Audit Exam 1 (Includes: Quiz 1 Questions, Quiz 2 Questions, Week 1 Recap, Week 3 Recap, Week 4 Recap, Week 6 Recap, Homework 1-6 Self-Test Questions)

Due to an independence issue, the previous auditors were required to resign. The new accounting firm was hired after year-end and was not able to attend the year-end inventory count. Although the inventory balance is material, the auditors do not believe the amount is pervasive to the overall financial statements. Which Audit Opinion/Auditor's Report should be issued assuming the client will not correct the issues noted? Is this a GAAP error or Scope restriction?

# 1:Qualified Opinion # 2:Scope Restriction

The client will not allow the auditors to send confirmation letters to the company's customers in Asia to confirm the employee receivables. Amounts are material but not pervasive. Which Audit Opinion/Auditor's Report should be issued assuming the client will not correct the issues noted? Is this a GAAP error or Scope restriction?

# 1:Qualified Opinion # 2:Scope Restriction

The company is a private company with ten shareholders; however; they are planning to ask the bank for a significant loan to help with the expansion of their business.

#1 Acceptable Audit Risk #2 Lower Risk

Revenue included several transactions which were for the next fiscal year. Amounts were material and would ruin the entire financial statements. Which Audit Opinion/Auditor's Report should be issued assuming the client will not correct the issues noted? Is this a GAAP error or Scope restriction?

#1 Adverse Opinion #2 GAAP Error

During the planning stage of the audit, your firm has noted that the company has reduced the number of management. As a result, some of the previous management review and approvals have been streamlined or eliminated this year.

#1 Control Risk #2 Higher Risk

The auditor sends a letter to the company's lawyer to confirm if there are any outstanding lawsuits

#1 External Confirmation #2 External Confirmation

The company has entered into a number of complex financial derivative transactions and they have been having difficulty in determining the appropriate inventory obsolesce balance to record.

#1 Inherent Risk #2 Higher Risk

The auditor attends the year-end inventory count and performs sample counts of the inventory

#1 Inspection of Tangible Assets #2 Physical Evidence

The auditor recalculates the allowance for doubtful account based on the methodology provided by management

#1 Recalculation #2 Computational

The accounting firm many accounting errors during their audit. They were very surprised how many errors they found. However, each error and all the errors combined were significantly below the materiality amount. Which Audit Opinion/Auditor's Report should be issued assuming the client will not correct the issues noted? Is this a GAAP error or Scope restriction?

#1 Unmodified Opinion #2 GAAP Error

Selecting the right audit strategy / audit approach for each account in the Financial Statements is an important decision. Identify the two options for an audit strategy and explain what are the key differences between each strategy. You response should include comment on controls, control testing and detailed testing of balances.

1. Substantive Audit Strategy An auditor adopts a predominantly substantive strategy when required detection risk is low, they are still required to obtain understanding of control systems but usually no testing of controls. In this strategy there is a high reliance on detailed substantive testing of balances and transactions, the exception is when a significant risk is identified. 2. Combined Audit Strategy The auditor adopts this strategy when assessed control risk is low and required detection risk is high. In this strategy, the auditor has a detailed understanding of client's system of internal controls and applies extensive testing of those controls. There is also a reduced reliance on substantive testing of balances and transactions.

You are the external auditor of TICB Manufacturing (TICB), a publicly traded company which manufactures high-tech equipment for the telecom industry. Management informed you that due to the economic downturn, they had to lay off a number of management and accounting staff. To demonstrate their long term commitment to TICB, senior management has accepted a 20% salary cut in return for additional stock options. Due to the layoffs in the accounting department, management has not been able to implement the control improvements you have recommended in the previous year audit but they do not believe this is a significant risk. Based on the information above, identify two potential fraud risk factors from the question and explain which fraud triangle condition it relates to (Incentives or Opportunities or Attitudes) and why.

1. Weak internal controls - we had asked them to implement the control improvements in the previous year audit but they do not believe this is a significant risk. Attitudes and rationalizations about fraud because there's a poor tone at the top and they have poor attitudes to internal controls, as they won't implement them. 2. Overly dominant management - they have laid off tons of staff, decided they want a 20% pay cut in return for additional stock options and won't implement our control reccomendations. Opportunities for fraud to be committed because they have high staff turnover and poor corporate governance as well as poor internal controls.

When Sheila Copes, CPA audited a new client she asked questions about what the client does, how the client functions, the ownership structure of the client and its sources of financing. She was getting an understanding of the client at the A) Entity level B) Industry level C) Economy level D) All of the answers provided E) None of the answers provided

A) Entity level

Which of the following is an example of a misappropriation of assets fraud? A) Unauthorized discounts or refunds to customers B) Inappropriate application of accounting principles C) Unrecorded liabilities D) Improper asset valuations E) All of the answers provided

A) Unauthorized discounts or refunds to customers

Which of the following is an example of a pressure to commit fraud A) falling profits B) high staff turnover C) unusual transactions at year end D) large cash-on-hand balances E) none of the answers provided

A) falling profits

Which of the following is NOT an example of an opportunity to commit fraud? A) remuneration tied to earnings B) poor internal controls C) significant related party transactions D) high volumes of transactions E) all of the answers provided are an opportunity to commit fraud

A) remuneration tied to earnings

The company previously had two shareholders; however they are planning to raise additional financing in the next year and expect to identify 5 additional shareholders who will bring in an additional $1,000,000 in equity for the company.

Acceptable audit risk, Lower

Fixed assets are overstated due to a clerical error made by the new accounting staff. As the error was that she recorded $100M instead of $10M, it was significant and the auditor did not want the financial statements to be released to the public

Adverse

Analytical procedures are used at which of the following stages of an audit? Reporting stage Only during the risk assessment stage Risk assessment stage Risk response stage All three stages of the audit

All three stages of the audit

The auditor compares the gross margin from this year to last year.

Analytical Procedures, Analytical Procedures, Accuracy

Attitudes and rationalization to justify a fraud include: A) Significant related party transactions. B) An excessive focus on profit maximization. C) A significant decline in demand for the client's products or services. D) A high volume of transactions close to year-end. E) None of the answers provided

B) An excessive focus on profit maximization.

Which of the following is an example of information used by auditors in gaining an understanding of a client at the entity level? A) The level of competition in the client's industry B) Whether the client is an importer or exporter of goods C) International currency fluctuations D) The level of government support in the client's industry E) None of the answers provided

B) Whether the client is an importer or exporter of goods

Auditors can assess the adequacy of their client's closing procedures by: A) Checking the accuracy of accrual calculations around year-end. B) Looking at earnings trends to assess whether reported income is in line with similar periods in prior years. C) A and B. D) None of the above.

C) A and B.

Red flags that auditors can use to alert them to the possibility that a fraud may have occurred include: A) Strong internal controls. B) Routine transactions. C) A high turnover of key employees. D) Effective internal auditing staff. E) All of the answers provided

C) A high turnover of key employees.

