client winning.
C) A lawsuit was filed and concluded with a third party winning an award of $100 000,
but the client hasn't paid yet.
D) A lawsuit was filed and concluded with a third party winning an award of $100 000,
which the client paid after the balance sheet date but before the statements were
issued.
A
9) If a potential loss on a contingent liability is unlikely and the event will not likely have
a significant adverse financial effect, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
C
10) IFRS uses specific terminology to refer to the likelihood of the occurrence of an
organizational event. Which of the following would need to provide for the recognition of
the obligation (i.e. the financial statements adjusted)?
A) outflow of resources is required, but cannot be reliably estimated
B) probable that an outflow of resources is required
C) likelihood is remote
D) amount is yet to be confirmed
B
11) IFRS uses specific terminology to refer to the likelihood of the occurrence of an
organizational event. Which of the following would require note disclosure only?
A) likely to occur and the amount can be estimated
B) possible that an outflow of resources is not required
C) likelihood is remote
D) amount is yet to be confirmed
D
12) The auditor's responsibility with regards to contingent liabilities is to
A) identify the appropriate accounting treatment.
B) decide on the appropriate accounting treatment.
C) prepare note disclosure.
D) evaluate the accounting treatment of known contingent liabilities.
D
13) When auditing contingent liabilities, the primary objective at the initial stage of the
tests is to determine
A) the materiality of any liability.
B) what constitutes adequate disclosure of the liability.
C) the likelihood of the liability.
D) the existence of the liability.
D
14) Which of the following procedures might be useful in discovering a contingent
liability for a lawsuit that management is intentionally neglecting to disclose?
A) inquiries (orally and in writing) of management
B) analyzing legal expense and reviewing invoices and statements from outside legal
counsel
C) reviewing current and previous years' Canada Revenue Agency correspondence
D) obtaining a letter of representation from management that it is not aware of any
undisclosed contingent liabilities
B
15) Which of the following substantive tests would the auditor conduct as a search for
contingent liabilities?
A) select an attribute sample of legal expenses for matching to invoices
B) select a dollar unit sample of legal expenses for matching to invoices
C) inspect legal expense invoices and perform a census test of legal expenses
D) review a sample of legal invoices, looking for appropriate authorization for payment
C
16) An agreement that commits the firm to a set of fixed conditions in the future
regardless of what happens to profits or the economy as a whole is a definition of a
A) contingent liability.
B) potentially hazardous agreement.
C) commitment.
D) conditional contract.
C
17) What audit approach is used to search for unknown commitments?
A) include as part of the search for subsequent events
B) conduct with substantive tests associated with the cutoff assertion
C) perform as part of the audit of each cycle or audit area
D) include with the legal letter sent to lawyers
C
18) Management furnishes the auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor's primary means of initiating action to
corroborate such information?
A) Request that the client's lawyers undertake a reconsideration of matters of litigation,
claims, and assessments with which they were consulted during the period under
examination.
B) Request that the client's management send a letter of inquiry to those lawyers with
whom management consulted concerning litigation, claims, and assessments.
C) Request that the client's lawyers provide a legal opinion concerning the policies and
procedures adopted by management to identify, evaluate, and account for litigation,
claims, and assessments.
D) Request that the client's management engage outside lawyers to suggest wording for
the text of a footnote explaining the nature and probable outcome of existing litigation,
claims, and assessments.
B
19) There are two categories of lawsuits: outstanding (or asserted) claims, and
A) possible or unasserted claims.
B) disputed claims among several parties.
C) settled claims.
D) claims that could result in material misstatements.
A
20) The standard letter of confirmation sent to the client's legal counsel should be
prepared on
A) the auditor's stationery and signed by an audit partner.
B) the lawyer's stationery and signed by the lawyer.
C) the client's stationery and signed by a company official.
D) plain paper and be unsigned.
C
21) What action will a lawyer likely take if they have information about a lawsuit that was
not mentioned by the client?
A) They will tell the auditor the number of suits and request the auditor to contact the
client.
B) They will request the client to notify the auditor about the lawsuit.
C) They will not mention the lawsuits since they are confidential.
D) They will refuse to answer the legal letter, since it is incorrect.
B
22) The standard letter of confirmation from a client's legal counsel should ask for
information about the period of time
A) covered by the client's financial statements.
B) covered by the client's financial statements plus the preceding year.
C) covered by the client's financial statements plus the succeeding year.
D) approximately up to the date of the auditor's report.
D
23) The auditor has sent inquiry letters to all of the client's law firms. Two law firms
stated that the client was unlikely to win the lawsuits in question, whereas the client had
said the opposite. What action should the auditor take?
A) Ask management for invoices supporting the omitted lawsuits.
B) Request a meeting with management and the respective law firms.
C) Ask the law firms to provide additional details with respect to the lawsuits.
D) Change control risk to maximum and increase substantive testing.
B
24) You sent a legal letter to a lawyer who had invoiced your client. The lawyer replied
that "his practice consists of conducting real estate closings, and so he could not
respond to the letter." What impact does this have on the financial statement audit?
A) There is no impact upon the financial statement audit.
B) The audit opinion will need to be qualified.
C) The auditor will need to provide a denial of opinion.
D) Additional information is needed by reference to legal invoices from this lawyer.
A
25) If a lawyer refuses to provide the auditor with information that is within the lawyer's
jurisdiction and may directly affect the fair presentation of financial statements about
material existing lawsuits (asserted claims) or unasserted claims, the audit report would
have to be
A) an adverse opinion.
B) a qualified opinion.
C) an unqualified opinion with an explanatory paragraph.
D) modified to reflect the lack of available evidence (i.e., scope limitation).
D
26) The auditor has a responsibility to review transactions and activities occurring after
the year-end to determine whether anything occurred that might affect the valuation or
disclosure of the statements being audited. The auditing procedures required to verify
these transactions are commonly referred to as the review for
A) contingent liabilities.
B) subsequent year's transactions.
C) late unusual occurrences.
D) subsequent events.
D
27) The auditor's responsibility for "reviewing the subsequent events" of a client is
normally limited to the period of time beginning with the
A) balance sheet date and ending with the date of the auditor's report.
B) start of the fiscal year under audit and ending with the balance sheet date.
C) start of the fiscal year under audit and ending with the date of the auditor's report
D) balance sheet date and ending with the date the registration statement becomes
effective.
A
28) The following events all occurred after the balance sheet date (6/30/17) but prior to
the auditor's report (9/10/17). Which one would require an adjustment to the account
balances as of 6/30/17?
A) client will market a new series of equity securities ($2 million of preferred shares) on
8/1/17
B) unused equipment on the books at 6/30/17 for $100 000 was disposed of 7/31/17 for
$60 000
C) securities costing $30 000 held for temporary investment on 6/30/17 declined in
value by one-third when the market took a plunge on 8/15/17
D) inventory valued at $100 000 on 6/30/17 was destroyed in a fire on 8/1/17
B
29) Whenever subsequent events are used to evaluate the amounts included in the
statements, care must be taken to distinguish between conditions that existed at the
balance sheet date and those that came into being after the end of the year. The
subsequent information should not be incorporated directly into the statements if the
conditions causing the change in valuation
A) did not take place until after year-end.
B) took place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.
A
30) Subsequent events affecting the valuation of assets ordinarily will require
adjustments of the financial statements under examination because such events
typically represent the
A) culmination of conditions that existed at the balance sheet date.
B) final estimates of losses relating to casualties occurring in the subsequent events
period.
C) discovery of new conditions occurring in the subsequent events period.
D) preliminary estimate of losses relating to new events that occurred subsequent to the
balance sheet date.
C
31) A client has a calendar year-end. Listed below are four events that occurred after
December 31. Which of these subsequent events might result in adjustment of the
December 31 financial statements?
A) adoption of accelerated depreciation methods
B) write-off of a substantial portion of inventory as obsolete
C) collection of 90% of the accounts receivable existing at December 31
D) sale of a major subsidiary
B
32) Which of the following material events occurring subsequent to the balance sheet
date would require an adjustment to the financial statements before they could be
issued?
A) sale of long-term debt or capital stock
B) loss of a plant as a result of a flood
C) major purchase of a business that is expected to double the sales volume
D) settlement of litigation in excess of the recorded liability
D
33) A client acquired 25% of its outstanding capital stock after year-end and prior to
completion of the auditor's fieldwork. The auditor should
A) advise management to adjust the balance sheet to reflect the acquisition.
B) issue pro forma financial statements giving effect to the acquisition as if it had
occurred at year-end.
C) advise management to disclose the acquisition in the notes to the financial
statements.
D) disclose the acquisition in the opinion paragraph of the auditor's report.
C
34) The audit procedures for the subsequent events review can be divided into two
categories: 1) procedures normally integrated as a part of the verification of year-end
account balances, and 2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures would be in the first category?
A) Make inquiries of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Examine subsequent period sales and purchases transactions to determine whether
the cutoff is accurate.
D) Review the minute book to determine the existence of any transaction related to year
1.
C
35) The audit procedures for the subsequent events review can be divided into two
categories: 1) procedures normally integrated as a part of the verification of year-end
account balances, and 2) those performed specifically for the purpose of discovering
subsequent events. Which of the following procedures would be in the second
category?
A) Examine subsequent-period sales and purchases transactions to determine whether
the cutoff is accurate.
B) Correspond with lawyers.
C) Test the collectability of accounts receivable by reviewing subsequent period cash
receipts.
D) Compare the subsequent period purchase price of inventory with the recorded cost
as a test of lower-of-cost-or-market valuation.
B
36) Inquiries of management are used to help identify subsequent events. To help
obtain meaningful answers
A) the standard firm checklist should be followed.
B) these inquiries must be conducted with the proper client personnel.
C) the inquiries should be conducted by senior audit personnel.
D) they should be asked after the effective date of the audit report.
B
37) Kendra is inquiring about subsequent events with regards to lawsuits and contingent
claims. To obtain a meaningful answer, Kendra should hold the enquiry with
A) in-house legal counsel.
B) the accountant in charge of the legal liability reconciliation.
C) the mail clerk.
D) the assistant controller.
A
38) As part of the review for subsequent events, the auditor will review financial
statements prepared after the balance sheet date. The purpose of this review is to
examine changes after year end and to look for
A) errors in capital versus maintenance charge allocations that occurred after the year
end.
B) subsequent payments to accounts payable and long term debt.
C) subsequent receipts in accounts receivable, especially for the larger customers.
D) changes in the business relative to results for the same period in the year under
audit.
D
39) As part of the review for subsequent events, the auditor will review financial
statements prepared after the balance sheet date. The statements should be discussed
with management to determine whether they
A) were approved by the controller prior to your review.
B) are mathematically correct, including calculation of depreciation.
C) are prepared on the same basis as the current-period statements.
D) were completed on a comparative basis, showing the last three years.
C
40) The primary objective of analytical procedures used in the final review stage of an
audit is to
A) obtain evidence from details tested to corroborate particular assertions.
B) identify areas that represent specific risks relevant to the audit.
C) assist the auditor in looking for potential material misstatements.
D) satisfy doubts when questions arise about a client's ability to continue operations.
C
41) CAS 570 - Going Concern, requires that the auditor evaluate management's
assessment of the ability of the entity to continue as a going concern based on
A) inquiry with management.
B) the opinion of the legal counsel of the company.
C) the liquidity and solvency ratios of the firm.
D) the evidence collected throughout the audit.
D
42) At the completion of the audit, management is asked to make a written statement
that it is not aware of any undisclosed contingent liabilities. This statement would
appear in the
A) management letter.
B) representation letter.
C) engagement letter.
D) letters testamentary.
B
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43) Which of the following auditing procedures is ordinarily performed last?
A) reading of the minutes of the directors' meetings
B) confirming accounts payable
C) obtaining a client representation letter
D) testing of the purchasing function
C
44) Refusal by a client to prepare and sign the representation letter would require a(n)
A) qualified opinion as to scope limitation or a disclaimer of opinion.
B) adverse opinion or a denial of opinion.
C) qualified opinion as to accounting treatment departure or an adverse opinion.
D) unqualified opinion with an explanatory paragraph.
A
45) One of the purposes of a client representation letter is to
A) reduce the amount of audit procedures performed by the auditor.
B) document the responses from management to inquiries about various aspects of the
audit.
C) serve as audit evidence for the accuracy of the contingent liabilities.
D) reduce the detection risk.
B
46) A client representation letter is a written statement from a non-independent source
and therefore
A) cannot be regarded as reliable evidence on its own.
B) can be regarded as reliable evidence only if the auditor finds strong internal controls.
C) can be regarded as reliable evidence if the high-level corporate officials who sign it
are trustworthy.
D) needs to be confirmed by an outside, independent source such as a financial
institution or law firm.