The task of assessing the company's ability to continue as a going concern is the primary responsibility of A) external auditor B) internal auditor C) management and those charged with governance D) company's lawyers E) all the above are primarily responsible

C) management and those charged with governance

Monica Marcelloni's team has been asked to follow up only on the financial reporting fraud. Which of the following items are financial reporting fraud? A) theft of stock by employees or customers B) employees remaining on the payroll after ceasing employment C) recording fictitious sales D) unauthorized refunds to customers E) none of the answers provided

C) recording fictitious sales

The risk response stage of an audit involves: A) evaluating the results of the detailed testing and forming an opinion on the fair presentation of the client's financial statements. B) the assessment of the audit firm's quality control procedures. C) the performance of detailed tests of controls and substantive testing of transactions and accounts. D) gaining an understanding of the client.

C) the performance of detailed tests of controls and substantive testing of transactions and accounts.

JK Chartered Accountants has accepted a new audit client, Gallant Manufacturing. Prior to accepting the audit, JK Chartered Accountant met extensively with the Company's Executive Management and Board of Directors. They also met with the internal auditors to understand the overall control environment. As a result, meeting or corresponding with the previous external auditors was not required.

Communication with predecessor auditor, Violation

Sinclair Chartered Accountants is taking part in a survey of accounting firms across Canada. As part of the survey, they provide a list of all their clients and the related audit fees. The survey results will only be distributed to the accounting firms that have participated in the survey and will not be made public.

Confidential, Violation

H&H, public accountants, have agreed to audit Kerr Manufacturing's financial statements. The audit fee is set at $500,000 based on an estimate of the amount of time required to complete the audit. During the audit, H&H realize that the accounting and bookkeeping of the Company is very poor and that the audit work is taking longer than expected. Before the audit is completed, they meet with management and inform them that the final audit fee will be dependent on the additional hours required to complete the work.

Contingent fees,No violation

The control improvements you recommended last year have not been properly implemented by management as they did not think it was a priority.

Control Risk, Higher

You learn that several key accounting personnel quit half way through the year and the company has had issues finding replacements.

Control Risk, Higher

Which of the following is NOT a possible indicator of a Going Concern problem? A) High staff turnover, loss of key personnel, strikes B) Problems obtaining raw materials, inputs C) Poor growth planning, inadequate risk management D) Consistent net income over the last five years E) All of the responses are possible indicators

D) Consistent net income over the last five years

Saad Zuberov is a rookie auditor who has asked you about financial reporting frauds and how they differ from misappropriation of assets frauds. Identify for Saad Zuberov which one of the following frauds consists of misappropriation of assets. A) improper asset valuation B) unrecorded liabilities C) both a and b D) none of these

D) none of these

Mathias Mousseau, external auditor, was at a client's offices and was preparing his work for the following day. He was considering the risk that a material misstatement due to significant error or fraud could occur in the client's financial statements. Which of the three main stages of the audit was he performing? A) risk response stage B) client input stage C) reporting stage D) risk assessment stage E) none of the answers provided

D) risk assessment stage

The auditor was unable to confirm the loan receivable from a significant customer. If the loan can't be confirmed or tested, the auditor is not comfortable providing an opinion.

Disclaimer of Opinion

A Compilation Engagement provides more assurance than a Review Engagement. True False

False

An audit that involves ensuring that processes are as efficient and effective as possible are called Compliance Audits True False

False

During the audit, the auditors were not able to properly test the inventory balance at year-end due to the inventory records being destroyed in a fire. If the inventory was material and pervasive, the Auditors should issue an Adverse Opinion. True False

False

Financial Statement audit fees can be fairly expensive. However, this is because the auditors are required to find all the accounting errors in the financial statement. True False

False

Insurance Hypothesis relates to the need for reliable information so that users can make key decisions True False

False

The Auditor's Report is addressed to the Executives of the Company True False

False

Your friend says to you: "I hear that audits can be very expensive, I guess it's expense because the auditors spend a lot of time ensuring they find every accounting error in the financial statements so they can guarantee it's correct". Based on what you have learned to date on this, what would be response to your friend?

I would tell my friend "Hey engagement's can have varying costs depending on which one you do. An audit does have the highest-cost, but that is because it provides reasonable assurance. Reasonable assurance means that audditors gather sufficient evidence to form a positive expression of opinion regarding whether the information being assured is presented fairly. But in regard to auditor's finding every accounting errror in teh financial statements so they can gauarantee it's correct is wrong. There are no "gaurantees" in audits but there is reasonable assurance. Auditor's do however try to have 0 significant or matterial errors. Materiality is an amount determined by teh auditor to change the decision of a reasonable user of the financla statements".

The company has entered into a number of new complex and non-routine transactions.

Inherent Risk, Higher

There has been a change in management's bonus structure. In previous years, the bonus was based upon the company's accounting income. The new bonus structure is now not based on any financial information.

Inherent risk, Lower

Sara Bains is planning the audit of her favourite client. She has learned the following new information about the client. For each item, identify which risk in the audit risk model is most impacted by the information and whether it causes the risk to be higher or lower. Use #1 to identify the risk component in the risk model. Use #2 to identify whether it results in "Higher risk" or "Lower risk" No additional explanations are required.

N.A

Based on the following independent audit issues, which type of Auditor's Report should be issued for each scenario? Assume the client will not correct the issues noted.

N/A

For each of the following audit procedures, identify the following two items: 1. Audit evidence gathering technique 2. Audit evidence type When answering, use #1 for "Audit Evidence Gathering Technique" and #2 for "Audit Evidence Type". It is important that you get the right answer with the right number. No other explanations required

N/A

For each of the following audit procedures, identify the following: 1. Test of audit test (Test of Control, Test of Details, Analytical Procedures) 2. Audit Evidence Gathering Technique 3. Audit Objective Tested

N/A

The following are 3 independent situations. For each situation, identify: 1. Rule of Professional Conduct which is applicable to the situation 2. State whether or not it is a violation of the rule.

N/A

You are in the planning stage of this year's audit of your favorite client and you have assembled the following information from various sources. For each item, indicate 1. Which component of the Audit Risk Model (Acceptable Audit Risk or Inherent Risk or Control Risk) is most likely to be affected by the info 2. State whether the information makes the risk lower or higher

N/A

Ken Laye, public accountant, is opening a new accounting office. As part of his marketing campaign, he is sending brochures to all businesses within 2 km of his office. The brochure includes a photo of himself and his office and lists the services he provides. Are there any Rules of Professional Conduct that have been violated? If so, which specific rule?

Nope it does not. If he had written something like "I am Ken Laye, I am the smartest public accountant within these 2 km" then he could definitely be in violation of Rule 217 but from what we have been told there are no rules broken.

The allowance for doubtful accounts is incorrect and should be $100,000 higher. This was change the decision of an user of the financial statements but would not ruin the entire the financial statements

Qualified

The notes to the financial statements do not include a breakdown of the types of inventory as required. Although the amount is material, the auditor is still comfortable providing an "except for" audit opinion

Qualified Opinion

Review sales invoices to determine if the credit manager has properly approved the credit provided to customers.