A
47) An important part of evaluating whether the financial statements are fairly stated is
summarizing the misstatements uncovered in the audit. Whenever the auditor uncovers
misstatements that are in themselves material,
A) entries should be proposed to the client to correct the statements.
B) no entries need to be made but footnote disclosure is required.
C) it is necessary to combine individually immaterial misstatements with the material
misstatements and make entries to correct the statements.
D) it is necessary to combine individually immaterial misstatements with the material
misstatements and make full disclosure in the footnotes.
A
48) There are often a large number of immaterial errors discovered that do not require
an adjustment at the time they are found. How should these errors be dealt with by the
auditor?
A) Since these items are individually immaterial, the auditor would not recommend
adjusting entries to the client.
B) Since there are a large number of these, the auditor would recommend adjusting
entries to the client.
C) The auditor must combine the individually immaterial errors and evaluate whether
the combined amount is material.
D) The auditor would never combine these individually immaterial amounts because
that would mix apples and oranges.
C
49) The initial review of the working papers prepared by any given auditor is normally
done by the
A) partner assigned to the audit.
B) supervisor or manager.
C) senior.
D) immediate supervisor.
D
50) When several staff are working together on an audit engagement, what type of
quality control review is conducted on a daily basis?
A) the partner reviews the electronic files
B) team review by interview
C) second partner review
D) manager review of sections
B
51) CAS require the auditor to review the other information in the annual report to
ascertain its consistency with the financial statements. If there is a material
inconsistency, the client should be requested to change the information. If the client
refuses, the auditor should
A) issue an adverse opinion.
B) issue a qualified opinion.
C) consider what further action is warranted, including making contact with the audit
committee.
D) issue an unqualified opinion, bill the client, and withdraw from any future
engagements.
C
52) In addition to the financial statements, MD&A (management discussion and
analysis) are appended to the financial statements to inform users of management's
expectations for the foreseeable future, as well as to provide management's
assessment of the financial results. MD&A is prepared primarily because it is
A) an additional piece of evidence used by auditors to assess the financial statements.
B) generally required by securities regulators in Canada.
C) an unbiased view of the prospective future results of the company.
D) required so that the company can borrow more funds or sell more shares to the
public.
B
53) CAS 250 requires the auditor to communicate illegal acts to the audit committee
A) if the illegal acts are slightly material.
B) if the illegal acts are material.
C) if the illegal acts are other than trivial.
D) regardless of materiality.
D
54) CAS 450 requires the auditor to communicate all misstatements to the audit
committee
A) if the misstatements are slightly material.
B) if the misstatements are material.
C) if the misstatements are other than trivial.
D) regardless of materiality.
C
55) The management letter
A) is required by CAS whenever there are "reportable conditions."
B) must follow the format prescribed by the CPA.
C) spells out to the audit committee the auditor's responsibilities under generally
accepted auditing standards.
D) is optional and is intended to help the client operate its business more effectively.
D
Chapter 19
1) What does a "clean" audit opinion mean?
A) an adverse opinion
B) a disclaimer of opinion
C) a modified opinion
D) an unmodified opinion
D
2) It is the responsibility of an auditor to include this in an audit report:
A) an order to management
B) an instruction to management
C) a recommendation
D) an opinion
D
3) The most common type of audit report contains
A) an adverse opinion.
B) a disclaimer of opinion.
C) a modified opinion.
D) an unmodified opinion.
D
4) Bianca Jones was engaged to conduct the audit of Smilicor Company (a toy
distributor) three months after its year-end date. Bianca was unable to conduct an audit
of opening inventory but was able to obtain evidence to satisfy herself with respect to
the opening balances. She was also able to conduct audit procedures for other opening
balances. For example, by observing fixed assets. What type of audit opinion would
Smilicor receive?
A) disclaimer
B) adverse
C) modified
D) unmodified
D
5) PA firm has been auditing Big Manufacturing Company (BMC) for several years. Last
year, BMC converted its inventory and purchasing systems to a new system effective
December 31, the date of the year-end. To their horror, the PA firm discovered at the
beginning of the current year that there was a cut-off error in the accounts payable
system of $25 million dollars last year. Neither the client nor the firm had detected that
the purchases of December 31 had been omitted from the old computer system
transaction processing and had been recorded only in the new computer system,
understating last year's expenses. Last year's financial statements have been restated
and the error disclosed in the notes to both last year's and this year's financial
statements. What type of audit opinion will BMC receive this year?
A) modified
B) disclaimer
C) adverse
D) unmodified
D
6) One of the most controversial parts of the auditor's report is the meaning of the term
"fairly stated." What does the auditor's opinion mean when these words are used?
A) The values in the financial statements represent the net realizable values of the
assets of the entity.
B) The financial statements are accurate and provide a true and fair representation of
the entity's current financial position.
C) The values in the financial statements represent the value of the entity now, if it were
liquidated on an open market.
D) The financial statements are fairly stated in accordance with the financial reporting
framework described in the opinion paragraph.
D
7) Three of the following conditions would, by themselves, require the auditor to issue a
report other than an unmodified report. Which condition would permit an unmodified
report?
A) The financial statements show a significant net loss for each of the last three years,
including the current fiscal period.
B) The financial statements have not been prepared in accordance with an acceptable
financial reporting framework and are misleading.
C) The auditor is not independent during the fiscal period under audit.
D) The scope of the auditor's examination has been restricted, although the cause of
the restriction was not the client's fault.
A
8) The auditor has set materiality at XYZ Company of $50 000 based upon a
percentage of net assets. The company currently has a small profit (only $3500). Which
of the following items would the auditor most likely consider to be material and request
an account balance adjustment?
A) a misclassification between accounts receivable and accounts payable of $10 000
B) incorrect allocation of a note payable to current rather than long term
C) poor wording in a note to the financial statements, making it a bit difficult to
understand
D) an understatement of depreciation expense, which would increase depreciation by
$5000
D
9) According to CAS 700, the unmodified audit report's title should be
A) "Unmodified Report of the Auditor."
B) "Audited Financial Statements."
C) "Auditors' Report."
D) "Independent Auditors' Report."
D
10) Under Canadian Auditing Standards, the introductory paragraph of the independent
auditor's report for a corporation indicates that the auditor has audited the statement of
financial position, the income statement, the statement of cash flows, a summary of
accounting policies and notes, and
A) the statements of retained earnings.
B) the statement of changes in equity.
C) management's discussion and analysis letter.
D) the internal controls of the company.
B
11) The standard unmodified audit report in the auditor responsibility section states that
the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) obtain reasonable assurance that the statements are free of material misstatement.
D) conform to a generally accepted financial reporting framework.
C
12) Management has several responsibilities that are important to the auditor. One of
these is that management is responsible for
A) internal controls that prevent material misstatements due to fraud or error.
B) maintaining control of evidence (such as confirmations) until assessed by the auditor.
C) evaluating evidence against acceptable criteria.
D) providing reasonable assurance that the financial statements are fairly stated.
A
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13) In the auditor's responsibility paragraph of the audit report, the use of the term
"reasonable assurance" is intended to indicate that
A) no misstatements exist in the financial statements.
B) no material misstatements exist in the statements.
C) there is some possibility that material misstatements still exist in the financial
statements.
D) there is a possibility that immaterial misstatements still exist in the financial
statements.
C
14) The use of the term "reasonable assurance" is intended to indicate that an audit
cannot be expected to
A) completely eliminate the possibility that a material error or fraud exists.
B) consider or search for minor errors.
C) be compliant with the generally accepted accounting principles for every account.
D) provide assurance of no material errors or irregularities to investors who are using
the financial statements for investment decisions.
A
15) It is management's responsibility to select the accounting policies that are used in
the preparation of the financial statements. What is the auditor's responsibility with
respect to these accounting policies?
A) Approve the accounting policies that are used, so that an opinion can be stated on
the fairness of the financial statements.
B) Evaluate the appropriateness of the accounting policies that are used and of the
associated estimates made.
C) Tell management which accounting policies should be selected so that accurate
estimates can be made for year-end adjustments.
D) Recalculate the estimates that are used for the accounting policies (such as bad debt
allowance and warranty expenses).
B
16) The independent auditor's opinion explains how much evidence the auditor collects
during the independent audit. How much evidence is collected?
A) sufficient and appropriate evidence to provide a basis for the audit opinion
B) sufficient evidence to state that there are no material errors in the financial
statements
C) appropriate evidence to be able to evaluate the exact accuracy of the accounting
estimates
D) sufficient and appropriate evidence to conclude the financial statements present a
true and fair view of the economic events of the organization
A
17) The phrase "in our opinion" indicates that
A) the auditor performed the audit on a test basis.
B) the auditor's judgment can be relied upon.
C) the auditor relied on his or her knowledge to perform the audit.
D) there may be some information risk associated with the financial statements.
D
18) Clark Kent is a PA partner at the firm of Kent, Lane, and Lang, a limited liability
partnership. Kent's firm has just completed the audit of a client with a March 31, 2018,
year end. How should the audit report be signed?
A) Clark Kent, PA
B) Kent, Lane, and Lang, LLP
C) Clark Kent, LLP
D) Kent, Lane, and Lang, PAs
B
19) The appropriate date for the audit report for a public company is the date on which
the
A) client's fiscal year ended.
B) auditor and client entered into a contract.
C) board of directors approved the financial statements.
D) auditor prepares and delivers the report to the client.
C
20) The audit report date is important to users because it indicates the last day
A) of the fiscal period.
B) on which the financial statements may be filed with the provincial securities
commission.
C) on which users may institute a lawsuit against either the client or auditor.
D) of the auditor's responsibility for the review of significant events that occurred after
the date of the financial statements.
D
21) If the balance sheet of a company is dated December 31, 2018, the audit report is
dated March 6, 2019, and both are released to the public on March 15, 2019, this
indicates that the auditor has searched for material unrecorded transactions and events
that occurred up to
A) December 31, 2018.
B) March 6, 2019.
C) March 15, 2019.
D) December 31, 2019.
B
22) Double dating a report is done when
A) the parent company and its subsidiaries have different year-ends.
B) the auditor finishes his work later than planned.
C) a material event occurs after the date of the auditor's report and affects the period
that was audited.
D) a material event occurs after the date of the auditor's report and before the date the
report is issued.
D
23) The ASPE (Accounting Standards for Private Enterprises) financial reporting
framework normally requires the auditor to report using the corresponding figures
approach. This means that the auditor reports on
A) the current year's financial statements.
B) both periods under audit: the current and prior year.
C) three years: the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
A
24) Publicly listed organizations and those using IFRS (International Financial Reporting
Standards) must have audit reports that use the comparative financial statements
approach. This means that the auditor reports on
A) the current year's financial statements.
B) both periods under audit, the current and prior year.
C) three years, the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
B
25) Your client is a large financial institution in Canada. Canadian regulators require that
financial statements for such institutions have an audit report that provides an opinion
on the consistency of accounting policies. How do these events affect the independent
auditor's report?
A) The auditor would add an other matter paragraph titled "Report on Other Legal and
Regulatory Requirements."
B) The auditor would add an emphasis of matter paragraph titled "Report on Other
Legal and Regulatory Requirements."
C) The auditor would use a standard unmodified auditor's report.
D) The auditor would state in the opinion paragraph that the financial statements were
prepared in accordance with the legislation for financial institutions.
A
26) ProForce Inc. is facing a large lawsuit from its employees. The contingency is
significant and may lead to a going concern issue if ProForce is found guilty. ProForce
took the adequate measures, as prescribed by IFRS (International Financial Reporting
Standards), to account, disclose, and present the contingency in the financial
statements. The auditor should
A) add a section in the audit report titled "Material Uncertainty Related to Going
Concern" after the opinion paragraph.
B) issue an unmodified report with no extra sections.
C) issue a modified report.
D) deny an audit opinion.
A
27) When a material uncertainty exists, the auditor must
A) disclose it in the audit report.
B) first determine the materiality of the item and whether adequate disclosure is
included in the financial statements.
C) issue a disclaimer of opinion.
D) issue a modified opinion.
B
28) The "unmodified report with Emphasis of Matter paragraph" or the "unmodified
report with an Other Matter paragraph"
A) arise as a result of an incomplete audit.
B) arise when the financial statements are not quite "presented fairly."
C) meet the criteria of a complete audit with satisfactory results but further explanation
is required.
D) meet the criteria of a complete audit but with unsatisfactory results.
C
29) Your client has experienced a major data breach with lawsuits and fines pending of
significant and uncertain amounts. These events are disclosed in the client's financial
statements and are clearly explained in the notes. How do these events affect the
independent auditor's report?
A) The auditor would issue an unmodified auditor's report.
B) The auditor would include an Emphasis of Matter paragraph titled "Data Breach" to
highlight the events.