Test of Control, Inspection of Documents, Valuation

Tour the warehouse to ensure that the security system appears to be working properly

Test of Control, Observation, Existence

Recalculate the depreciation expense for the year to ensure it's reasonable

Test of Detail, Recalculation, Accuracy

Send a letter to a supplier to confirm that the client doesn't owe them any money.

Test of Details, Confirmation, Completeness

Discuss with the CFO whether the inventory in the warehouse is on consignment

Test of Details, Enquiry of Client, Rights and Obligations

Which of the following situations would generally result in a higher inherent risk? The company has purchased another company is Asia. None of the responses provided Management's bonus is not based on any financial results The company being audited is in an industry that is not very complex Management's controls do not appear to be strong

The company has purchased another company is Asia.

The audit client will not allow the auditors to attend their subsidiary in China. The subsidiary is new and started production 2 months ago. However, the subsidiary's financial statements would not change the decision of an user of the financial statements

Unmodified

The auditors were unable to count the petty cash at year-end due to a power outage at the client's location. However, the client does not have a significant amount of petty cash and it is below the materiality amount

Unmodified

Jeff Skills, public accountant, has been asked by his uncle to help him prepare the year-end financial statements for his uncle's small business. The financial statements will be provided to the company's bank as required by the loan conditions. His uncle states that certain transactions may be wrong because the accountant was not very competent and recorded several incorrect transactions and that not all transactions were probably recorded. His uncle says not to worry because the bank only wants a rough idea of how the business is doing. Are there any Rules of Professional Conduct that have been violated? If so, which specific rule?

Yes there are Rules of Professional Conduct being violated here. The issue here is in regard to Rule 205: False or misleading documents and oral representations. This rule states that Jeff shall not sign or associate with any letter, report, statement, representation, or financial statement which knows or should know is false or misleading, whether or not the singing or association is subject to a disclaimer of responsibility. In this situation that would be Jeff not going back and ensuring all transactions are recorded and fixing recording errors.

A client approaches you and explains that they need to provide financial statements to the bank for a loan application for a small amount. The client says that the bank has requested some type of assurance engagement on the financial statements. Which of the following services can you not provide to meet this request? a) Compilation engagement b) Review engagement c) Audit engagement d) All of the above.

a) Compilation engagement

A qualified audit opinion indicates: a) IFRS has not been followed for a particular transaction and it is material but not pervasive b) The financial statements are fairly presented in all material respects except for an immaterial error. c) An accounting error has been identified which is not material d) A scope limitation has occurred which is material and pervasive e) None of the responses provided

a) IFRS has not been followed for a particular transaction and it is material but not pervasive

In the context of an audit of financial statements, substantive tests are audit procedures that a) May be either tests of details of balances or analytical procedures. b) Are designed to discover significant subsequent events. c) May be eliminated under certain conditions. d) Will increase proportionately with the auditor's reliance on internal control. e) None of the responses provided

a) May be either tests of details of balances or analytical procedures.

There are many facets of independence. A member in public practice who does the bookkeeping for a client and wishes to also perform tax advisory work for the same client is in breach of which facet of independence? a) None of the responses provided b) Self-review c) Self-interest d) Advocacy e) Investigative

a) None of the responses provided

Which of the following is an example of a IFRS Departure? a) Two of the answers provided are examples of IFRS Departure b) The auditor was not able to audit the inventory at one of the company's regional locations at year-end due to a snow storm c) The audit client forgot to disclose certain related party transactions in the notes to the Financial Statements d) The audit client overstated revenue at year-end. e) The auditor had difficulties getting information the sales transactions around year-end

a) Two of the answers provided are examples of IFRS Departure

Sampling risk for tests of controls is when a) an auditor concludes that the audit client's internal control system is effective when it is not. b) audit risk is increased. c) audit risk is reduced. d) an auditor concludes that materials misstatement exists when they do not.

a) an auditor concludes that the audit client's internal control system is effective when it is not.

The risk that an auditor concludes that a material misstatement exists when it does not will result in an a) increased risk that the audit will be inefficient. b) none of the responses provided. c) increase in the auditors assessment of the risk of material misstatement. d) increased risk that the audit will not be effective.

a) increased risk that the audit will be inefficient.

Insurance hypothesis tells us that: a) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail. b) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail. c) investors cannot insure themselves against loss when investing in an entity. d) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements

a) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.

Ming Yao reviewed the operations of a basketball academy. His objectives were to determine how efficiently the academy delivered its many programs. What kind of audit did he perform? a) performance/operational b) compliance c) financial d) comprehensive

a) performance/operational

Due care means that members of a profession must: a. act diligently. b. claim to possess all qualifications. c. question the reputation of accountants who are not members of professional bodies. d. provide all services clients request.

a. act diligently.

The parties relevant to an assurance engagement are: a. assurance practitioner, users, responsible party. b. assurance practitioner, responsible party, subject matter. c. assurance practitioner, users, criteria. d. assurance practitioner, subject matter, criteria.

a. assurance practitioner, users, responsible party.

The auditor must consider whether it is appropriate to assume that the client will remain as a going concern: a. because this means that assets are valued on the basis that they will continue to be used for the purposes of conducting a business. b. only if the client is facing bankruptcy, and long-term debt is likely to be withdrawn. c. only if the client is listed on a stock exchange. d. because mitigating circumstances are not important.

a. because this means that assets are valued on the basis that they will continue to be used for the purposes of conducting a business.

Profitability ratios are used to assess performance and: a. companies will be interested in trends in the ratios. b. companies will try to have the same ratio in each month of operation. c. should be the same for all divisions of the company. d. companies will track their revenue and expenses over time and assess any variability.

a. companies will be interested in trends in the ratios.

When an auditor inspects tangible assets on hand and traces the details to the details recorded in the client's records, the auditor is gathering evidence to support the: a. completeness assertion. b. existence assertion. c. both (a) and (b). d. neither (a) nor (b).

a. completeness assertion.

When testing controls the auditor: a. is interested in assessing the effectiveness of controls. b. gathers evidence about the balances of the main accounts. c. does not have to have any prior knowledge of the client's inherent risks and how the controls address those risks. d. all of the above.

a. is interested in assessing the effectiveness of controls.

Tolerable error: a. is the maximum error an auditor is willing to accept within the population. b. is positively related to sample size. c. relates only to control testing. d. is an amount prescribed by CAS 530.

a. is the maximum error an auditor is willing to accept within the population.

If an expert is engaged to assist with the audit: a. it means the auditor does not have the requisite skill and knowledge to assess the item. b.it means the auditor should not have taken on the audit because they are not qualified. c.CPA Canada must be contacted and permission obtained before the expert starts work. d. the auditor does not have to take responsibility for the fair presentation of the item in the financial statements.

a. it means the auditor does not have the requisite skill and knowledge to assess the item.

Agency theory explains that audits are demanded because conflicts can arise between: a. managers and owners. b. managers and agents. c. owners and principals. d. auditors and owners.

a. managers and owners.