C) The auditor would include an Other Matters paragraph titled "Data Breach" to
highlight the amounts.
D) The auditor issue a modified audit opinion due to the size of the uncertainty.
B
30) Your client has two sets of financial statements. One set is in compliance with IFRS,
while the other set is in compliance with local tax legislation and will be used only with
the tax returns. How do these events affect the independent auditor's report?
A) The auditor would issue an unmodified audit report for both financial statements, with
an Emphasis of Matter paragraph that describes to readers the nature of the other set of
financial statements.
B) The auditor would issue an unmodified auditor's report for both financial statements,
labeling the auditor's report "for IFRS only" and "for tax purposes only."
C) The auditor would issue an unmodified audit report for both financial statements, with
an Other Matter paragraph that describes to readers the nature of the other set of
financial statements.
D) The auditor would issue a modified audit report, as the client is not allowed to have
two different sets of financial statements.
C
31) Your client is not using either ASPE or IFRS. Instead, it is using current value
accounting with no use of historical cost, because your client is in a country with about
50% inflation per year. Local legislation requires that all resident organizations use
current value accounting. How do these events affect the independent auditor's report?
A) The auditor would issue an unmodified auditor's report.
B) The auditor would use an Emphasis of Matter paragraph to explain that the financial
statements are prepared in accordance with local legislation.
C) The auditor would use an Other Matter paragraph to explain that the financial
statements are prepared in accordance with local legislation.
D) The auditor would state in the opinion paragraph that the financial statements were
prepared in accordance with the local legislation.
D
32) Beem & Lord, a PA firm, audited the financial statements of Frazer Inc. Since this
was a first time audit, Beem & Lord did not audit the comparative financial statements,
as this was done by the previous auditor. Beem & Lord should expand their report to
include an explanation in
A) the scope paragraph.
B) the management responsibility paragraph.
C) the opinion paragraph.
D) a paragraph following the opinion paragraph.
D
33) A company has changed its method of inventory valuation from an unacceptable
one to one that complies with ASPE (Accounting Standards for Private Enterprises).
The auditor's report on the financial statements of the year of the change should include
A) no reference to the item assuming that the change has been properly disclosed.
B) a reference to a change in accounting principles in the opinion paragraph.
C) an explanatory paragraph explaining the change.
D) a justification for making the change and the impact of the change on reported net
income.
A
34) A deviation from the unmodified audit report will cause knowledgeable users of
financial statements to recognize that the
A) auditor intends to communicate concerns about the quality of the financial
statements.
B) financial statements contain a material error.
C) financial statements contain an error.
D) Canadian Auditing Standards were not followed.
A
35) A misstatement in the financial statements can be considered material if
A) it overshadows the financial statements as a whole.
B) knowledge of the misstatement would affect the decision of a reasonable user of the
financial statements.
C) it affects more than one account on the financial statements.
D) it affects only one account on the financial statements.
B
36) When a misstatement in the financial statements exists but is unlikely to affect the
decisions of a reasonable user, it would be appropriate to issue
A) an unmodified opinion.
B) a qualified opinion.
C) a disclaimer of opinion.
D) an adverse opinion.
A
37) The dollar amount of some misstatements cannot be accurately measured. If, for
example, the client was unwilling to disclose an existing lawsuit, the materiality question
the auditor must evaluate in such a situation is
A) what effect will it have on net income?
B) how will it affect management's future decisions?
C) will it increase the auditor's exposure to lawsuits?
D) what effect will it have on financial statement users?
D
38) When determining whether an exception is highly material, the extent to which the
exception affects different parts of the financial statements must be considered. This is
referred to as
A) materiality.
B) pervasiveness.
C) financial analysis.
D) ratio analysis.
B
39) Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces
keyboards and other types of computer hardware. Fractal is refusing to consolidate its
financial statements, as this would increase the debt to equity ratio to the point that
Fractal would violate its debt agreement, although it would benefit the current ratio with
a sizeable increase in inventory. Instead, Fractal would like to record the investment in
the Malaysian subsidiary at cost. What type of effect does the non-consolidation have
upon the financial statements?
A) material and isolated
B) material
C) material and pervasive
D) immaterial
C
40) The primary concern in measuring materiality when a client has failed to follow an
acceptable financial reporting framework is usually
A) the total dollar error in the accounts involved, compared with some acceptable base.
B) measurability of the dollar error.
C) the nature of the item in error.
D) whether it can materially affect some future period.
A
41) If a misstatement is immaterial relative to the financial statements of the entity for
the current period and is not expected to have a material effect in future periods, it is
appropriate to issue
A) an unmodified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
A
42) The least severe type of report for disclosing departures from an unmodified report
is the
A) adverse opinion.
B) disclaimer of opinion.
C) qualified opinion.
D) report on unaudited financial statements.
C
43) As a result of management's refusal to permit the auditor to physically examine
inventory, the auditor has not accumulated sufficient evidence to conclude whether
financial statements are stated in accordance with ASPE (Accounting Standards for
Private Enterprises). The auditor must depart from the unmodified audit report because
A) the financial statements have not been prepared in accordance with GAAP.
B) the scope of the audit has been restricted by circumstances beyond either the client's
or auditor's control.
C) the auditor has lost independence.
D) the scope of the audit has been restricted by the client.
D
44) The auditor's report of the Huge Mega Company indicates that the financial
statements are fairly presented except for the goodwill balance, which does not comply
with International Financial Reporting Standards. The auditor's report is
A) unmodified.
B) unmodified with an explanatory paragraph.
C) qualified.
D) adverse.
C
45) When the auditor knows that the financial statements may be misleading because
they were not prepared in accordance with an acceptable financial reporting framework,
he or she must issue
A) a qualified opinion.
B) an adverse opinion.
C) a disclaimer of opinion.
D) a qualified or an adverse opinion, depending on the materiality of the item in
question.
D
46) When a misstatement in the financial statements would affect a user's decision but
the overall statements are still fairly stated, it would be appropriate to issue
A) an unmodified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
B
47) The client has presented all required financial statements with the exception of the
statement of cash flows. The auditor has completed the audit and is satisfied that
everything, with the exception of the missing statement, is presented fairly. As a result,
the auditor would likely issue
A) a qualified opinion.
B) an unmodified opinion.
C) a disclaimer of opinion.
D) either an unmodified or qualified opinion.
A
48) Dussault & Montgomery, the auditors of Greenwich Corp., relied on Groves &
Padden, another PA firm, to audit the Quebec subsidiaries of Greenwich. The
responsibility for the opinion to issue on the financial statements is the responsibility of
A) Greenwich Corp.
B) Dussault & Montgomery.
C) Groves & Padden.
D) Dussault & Montgomery and Groves & Padden.
B
49) When Dussault & Montgomery relies on Groves & Padden, another PA firm, to audit
the Quebec subsidiaries of one of their audit clients, Dussault & Montgomery should
A) assess Groves & Padden's professional qualifications.
B) ask Groves & Padden to also sign the auditor's report.
C) send one of their auditors to Quebec to supervise the work being done by Groves &
Padden.
D) issue a qualified opinion for the financial information pertaining to the Quebec
subsidiaries.
A
50) The primary auditor who relies on a secondary auditor
A) is responsible for any deficiencies in the secondary auditor's work.
B) will mention the name of the secondary auditor if he or she decides that an
unmodified opinion is appropriate.
C) will never mention the name of the secondary auditor in his or her report even if the
report is qualified.
D) has no responsibility for checking the work of the secondary auditor.
A
51) An adverse opinion is issued when the auditor believes
A) some parts of the financial statements are materially misstated or misleading.
B) the financial statements will be found to be misleading or misstated, if an adequate
investigation is performed.
C) the overall financial statements are so materially misstated or misleading as a whole
that they do not present fairly the financial position or results of operations and changes
in financial position.
D) the audit firm is not independent.
C
52) If inventory is the largest balance on the financial statements, a large misstatement
would be so material that the auditor should issue
A) an unmodified opinion.
B) a qualified opinion.
C) an adverse opinion.
D) a disclaimer of opinion.
C
53) A PA finds that the client has not capitalized a material amount of leases in the
financial statements. When considering the materiality of this departure from IFRS, the
PA's reporting options are
A) qualified or adverse opinion.
B) unmodified or disclaimer of opinion.
C) unmodified or qualified opinion.
D) unmodified opinion with an Emphasis of Matter paragraph.
A
54) An auditor has found that the client is suffering financial difficulty and that the goingconcern status is seriously in doubt. The client has not placed good disclosures in the
financial statements. Which of the following audit report alternatives must the PA
choose?
A) qualified or adverse opinion
B) disclaimer of opinion
C) unmodified opinion
D) unmodified opinion with an Emphasis of Matter paragraph
A
55) The auditor's report of the Samcorp Company indicates that the auditor is unable to
form an opinion on whether the financial statements of the company are fairly presented
due to scope restrictions and unavailable and incomplete records. The auditor's report
A) is unmodified.
B) is qualified.
C) is adverse.
D) is a disclaimer of opinion.
D
56) The auditor would most likely issue a disclaimer of opinion because of
A) the client's failure to present supplementary information.
B) inadequate disclosure of material information.
C) a client-imposed scope limitation.
D) the qualification of an opinion by the other auditor of a subsidiary where there is a
division of responsibility.
C
57) Mafah Distribution Limited has requested that the audited financial statements be
completed by January 5, five days after the December 31 year-end. This means that the
auditor will be unable to verify subsequent payments on accounts receivable and will be
unable to determine whether accounts payable have been set up correctly. What type of
audit report should Mafah receive if the auditor is unable to use alternative procedures
for these two audit areas?
A) disclaimer
B) adverse
C) qualified
D) unmodified
A
58) Whenever the client imposes restrictions on the scope of the audit, the auditor
should be concerned about the possibility that management is trying to prevent
discovery of misstated information. In such cases, which type of report should be
issued?
A) a disclaimer of opinion in all cases
B) a qualification of both scope and opinion in all cases
C) a disclaimer of opinion whenever materiality is in question
D) a qualification of both scope and opinion whenever materiality is in question
C
59) Both disclaimers of opinion and adverse opinions are used
A) only when the condition is highly material and pervasive.
B) whether the condition is material or not.
C) regardless of the auditor's independence.
D) regardless of the client's choice of accounting method.
A
60) What level of assurance is provided by the auditor in an audit engagement?
A) high, but not absolute, level of assurance
B) positive level of assurance
C) moderate assurance
D) high level of assurance
A
61) The new IAASB auditor's report is effective for audits and will be mandatory for
listed companies for audits with a year ending
A) 31 December 2017.
B) 31 December 2016.
C) 31 December 2015.
D) 31 December 2014.
B
Chapter 20 not sure if this is being tested
1) The Locker Building is a new apartment building in a Vancouver suburb. In order to
receive a subsidy from the municipality, it needs to prove that it has complied with the
city's new rules about "green efficiency." The "green efficiency" rules are described on
the municipality's website and list the requirements a building must meet to be
considered green and efficient. Your firm, with the help of an environmental scientist,
has been asked to perform a direct reporting engagement for the Locker Building. The
suitable criteria in this case are the
A) green efficiency rules.
B) auditor's judgment.
C) environmental scientist's judgment.
D) federal environmental laws.
A
2) Four different engagements that the auditor can complete are compilation,
bookkeeping, audit, and review. Rank these engagements with respect to the level of
assurance provided from highest assurance level to lowest assurance level.
A) audit, review, compilation, bookkeeping
B) audit, compilation, review, bookkeeping
C) review, audit, compilation, bookkeeping
D) bookkeeping, compilation, review, audit
A
3) Performing inquiry, analytical procedures, and discussion with the limited objective of
assessing whether the information being reported on is plausible within the framework
of appropriate criteria is the definition of a(n)
A) compilation.
B) review.
C) audit.
D) examination.
B
4) Leon Levy, a partner at the audit firm where you work, asked you to work on the audit
of the balance sheet of Geminy Corp. Geminy is not a public company and has not
been required to have audited financial statements in the past. This year, due to a new
bank loan, its bank requested that audited financial statements be provided. Who are
the primary users in this assurance engagement?
A) Leon Levy
B) the bank
C) management of Geminy Corp
D) shareholders of Geminy Corp
B
5) A review engagement requires what amount of evidence to be accumulated?
A) minimal
B) moderate
C) extensive
D) maximum
B
6) Which of the following components of an engagement letter would apply to both a
review engagement and a compilation engagement?
A) negative assurance will be provided so there is no assurance that fraud will be
detected
B) no assurance will be provided since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and
inquiry
D) a statement that an audit is not to be performed and that no opinion will be
expressed
D
7) A review engagement includes
A) obtaining an understanding of the internal controls.
B) tests of controls or transactions.