If preliminary testing of controls reveals that the rate of deviation in controls is above the expected rate, the auditor will: a. reduce detection risk and increase reliance on detailed substantive testing at year end. b. increase detection risk and increase reliance on detailed substantive testing at year end. c. reduce detection risk and decrease reliance on detailed substantive testing at year end. d. increase detection risk and decrease reliance on detailed substantive testing at year end.

a. reduce detection risk and increase reliance on detailed substantive testing at year end.

A self-interest threat arises when: a. the auditor owns shares in the client's business. b. an assurance team member has recently been a director of the client. c. the auditor encourages others to buy shares in the client's business. d. the client threatens to use a different auditor next year.

a. the auditor owns shares in the client's business.

The purpose of the Auditing and Assurance Standards Board is: a. to set high-quality auditing and assurance standards. b. to regulate capital markets. c. to promote high-quality audits. d. to set the educational requirements for the Chartered Professional Accountant designation.

a. to set high-quality auditing and assurance standards.

The quantity of evidence that an auditor will gather: a. varies with audit risk. b. is the same for all audits because it has to be appropriate. c. depends on the size of the audit team. d. all of the above.

a. varies with audit risk.

When gaining an understanding of the client at the industry level, the auditor: a. will not ignore information about the client's industry. b. will not consider the level of demand for the goods and services provided by other companies in the client's industry. c. will not consider government taxes on the industry because they are out of the client's control. d. will not listen to bad news reports about the client firm because the client's reputation in the press is not important.

a. will not ignore information about the client's industry.

Which of the following would be considered the least reliable audit evidence? a) None of the responses provided b) Auditors perform analytical procedures using the preliminary financial results c) Auditors recalculate the depreciation expense for the year d) Auditors obtain third party confirmations from the audit client's customers e) Auditors attend the year-end inventory count and perform sample counting on the inventory

b) Auditors perform analytical procedures using the preliminary financial results

Which of the following is true with regards to the Combined and Substantive Audit Approaches? a) None of the responses provided b) Combined Audit Approach will generally include a low control risk assessment. c) Substantive Audit Approach requires testing of the client's system of internal controls. d) Substantive Audit Approach must be used when auditing publicly traded companies e) Combined Audit Approach requires understanding the internal controls where the Substantive Audit Approach does not

b) Combined Audit Approach will generally include a low control risk assessment.

The MNB Corp. implemented a new computer system to track and record insurance premiums receivable. Due to a program error, a whole series of invoices were appropriately included in revenue and deferred revenue but were inappropriately excluded from accounts receivable. The audit objective affected by this issue is: a) Accuracy b) Completeness c) Existence d) Cut-off e) Classification

b) Completeness

Your audit team has identified that the following audit procedure should be conducted: "Send letter to the bank to verify the client's year end bank balance." What type of evidence gathering technique would this represent? a) None of the responses provided b) Confirmation c) Enquiry d) Reperformance e) Inspection

b) Confirmation

The auditors of Sunnyside Corporation were reviewing accounts receivable write-off forms to ensure the Controller properly signed-off and authorized the write-off. What type of audit test is this? a) Analytical Procedures b) Control testing c) None of the responses provided d) Audit Planning e) Test of Detail Balances

b) Control testing

The majority of members of a client's "audit committee" should be: a) Shareholders of the company b) Directors who are not a part of company management c) Directors who are also on the governance committee d) Members of management e) None of the responses provided

b) Directors who are not a part of company management

Which of the following audit tests would be regarded as a "test of controls"? a) None of the responses provided b) Examining the bank reconciliation to ensure the person preparing it is a different person from the cash accountant. c) Reviewing an aging of receivables with the credit manager to assess the collectability of receivables. d) Discussing the valuation of inventory with the client. e) Counting the quantities in the warehouse and comparing them to the perpetual records to verify amounts.

b) Examining the bank reconciliation to ensure the person preparing it is a different person from the cash accountant.

Which of the following legal defenses involve arguing that the financial statement auditors have no responsibility to the third party that is suing them as they were unaware of the third party a) Lack of material misstatement b) None of the answers provided c) No damages d) Management was committing fraud e) Not enough audit fee

b) None of the answers provided

During the audit, the auditors identified that the Allowance for Doubtful accounts was understated by $5 million as one of the customers have recently filed for bankruptcy. Management did not correct this error which is material but not pervasive. The auditor should issue which type of Audit Opinion? a) Unmodified b) Qualified c) Adverse d) Disclaimer

b) Qualified

Which of the following is an advantage of using statistical sampling over non-statistical sampling? a) Statistical sampling allows an auditor to select a sample he/she believes is appropriate. b) Statistical sampling allows for the measurement of sampling risk. c) Statistical sampling is easier to use. d) Statistical sampling eliminates the need for judgement.

b) Statistical sampling allows for the measurement of sampling risk.

Which of the following is an example of a Scope Limitation? a) None of the answers provided b) The auditor was not able to audit the inventory at one of the company's regional locations at year-end due to weather c) The auditor was able to audit the accounts properly even though they were not permitted to be at the audit client's location due to COVID-19. d) The audit client overstated revenue at year-end. e) The audit client forgot to disclose certain related party transactions in the notes to the Financial Statements

b) The auditor was not able to audit the inventory at one of the company's regional locations at year-end due to weather

An accounting firm is planning the audit of Honda Manufacturing Corp. They are assessing the fraud risk factors at the company. Which of the following would be an example of the opportunity fraud risk condition? a) The company's debt is coming due for renewal next year b) There are various related party transactions during the year c) The company has had significant losses over the last 3 years d) Management and the Board are heavily focused on maximizing profit. e) None of the responses provided

b) There are various related party transactions during the year

Which of the following are examples of a non-assurance engagement? a) The accounting firm is hired to assist the company prepare their financial statements for a bank loan b) Two of the above are examples of non-assurance engagements c) The accounting firm is hired to provide an opinion on the financial statements which may be used by a bank d) The accounting firm is hired to provide the company with tax planning advice and services e) The accounting firm is hired to audit the company's internal controls over financial reporting

b) Two of the above are examples of non-assurance engagements

Which of the following factors increases sample size in tests of controls? a) a decrease in the expected deviation rate in the population b) a decrease in the tolerable deviation rate c) a decrease in the number of sampling units in the population d) a decrease in the extent to which an auditor's risk assessment takes into account internal controls

b) a decrease in the tolerable deviation rate

Non-statistical sampling is: a) the process of dividing a population into groups of sampling units with similar characteristics. b) an approach to sampling which includes any selection method that does not have the characteristics of statistical sampling. c) an approach to sampling where random selection is used to select a sample and probability theory is used to evaluate the sample results. d) the process whereby a sample is selected free of bias and each item in a population has an equal chance of selection.

b) an approach to sampling which includes any selection method that does not have the characteristics of statistical sampling.

An example of the three parties in an assurance engagement would be: a) audit client, employee, customer b) audit client, supplier, auditor c) auditor, shareholder, general public d) auditor, general public, employees

b) audit client, supplier, auditor

Simple explanation of the expectation gap is: a) gap between the actual time it takes the audit to be completed vs. what the client believes how long it should take b) gap between what users of the financial statements believe the auditors are doing and the level of assurance they provide vs. what the auditors actually do and the level of assurance provided c) gap between what the shareholders believe is management's responsibility for the financial statements vs. what management's responsibility really is. d) gap between what the users of the financial statements believe is paid for the audit vs. what is actually paid for the audit

b) gap between what users of the financial statements believe the auditors are doing and the level of assurance they provide vs. what the auditors actually do and the level of assurance provided

Michael Stiller performed work for a client in the real estate business and issued a Review Engagement Report. What degree of assurance does this report provide to the user of the statements? a) reasonable assurance b) moderate assurance c) no assurance d) none of the above

b) moderate assurance

The auditor has discovered errors when conducting substantive testing on a sample of invoices. If the total error discovered is $3,442, the dollar value of the sample is $25,136, and the population dollar value is $64,912, then the projected error is: a. $3,442. b. $8,889. c. $1,885. d. $1,369.

b. $8,889.

An attitude of professional scepticism means: a. the auditor can rely on past experience to determine the current risk of fraud. b. any indicator of fraud is properly investigated. c. the auditor can rely on management assertions. d. all of the above.

b. any indicator of fraud is properly investigated.

Client closing procedures: a. are routine transactions that do not have an impact on audit risk. b. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period. c. affect expense accounts only. d. all of the above.

b. are the responsibility of those charged with governance who must ensure that transactions are recorded in the correct accounting period.

When an auditor gathers documentary evidence or physical evidence to support an entry in the client's records, the auditor is gathering evidence to support the: a. completeness assertion. b. existence assertion. c. both (a) and (b). d. neither (a) nor (b).

b. existence assertion.

An auditor is interested in the client's inventory turnover ratio because it helps the auditor understand: a. if the industry is the same as another industry. b. if the client is as competitive and has as high a turnover as the industry average. c. if the client's accounts receivable customers are paying their accounts on time. d. if the client is in the right industry.

b. if the client is as competitive and has as high a turnover as the industry average.

Professional independence for auditors: a. detracts from the ability of users to rely on the financial statements to make their decisions. b. is the ability to act with integrity, objectivity, and professional scepticism. c. is important when the auditor acts independently, and it does not matter what people believe about the auditor's independence. d. is only relevant to audits for new clients, not for continuing clients.

b. is the ability to act with integrity, objectivity, and professional scepticism.

Sampling risk: a. is the risk that the results of the test will be misinterpreted by the auditor. b. is the risk that the sample chosen by the auditor is not representative of the population of transactions. c. can be eliminated by taking a random sample. d. applies only to samples for substantive testing.

b. is the risk that the sample chosen by the auditor is not representative of the population of transactions.

Deviations: a. are errors that affect account balances by a material amount. b. occur when controls do not operate as intended. c.are relevant only when they occur consistently throughout the accounting period. d. are caused by auditors choosing incorrect audit procedures.

b. occur when controls do not operate as intended.

If a prospective new audit client does not allow the auditor to contact its existing auditor: a. the auditor should contact the existing auditor anyway because it is their duty. b. the auditor should consider refusing to take on the prospective new client. c. the existing auditor should contact the new auditor to tell them all about the client. d. the auditor should respect the prospective client's right to privacy.

b. the auditor should consider refusing to take on the prospective new client.

Inherent risk is: a. the risk the auditor will issue an inappropriate opinion. b. the risk the financial statements are materially misstated without any consideration of controls. c. the only risk the auditor can control. d. a risk that requires special audit consideration.

b. the risk the financial statements are materially misstated without any consideration of controls.

Performance audits are useful because: a. they include an internal audit. b. they are concerned with the economy, efficiency, and effectiveness of an organization's activities. c. they involve gathering evidence to ascertain whether the entity under review has followed the rules, policies, procedures, laws, or regulations with which it must conform. d. none of the above.

b. they are concerned with the economy, efficiency, and effectiveness of an organization's activities.

Generally, the auditor could be legally liable: a. under contract law to third parties and to the client. b. under contract law and under the tort of negligence to the client. c. under contract law but not under the tort of negligence to third parties. d. under the tort of negligence but not contract law to the client.

b. under contract law and under the tort of negligence to the client.

The audit expectation gap occurs when: a. auditors perform their duties appropriately and satisfy users' demands. b. user beliefs do not align with what an auditor has actually done. c. peer reviews of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfies users' demands. d. the public is well educated about auditing.

b. user beliefs do not align with what an auditor has actually done.

An audit strategy: is determined by the client. involves determining the amount of time to be spent testing the client's internal controls and conducting detailed substantive testing. sets the scope, timing and direction of the audit. both b and c.

both b and c.

An error would be considered material if: a) Management believes it is not important b) Amount is less than the net income c) Auditor believes the amount is big enough that an user of the financial statements would care about it d) Management agrees that it is important

c) Auditor believes the amount is big enough that an user of the financial statements would care about it

Which of the following is true about Financial Statement audits? a) Audits are an opinion that management is doing an effective job operating the company b) Audits will find all the errors in the financial statements c) Audits are based on professional judgment and materiality d) Audits are performed by the Executive management of the company

c) Audits are based on professional judgment and materiality

Which of the following Rules of Professional Conduct do not allow public accountants to have audit fees that are based on whether a company will receive a bank loan after the audit? a) False and Misleading Information b) None of the responses provided c) Contingent fees d) Commissions e) Confidentiality

c) Contingent fees

Which of the following is one of the key items that the Canadian Public Accountability Board is responsible for. a) Develop the new IFRS standards b) Audit the Federal Government to ensure money is being spent efficiently c) Inspect the Public Accounting firms to ensure they are performing quality audits d) Audit all the companies on the Toronto Stock Exchange

c) Inspect the Public Accounting firms to ensure they are performing quality audits

If the primary auditor relies on the work of other auditors and no material errors have been identified in the financial statements they are auditing, the primary auditor should: a) Issue an Unmodified opinion and mention the other auditors' involvement b) None of the responses provided c) Issue an Unmodified opinion and not refer to the other auditors d) Deny an opinion e) Qualify their opinion

c) Issue an Unmodified opinion and not refer to the other auditors

Materiality is an important concept in financial statement auditing. Which of the following is true with regards to materiality? a) It is the amount that the Board of Directors believe is significant to the financial statements b) It is the amount that Senior Management calculate based on net income and provide to the auditors to use in the audit c) None of these answers provided d) It is always $1 million e) It is the amount that the auditors believe would impact their audit fees

c) None of these answers provided

Which of the following is an example of a non-assurance service? a) Public accountant performs a Review Engagement b) Public accountant performs a Financial Statement Audit c) Public accountant prepares the financial statements for the client d) None of the above

c) Public accountant prepares the financial statements for the client

A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a a) Judgmental sample b) Haphazard sample c) Random sample d) Biased sample

c) Random sample

Michael Fernandez has decided to perform substantive procedures at a major retailer. Which one of the following is not a substantive procedure? a) Bank confirmations regarding interest rates on borrowings by client b) Recalculating an interest expense using confirmed interest rates c) Re-Performing management procedures to ensure they are working effectively d) Inspecting documents to verify the dates of the transactions e) None of the responses provided

c) Reperforming management procedures to ensure they are working effectively

Which of the following is NOT one of the key reasons why financial statement audits required each year for publicly traded companies? a) Required by stock exchange regulators b) Shareholders would like assurance that the financial results reported are reliable c) Required by International Financial Reporting Standards (IFRS) d) All of the above are key reasons why financial statement audits are required

c) Required by International Financial Reporting Standards (IFRS)