C) inquiry, analytical procedures, and discussion.
D) independent confirmation or physical examination.
C
8) When would the public accountant conduct audit procedures during a review
engagement?
A) When junior staff are assigned to the engagement.
B) When required to assess plausibility.
C) When it is a first-time review engagement.
D) When a higher level of assurance is required for the bank.
B
9) As part of the review engagement for a small manufacturing company, which of the
following would be a typical review procedure for the sales cycle?
A) review of internal controls over the granting of credit
B) examination of sales documents to ensure credit approval is documented
C) recalculation of the taxes and extensions on a sample of invoices
D) comparison of sales and gross profit to the prior year
D
10) When conducting a review engagement, how is materiality calculated?
A) materiality is not calculated as a lower level of assurance is being provided
B) the concept of significance is used, rather than the concept of materiality
C) always as a percentage of net income before income taxes
D) in the same manner as an audit engagement
D
11) As part of the conduct of a review engagement, which of the following procedures
would be appropriate for assessing the ending value of accounts payable?
A) sending zero-balance confirmations to frequently used suppliers
B) use of negative confirmations to suppliers with material balances
C) comparison of the accounts payable balances by supplier to the prior year
D) examination of invoices received after the year-end to ensure that they were
recorded in the proper period
C
12) Before performing a review of an entity's financial statements, an accountant should
A) complete a series of inquiries concerning the entity's procedures for recording,
classifying, and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material
modifications should be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of
the industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required
by generally accepted accounting principles.
C
13) As part of the conduct of a review engagement, which of the following would be a
typical procedure used for the assessment of the ending accounts receivable balance?
A) circularization of positive confirmations to all balances exceeding materiality
B) comparison of the age of the accounts receivable to the prior year
C) use of negative confirmations on all large balances
D) detailed examination of all accounts over 120 days to assess the bad debt allowance
B
14) As part of the conduct of a review engagement, which of the following procedures
would be appropriate for assessing the ending value of inventory?
A) discussion with management with respect to the costing method used
B) observation of the inventory count
C) observation of the warehouse, paying particular attention to dusty and damaged
goods
D) confirmation with customers that are holding consignment inventory with respect to
quantity and condition of the inventory
A
15) When is negative assurance used during a review engagement?
A) when the standards applicable to a review engagement have been met
B) if a qualification is required during the review engagement
C) when the criteria associated with a review engagement have not been satisfied
D) when the practitioner is unable to set appropriate criteria for the review engagement
A
16) Why is it important for the review engagement report to state that the review is not
an audit?
A) to make sure that the public accountant is not sued
B) to clarify that only review engagement procedures were used during the engagement
C) to make users aware that a review provides a lower level of assurance
D) so that the user does not ask any unnecessary questions about the engagement
C
17) When assessing the plausibility of the financial statements for a review
engagement, the auditor will use which of the following criteria for auditing a small,
privately held company?
A) standards of efficiency and effectiveness
B) the audit objectives associated with the audit of financial statements
C) an acceptable reporting framework such as ASPE
D) an enterprise risk-management framework to help detect fraud
C
18) An accountant who reviews the financial statements of an entity should issue a
report stating that a review
A) does not constitute an audit.
B) provides negative assurance that the internal control structure is functioning as
designed.
C) provides only limited assurance that the financial statements are fairly presented.
D) is substantially greater in scope than a compilation.
A
19) The statement that "nothing came to our attention that would indicate that these
statements are not fairly presented" expresses which of the following?
A) disclaimer of an opinion
B) negative assurance
C) negative confirmation
D) piecemeal opinion
B
20) The fact that a client has a material accounting departure for failure to follow ASPE
would require the accountant to disclose that fact in a separate paragraph giving rise to
the modification when the accountant is performing
A) a compilation.
B) a review and an audit.
C) either a compilation or a review.
D) neither a compilation nor a review, only an audit.
B
21) A review service engagement for an accountants' association with unaudited
financial statements involves which of the following?
A) more work than a compilation, and more than an audit.
B) less work than an audit, but more than a compilation.
C) less work than a compilation, but more than an audit.
D) less work than an audit, and less than a compilation.
B
22) Which of the following would be required in a compilation?
A) an understanding between the client and the accountant for the services to be
provided
B) a formal engagement letter signed by the client
C) management's acknowledgements for its responsibility with regards to the financial
statements
D) a confirmation of the auditor's independence
A
23) The level of assurance that is provided by the public accountant on a compilation
report is
A) none.
B) low.
C) medium.
D) high.
A
24) Which of the following components of an engagement letter would apply to both a
review engagement and a compilation engagement?
A) negative assurance will be provided, so there is no assurance that fraud will be
detected
B) no assurance will be provided since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and
inquiry
D) a statement that each page of the statements should be clearly marked "unaudited"
D
25) You have just recently become a member of your local non-profit housing co-op by
moving into the largest unit. The board of directors has asked that you handle the
review engagement but you are concerned about independence. What is a practical
way for you to stay in the co-op but also perform the review engagement?
A) Request a bylaw stating that the accountant cannot vote for board members.
B) Do a compilation rather than a review engagement.
C) Have all the preparation work for the review engagement completed by a board
member.
D) Include a paragraph in the review engagement report stating that you are not
independent.
A
26) Richard is performing a compilation engagement. Richard is concerned that the
information is
A) arithmetically correct.
B) accurate.
C) complete.
D) in accordance with ASPE.
A
27) A compilation presents information, in the form of financial statements, that is the
representation of management. The public accountant who prepares the compilation
undertakes to express
A) limited assurance on the statements.
B) minimal assurance on the statements.
C) no assurance on the statements.
D) full assurance on the statements.
C
28) Which of the following engagements would most likely be a compilation
engagement?
A) An engagement with respect to financial statements attached to a personal tax
return.
B) An engagement with respect to financial statements for a large public company.
C) An engagement with respect to financial statements for a company that has a large
bank loan.
D) An engagement with respect to financial statements that accompany future-oriented
information to obtain financing.
A
29) Which of the following procedures would most likely be conducted by an accountant
during a compilation engagement?
A) Enquire of management with respect to the purpose of new capital assets.
B) Compare gross profit on a year-by-year basis over the last five years.
C) Circularize negative accounts receivable confirmations.
D) Assemble and recalculate the financial statement allocations.
D
30) The accountant is working on an engagement with respect to the client's financial
statements. Which of the following engagements would omit an assessment of the
client's accounting policies' compliance with GAAP?