The accounting firm of Morris and Olsvik, CPA, CAs are being investigated for a violation of the independence rule. Which of the following is a independence threat of FAMILIARITY? a) The accounting firm was also hired to represent the audit client in court as a financial expert. b) Owing a significant amount of money to or being owed a significant amount of money by a client. c) The auditor is auditing a company where the CFO is her husband. d) Having a single client whose fee(s) represents a major portion of the public accountant's total revenue.

c) The auditor is auditing a company where the CFO is her husband.

Which of the following is the key reason why accounting firms more concerned with third parties suing them vs. the audit client suing them? a) Third parties generally have better lawyers b) None of the answers provided c) Third party lawsuits can generally result in significantly higher dollar amounts than lawsuits from the audit client d) Audit clients are not allowed to sue the financial statement auditors e) Third parties are not allowed to sue the financial statements auditors

c) Third party lawsuits can generally result in significantly higher dollar amounts than lawsuits from the audit client

Which of the following is one of the factors that should be considered when the auditor determines their acceptable audit risk? a) Presence of related parties b) Susceptibility of assets to misappropriation c) Users of the audited financial statements d) Client motivation e) None of the responses provided

c) Users of the audited financial statements

What does a combined audit approach mean? a) When the auditors combines the planning phase and testing phase b) When the auditor combines analytical review with test of detail balances c) When the auditor decides to test controls and perform substantive tests d) None of the responses provided e) When the auditor uses various accounting firms to audit the same company

c) When the auditor decides to test controls and perform substantive tests

The selection of a sample without use of a methodical technique is a) judgmental selection. b) block selection. c) haphazard selection. d) random selection.

c) haphazard selection.

When an auditor is not able to obtain sufficient appropriate audit evidence on which to base an opinion and concludes the effects to be material but not pervasive then the report is issued with a(n) a) unmodified opinion. b) adverse opinion. c) qualified opinion. d) none of the above.

c) qualified opinion.

The timing of audit testing refers to: a) the purpose of the audit test. b) the amount of audit evidence collected. c) the stage of the audit plan when tests are conducted. d) the detailed tests of transactions and balances.

c) the stage of the audit plan when tests are conducted.

If the auditor has determined that a Qualified Audit Report must be issued, this means that: a) there were accounting errors identified that were not material b) there was a scope limitation on one of the financial statement accounts that was considered material and pervasive c) there was an accounting error that was considered material but not pervasive d) none of the above

c) there was an accounting error that was considered material but not pervasive

The insurance hypothesis means: a. managers must take insurance. b. owners must take insurance. c. an audit acts as insurance. d. none of the above.

c. an audit acts as insurance.

Analytical procedures: a. are less efficient than substantive testing of details. b. place less reliance on the client's accounting records than substantive testing of details. c. are relied on to a greater extent when a client's internal controls are effective. d. are most useful when inherent and control risk are high.

c. are relied on to a greater extent when a client's internal controls are effective.

Generally the most persuasive form of evidence is: a.internally generated evidence. b. externally generated evidence held by the client. c. externally generated evidence sent directly to the auditor. d. none of the above; they are equally persuasive.

c. externally generated evidence sent directly to the auditor.

The relationship between audit risk, reliance on substantive testing, and evidence persuasiveness is: a. high audit risk, low reliance on substantive testing, low evidence persuasiveness required. b. low audit risk, high reliance on substantive testing, low evidence persuasiveness required. c. high audit risk, high reliance on substantive testing, high evidence persuasiveness required. d. low audit risk, low reliance on substantive testing, high evidence persuasiveness required.

c. high audit risk, high reliance on substantive testing, high evidence persuasiveness required.

An auditor will identify accounts and related assertions at risk of material misstatement: a. after testing internal controls. b. before writing the audit report. c. in order to plan the audit to focus on those accounts. d. to eliminate audit risk.

c. in order to plan the audit to focus on those accounts.

Non-sampling risk: a. occurs only if you test every member of the population. b. applies only to samples taken for the purposes of control testing. c. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues. d. does not occur if an auditor relies on unreliable evidence.

c. is the risk that an auditor arrives at an inappropriate conclusion for a reason unrelated to sampling issues.

Analytical procedures: a. cannot be performed on interim data. b. are not affected by different accounting methods between the client and other members of the industry. c. must take into account seasonal variation in the client's business. d. are only useful if the client's variance from budget is low.

c. must take into account seasonal variation in the client's business.

A combined audit strategy: a. is appropriate when internal controls are minimal. b. means that the auditor will gain the minimum necessary knowledge of the client's system of internal controls. c. requires the auditor to conduct extensive control testing. d. means that the auditor will conduct extensive testing of yearend account balances.

c. requires the auditor to conduct extensive control testing.

Testing controls means that: a. the auditor can completely rely on a client's system of internal controls. b. no substantive testing is required. c. the auditor can plan to reduce their reliance on detailed substantive testing of transactions and account balances. d. all of the above.

c. the auditor can plan to reduce their reliance on detailed substantive testing of transactions and account balances.

An auditor disclaims responsibility when: a. the users cannot rely on the financial statements. b. the audit opinion is unqualified and unmodified. c. the auditor is unable to obtain sufficient evidence about a potentially material and pervasive matter. d. the audit opinion is unqualified and the auditor includes a paragraph in the audit report to emphasize something important.

c. the auditor is unable to obtain sufficient evidence about a potentially material and pervasive matter.

A self-review threat arises when: a. the auditor has a loan from the client. b. the auditor represents the client in negotiations with a third party. c. the auditor performs services for the client that are then assured. d. there is a long association between the auditor and its client.

c. the auditor performs services for the client that are then assured.

The working papers for a client contain both a permanent and a current file. The difference between the two files is that: a. the permanent file is kept by the audit partner in charge and cannot be altered after the first audit engagement is completed, but the current file can be updated. b. the permanent file is provided to the client and the current file is not. c. the permanent file includes documents that relate to the client and are relevant for more than one audit, and the current file includes the details of work completed and evidence gathered that relate to the current audit. d. all of the above.

c. the permanent file includes documents that relate to the client and are relevant for more than one audit, and the current file includes the details of work completed and evidence gathered that relate to the current audit.

The function of internal audit is determined by: a. the external auditor. b. the Institute of Internal Auditors. c. those charged with governance and management. d. the government.

c. those charged with governance and management.

Independence is very important for financial statement auditors. Who does the financial statement auditor meet with to present their audit findings to? a) CEO b) None of the answers provided c) Shareholders d) Audit Committee of the Board e) Internal audit

d) Audit Committee of the Board

A public accountant has been asked by their client to perform an IT system implementation for them. The public accountant does not have experience doing this type of work. What rule is applicable to this situation? a) Confidentiality b) Objectivity c) Communication with predecessor auditors d) Competence e) Commission

d) Competence

If the auditors believe that consolidated financial statements need to be prepared but the client only has non-consolidated financial statements, the auditor should: a) Deny an opinion b) Add an emphasizing paragraph to their unqualified opinion c) Qualify their opinion d) Issue a qualified or adverse opinion. e) Add an explanatory paragraph to their unqualified opinion

d) Issue a qualified or adverse opinion.

How many auditors does it take to screw in a lightbulb at the company's office? a) 3 b) 1 c) 2 d) None

d) None

What is a simple explanation of professional judgment in terms of financial statement audits? a) Decisions being made by management based on their professional experience b) Decisions made by auditors during the audit based only on auditing standards c) Decisions made by auditors during the audit based both on their professional experience and management input. d) None of the above

d) None of the above

What is the key difference between Adverse and Disclaimer Opinions? a) One relates to material and pervasive items whereas the other one doesn't b) One would result in a Qualified Opinion whereas the other one would not c) None of the responses provided d) One relates to accounting errors and the other relates to scope restrictions e) One would result in an Unmodified Opinion whereas the other one would not

d) One relates to accounting errors and the other relates to scope restrictions

Sampling risk is an inherent part of sampling that results from a) Weaknesses in client's internal control system b) Failure to recognize exceptions c) Inappropriate audit procedures d) Testing less than the entire population

d) Testing less than the entire population

Which audit assertion does the following relate to? The inventory at year-end is being audit tested to ensure the selling price is higher than the inventory cost. a) Existence b) Completeness c) Cut-off d) Valuation e) Accuracy

d) Valuation

Which of the following would decrease the sample size in substantive tests? a) an increase in the amount of misstatement the auditor expects to find in the population b) the number of sampling units in the population c) a decrease in tolerable misstatement d) a decrease in the auditor's assessment of the risk of material misstatement

d) a decrease in the auditor's assessment of the risk of material misstatement

Professional scepticism involves: a) having a questioning mind during an audit engagement b) seeking independent evidence to corroborate information provided by their client c) being suspicious when evidence contradicts documents held by their client or enquiries made of client personnel d) all of the above.

d) all of the above.

In the second year of the client's audit, the auditor decides the control risk is now higher from the previous year. To achieve the same level of assurance as the previous year, the auditor would: a) increase materiality levels b) decrease the audit fee c) increase inherent risk d) decrease planned detection risk e) decrease substantive testing

d) decrease planned detection risk

Stratification is: a) selecting items that are grouped together within the population. b) choosing the nth item within a population. c) selection of items an auditor believes should be included in the sample. d) division of a population into groups of items with similar characteristics.

d) division of a population into groups of items with similar characteristics.

Which of the following would be an example of a no assurance engagement? a) the review of annual financial statements. b) the audit of annual financial statements. c) the reporting of procedures performed by the auditor as agreed by the client. d) none of the above.

d) none of the above.

Vera Sobczyk spent a week at a client's wholesale operation determining whether the client's remittances to the tax authorities were in accordance with tax regulations. This is an example of a(n) a) taxes payable mandate b) financial audit c) performance / operational audit d) none of these

d) none of these

Which of the following is a statistical sampling method? a) block selection b) haphazard selection c) judgmental selection d) random selection

d) random selection

A detailed audit plan: a. is based on the overall audit strategy. b. contains a description of the control testing procedures. c. lists the audit procedures to be used in substantive testing. d. all of the above.

d. all of the above.

An example of an item that is material is: a. a theft of $100. b. an undisclosed lawsuit for $1 million. c. an undisclosed related party. d. all of the above.

d. all of the above.

An example of an opportunity that increases the risk of fraud is: a. the client operates in a highly competitive industry. b. the client has a history of making losses. c. there is a high volume of transaction close to year end. d. all of the above.

d. all of the above.

Analytical procedures are used to gather evidence: a. at the risk assessment phase to gain an understanding of a client. b. at the risk response phase to evaluate information included in the financial statements. c. at the reporting phase to assess whether the financial statements reflect the auditor's understanding of their client. d. all of the above.

d. all of the above.

Common uses of analytical procedures include: a. risk identification during the risk assessment phase. b. estimation of account balances during the risk response phase. c. overall assessment of the financial statements at the reporting phase. d. all of the above.

d. all of the above.

Inspecting documents, such as an invoice for the purchase of fixed assets, provides the auditor with evidence relevant to the: a. rights and obligations assertion, because the document will show the client's name as the purchaser. b. occurrence assertion, because the document will show that the transaction took place on the specified date. c. accuracy assertion, because the document will show the purchase amounts. d. all of the above.

d. all of the above.

Safeguards to independence: a. minimize the risk that a threat to independence will surface. b. deal with a threat when one becomes apparent. c. are developed by the accounting profession, legislators, regulators, clients, and accounting firms. d. all of the above.

d. all of the above.

The CSA's Corporate Governance Guidelines are designed to help companies: a. improve their corporate structure. b. improve performance. c. enhance their accountability to shareholders and other interested third parties. d. all of the above.

d. all of the above.

Those charged with governance have a responsibility to ensure that the information in financial statements is: a. relevant and reliable. b. comparable and understandable. c. fairly presented. d. all of the above.

d. all of the above.

When gaining an understanding of the client's operations, the auditor: a. will note the number of operations the client has. b. will consider if the client is geographically dispersed. c. will note where the client operates. d. all of the above.

d. all of the above.

When gaining an understanding of the client, the auditor will identify the geographic location of the client because: a. more spread-out clients are harder to control. b. the auditor will need to visit the various locations to assess processes and procedures at each site. c. the auditor will plan to use staff from affiliated offices to visit overseas locations. d. all of the above.

d. all of the above.

For an audit, the auditor can control: a. inherent risk. b. control risk. c. financial risk. d. detection risk.

d. detection risk.

An auditor will perform all of the following to gain an understanding of the entity, except: a. make inquiries of both financial and non-financial staff who may be able to identify the risk of material misstatement. b. perform analytical procedures to identify any unusual or unexpected relationships that may indicate areas of risk. c. perform observation and inspection procedures to corroborate the responses by management. d. perform detailed testing on key balance sheet accounts.

d. perform detailed testing on key balance sheet accounts.

An external confirmation sent to a customer: a. provides strong evidence for the valuation assertion when the customer agrees with the balance owing. b. requests information about due dates. c. primarily focuses on accounts where there are small or zero balances. d. provides evidence for the existence assertion.

d. provides evidence for the existence assertion.