A) review
B) compilation
C) audit
D) attestation
B
31) Which of the following items includes criteria for accepting a compilation
engagement?
A) evaluation of whether the financial statements are in accordance with ASPE
B) no reason to believe that the financial statements are false or misleading
C) completion of an independence threat analysis, ensuring that there are no threats to
independence
D) completion of a client risk analysis with the conclusion that risks are low
B
32) A public accounting firm can issue a compilation report
A) only if the partners are independent.
B) only if all the partners and the staff in the office performing the engagement are
independent.
C) if the partners have no material or direct immaterial interest in client.
D) even if it is not independent.
D
33) What is the title of a compilation report?
A) Opinion
B) Criteria Schedule
C) Engagement Report
D) Notice to Reader
D
34) Which of the following is a professional standard that must be followed by an
accountant when conducting a compilation engagement?
A) work being adequately planned and properly executed
B) having adequate technical training and proficiency in auditing
C) obtaining an adequate understanding of the business and its industry
D) documenting the processes used to compile and record transactions
A
35) The interim financial statements are usually
A) not audited by the auditors.
B) not compiled by the auditors.
C) not reviewed by the auditors.
D) checked for compliance by the auditors.
A
36) Prior to accepting an engagement to examine a financial forecast or projection
included in a prospectus or other public offering document, the public accountant should
A) obtain an understanding of the controls over preparation of internal forecasts such as
budgets.
B) increase the risk profile of the client with respect to management integrity.
C) ensure that management will provide sufficient evidence to conduct the engagement.
D) inform the client that the engagement may not detect errors in the client's forecasts.
C
37) With respect to working on an engagement to examine a financial forecast or
projection included in a prospectus or other public offering document, the public
accountant and the client should agree upon
A) allocation of the responsibility of creating the assumptions to the public accountant.
B) the period of time to be covered.
C) delegation of forecast preparation to the public accountant.
D) the fact that the forecast may not be prepared in accordance with standards.
B
38) An engagement for applying specified auditing procedures to financial information
other than financial statements provides no assurance. This results in
A) a report that can be readily tailored to any type of engagement.
B) a broad set of audit procedures being conducted for specific information.
C) frequent disagreement between auditor and client with respect to results.
D) distribution of the report normally being restricted.
D
39) "An engagement where there is an accountability relationship between two or more
parties and the practitioner is engaged to issue a written communication expressing a
conclusion about subject matter for which the accountable party is responsible" is the
definition of a(n)
A) audit engagement.
B) assurance engagement.
C) review engagement.
D) compilation engagement.
B
40) You have just signed off the audit report on the financial statements of your client.
What type of engagement did you complete?
A) review
B) direct reporting
C) attest and assurance
D) operational
C
41) "An engagement where the practitioner expresses a conclusion on a written
assertion about a subject prepared by a party accountable for the assertion, such as
management" is the definition of a(n)
A) audit engagement.
B) attestation engagement.
C) review engagement.
D) assurance engagement.
B
42) In addition to having modifications of wording for the financial statement audit
opinion, other types of opinions can have modifications as well. Which of the following
describes a situation where there would be a qualification or disclaimer of opinion for a
direct reporting engagement?
A) The subject matter does not conform to the criteria.
B) The information is not presented fairly.
C) The practitioner conducted alternative procedures where there was a scope
limitation.
D) The practitioner and management disagree about the content of the report.
A
43) Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm.
Leon Levy is the auditor in charge of the audit. The accountable party in this assurance
engagement is
A) Leon Levy.
B) Pilott & Levy.
C) management of Thermos Inc.
D) the board of directors of Thermos Inc.
C
44) The Federal Auditor General provides the results of operational audits to Parliament
in Auditor General reports. What type of engagements are these?
A) direct reporting
B) attest engagement
C) review engagement
D) compilation engagement
A
45) For the conduct of an assurance engagement, the practitioner is required to identify
or develop criteria to evaluate the subject matter. Identify some characteristics of
suitable criteria.
A) relevance, reliability, neutrality, understandability, completeness
B) reliability, accuracy, neutrality, timeliness
C) understandability, completeness, timeliness, free from bias
D) completeness, timeliness, free from bias, competent
A
46) What is the purpose of an auditor reporting on the effectiveness of internal control
over financial reporting?
A) To attest to the effectiveness and efficiency of internal controls at an organization.
B) To state an opinion on management's assessment of the effectiveness of internal
controls.
C) To provide an alternative to the operational audits conducted by internal auditors.
D) To state that the controls are in conformity with standards with respect to internal
controls.
B
47) Which of the following techniques would be conducted by a practitioner when
conducting a review of compliance with agreements and regulations?
A) use of a specialist to ensure that the terms of the agreement are complied with
B) inquiring about how the client monitors its compliance with the provisions
C) testing control procedures throughout the year that pertain to the provisions of the
agreement
D) discussing with client's legal counsel to identify any legal liabilities with respect to
potential violations of the agreements
B
48) You are a public accountant retained by the manager of a cooperative retirement
village to do "write-up work." You are expected to prepare unaudited financial
statements with each page marked "unaudited" and accompanied by a disclaimer of
opinion stating no audit was made. In performing the work, you discover that there are
no invoices to support $25 000 of the manager's claimed disbursements. The manager
informs you that all the disbursements are proper. What should you do?
A) Submit the expected statements but omit $25 000 of unsupported disbursements.
B) Include the unsupported disbursements in the statements since you are not expected
to make an audit.
C) Obtain from the manager a written statement that you informed him of the missing
invoices and include his assurance that the disbursements are proper.
D) Obtain further information about the $25 000 of unsupported items and withdraw if
the situation is not satisfactorily resolved.
D
49) Which of the following matters would be addressed in a report on the results of
applying specified auditing procedures to financial information other than financial
statements?
A) an opinion with respect to the quality of the information examined
B) explanations of the differences between audits, reviews, and special engagements
C) the factual results of the procedures
D) provision of negative assurance with respect to the accounts examined
C
50) What is an auditor's responsibility for supplementary information that is outside the
basic financial
statements but required by accounting guidelines?
A) The auditor should apply certain limited procedures to the required supplementary
information and add an explanatory paragraph to the financial statement audit report.
B) The auditor has no responsibility for required supplementary information as long as it
is outside the basic financial statements.
C) The auditor's only responsibility for required supplementary information is to
determine that such information has not been omitted.
D) The auditor should apply tests of details of transactions and balances to the required
supplementary information and report any material misstatements in such information.
A