The assertion of cut-off: a. reflects that all assets and liabilities that should have been recorded are recorded. b. ensures that events have been recorded in the correct accounts. c. is an assertion made by the auditor to help determine audit testing. d. reflects that all events have been recorded in the correct accounting period.

d. reflects that all events have been recorded in the correct accounting period.

Audit committees for listed entities per the CSA: a. must include the CFO if he or she is on the board of directors. b. can be any size. c. have the same chair as the board of directors. d. should have a formal charter.

d. should have a formal charter.

Reasonable assurance means: a. the auditor disclaims responsibility for the audit opinion. b. an adverse audit report. c. the auditor has done adequate work to report whether or not anything came to their attention that would lead them to believe that the information being assured is not fairly presented. d. the auditor has gathered sufficient and appropriate evidence to form a positive expression of opinion regarding the financial statements.

d. the auditor has gathered sufficient and appropriate evidence to form a positive expression of opinion regarding the financial statements.

A client engagement letter should include all of the following except: a. the objective and scope of the audit. b. the expected form and content of the audit report. c. management's responsibilities. d. the results of previous audits.

d. the results of previous audits.

When gaining an understanding of the client, the auditor will consider: a. related party identification. b. the appropriateness of the client's system of internal controls to mitigate identified business risks. c. controls over the technology used to process and store data electronically. d.all of the above.

d.all of the above.

Professional behaviour means that members of the professional body must: a. maintain their knowledge and skill at the required level. b. keep up to date with changes in regulations and standards. c. act diligently. d.uphold the reputation of the profession.

d.uphold the reputation of the profession.

Which of the following audit procedures would be considered the highest reliable audit evidence? a) Auditor discussing the allowance for doubtful accounts with the CFO b) Auditor comparing the key financial ratios to last year c) Auditor observing the company count the inventory at year-end d) Auditor obtaining copies of invoices from the client e) Auditor recalculating the interest expense

e) Auditor recalculating the interest expense

For the standard Auditor's Report, which section of the Report would include the concept that the audit includes understanding the internal controls but not expressing an opinion on internal controls a) Basis for Opinion section b) None of the answers provided c) Responsibilities of management and those charged with governance for Financial Statements section d) Opinion section e) Auditor's responsibilities for the Audit of the Financial Statements section

e) Auditor's responsibilities for the Audit of the Financial Statements section

Which of the following statement is true? a) An Unqualified Auditor's Report may still be issued if there are uncorrected errors in the financial statements which are material but not pervasive b) An error in the financial statements is only considered material if it is more than the company's net income amount. c) The materiality amount used in audit engagements is generally determined by the auditor and approved by management. d) None of the above responses provided e) Auditors are responsible to identify material misstatements but should also be concerned with immaterial errors due to fraud.

e) Auditors are responsible to identify material misstatements but should also be concerned with immaterial errors due to fraud.

The Board of Directors of Biden Co. are looking for the public accounting firm to audit whether the Senior Management of the company have been complying with the company's policies and procedures. What type of audit is this? a) Performance / Operational audit b) Comprehensive audit c) Financial Statement audit d) None of the answers provided e) Compliance audit

e) Compliance audit

Which of the following statements about materiality is NOT correct? a) None of the responses provided b) Materiality is a key auditing concept that is assessed during the planning stage of every audit. c) The preliminary assessment of materiality guides audit planning and testing. d) Materiality is the amount the auditors believe will change the decision of a reasonable financial statement user e) Information is only considered material when management determines that the amount is big enough that the shareholders will care about the amount.

e) Information is only considered material when management determines that the amount is big enough that the shareholders will care about the amount.

Regency Fire Extinguishers Inc. decided to overstate revenue by recording fake sales. Several fake clients were created and sales were added into the sales journal throughout the year. The management assertion or audit objective affected by these actions is: a) Completeness b) Classification c) None of the responses provided d) Accuracy e) Occurrence

e) Occurrence

Michael Jones has decided to take a Substantive Audit approach on the audit at a major retailer. Which of the following audit procedures are not consistent with this audit approach? a) Recalculating an interest expense using confirmed interest rates b) Sending a bank confirmation letter for the year-end audit c) Attending the year-end inventory count and performing sample counts to ensure the inventory is recorded at the right amounts d) All of the responses provided are consistent with a Substantive Audit Approach e) Reperforming procedures to ensure the controls are working effectively

e) Reperforming procedures to ensure the controls are working effectively

The auditor was test counting inventory on a sample basis at the company's year-end inventory count. Which type of audit test is this? a) Audit Planning b) Analytical Procedures c) All of the responses provided d) Control testing e) Test of Detail Balances

e) Test of Detail Balances

Which of the following appears to be an example of the "Audit Expectation Gap"? a) None of the answers provided b) The auditors did not attend the year-end inventory count as they got the date wrong c) The client expected the auditor to start the audit testing during the second week of January but the auditors didn't start until February. d) The auditor expected the client to have all supporting documentation ready for the audit by the first week of January but they were not ready until the end of January e) The bank that has a significant loan with the audit client and the bank expected the auditors to test all transactions at year-end as part of the audit

e) The bank that has a significant loan with the audit client and the bank expected the auditors to test all transactions at year-end as part of the audit

When testing for accuracy, an auditor searches for evidence: a) to verify that recorded assets are owned by the entity. b) None of the responses provided c) that all disclosures that should have been included in the financial statements have been included. d) to verify that a recorded transaction or event took place and relates to the entity. e) that transactions and events recorded are at the appropriate amounts.

e) that transactions and events recorded are at the appropriate amounts.

Qualitative materiality refers to information that: is less than an auditor's preliminary materiality amount impacts a user's decision-making process for a reason other than its magnitude. exceeds an auditor's preliminary materiality amount impacts a user's decision-making process due to its magnitude. none of the answers provided

impacts a user's decision-making process for a reason other than its magnitude.

Martin Shawbridge, a manager at Cox, Durham, & Elliott, CA's was given the mandate to deal with the following risks: fraud risks, complex transactions, significant related party transactions. How would you classify these risks? inherent risk audit risk control risk significant risk none of the responses provided

inherent risk

By assessing control risk as high, an auditor has determined that their client's system of internal controls: none of the responses provided is unlikely to be effective in mitigating inherent risks identified. is very effective at preventing or detecting material misstatements. will eliminate the possibility of material fraud or error. is very strong.

is unlikely to be effective in mitigating inherent risks identified.

The audit strategy for a client with high inherent risk and high control risk will include: no or very limited tests of controls. increased reliance on controls. increased testing of controls. decreased reliance on substantive tests.

no or very limited tests of controls.

By setting high detection risk, an auditor will likely: eliminate the possibility that fraud will be detected. reduce the level of testing of the client's internal control system. increase the level of reliance placed on their detailed substantive procedures. reduce the level of reliance placed on their detailed substantive procedures.

reduce the level of reliance placed on their detailed substantive procedures.