Audit and Assurance

Advocacy threats

here the practitioner (or his or her firm) is perceived to promote, or actually promotes, the position of the client, as in the following examples:

You, CPA, work for the Provincial Auditor General and are planning an engagement to provide assurance on whether the Provincial Government's new Greenhouse Gas Initiative is economical, efficient, and effective. Which type of engagement would be most appropriate? a) A comprehensive audit b) An audit report on compliance with agreements, statutes and regulations c) A forensic audit d) An environmental audit

Answer a) is correct. Comprehensive audits are performed to determine whether an entity is using its resources economically, efficiently, and effectively.

Liabilities

Things you have to pay because of something you did in the past which is to be paid with future cash payments

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

Which of the following statements regarding the auditor's approach in establishing the overall audit strategy is true?

A. The audit strategy is developed during the first stage of the audit process. B. As the auditor is planning a new audit, the results from the previous year are irrelevant. C. The auditor will consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant. D. In determining overall strategy, the client will determine the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required.

Which of the following is a main qualitative characteristic in the ASPE framework? A. Verifiability B. Timeliness C. Neutrality D. Relevance

D. Relevance Correct! Relevance is one of the main characteristics of the ASPE framework, along with understandability, reliability, and comparability. Relevance means that the financial information provided is capable of making a difference in the decisions made by users, and that without this information, the decision maker may make a different decision.

Performance materiality

The auditor will determine a lower materiality for purposes of assessing the risks of material misstatement and determining the nature, timing, and extent of further audit procedures.

Control risk examples

Use of an outdated general ledger system that is no longer supported by the software system: An outdated general ledger system used for financial reporting may not reliably compile financial statement information. • Lack of segregation of duties: Staff may have access to the complete accounting cycle of transactions, which increases the risk of fraud and error occurring and going undetected. • Lack of an internal audit function: Management and the board of directors may not be aware of the company's control deficiencies. • Lack of general computer controls, such as passwords, firewalls, encryption, virus protection, backup system, and so forth: These risks make the system susceptible to a loss of data or intrusion by unwanted parties. • Management has a poor attitude toward control or places little importance on control systems: Appropriate controls may not be in place or employees may put little effort into following and/or executing controls. • Management override of controls: This sets a tone at the top for a disregard of controls. • Lack of policies: Employees may act inappropriately and inconsistently, and there may be a lack of accountability. • Lack of system documentation: It may be difficult to ascertain system processes and controls. Employees may not be following complete system processes.

ualitative characteristics of financial information under Accounting Standards for Private Enterprises (ASPE) in Canada

1. Relevance: financial information is capable of making a difference in decision-making. 2. Reliability: financial information is free from material error and bias. 3. Comparability: financial information can be compared across time and with other entities. 4. Understandability: financial information is presented in a manner that is easy to understand by its intended users.

qualitative characteristics of financial information under International Financial Reporting Standards (IFRS)

1. Relevance: financial information is useful for making decisions. 2. Faithful representation: financial information accurately represents what it purports to represent. 3. Completeness: financial information includes all relevant information to understand the transactions and events being reported. 4. Comparability: financial information can be compared with other information over time and across companies. 5. Timeliness: financial information is made available in a timely manner. 6. Understandability: financial information is presented in a way that is easily understandable to users.

Which of the following statements regarding the basis for opinion paragraph of the Independent Auditor's Report is true? A. This paragraph discusses the auditor's independence from the auditee and compliance with ethical requirements. B. The basis for opinion paragraph is located at the top of the auditor's report directly under the Title and Addressee sections of the report. C. The purpose of this paragraph is to provide the users with the auditor's opinion on the financial statements. D. This paragraph discusses areas of higher assessed risk of material misstatement.

A

Which of the following statements is true regarding Part I (IFRS)? A. The standards known as IFRS comprise the IFRSs, IASs, SICs, and IFRICs. B. New SICs that interpret the accounting standards and provide additional insight are regularly issued. C. IFRIC and SIC are used most often in case situations or questions. D. IASs and IFRSs are both issued regularly, depending on the standard.

A. The standards known as IFRS comprise the IFRSs, IASs, SICs, and IFRICs. Correct! IAS stands for International Accounting Standards; IFRIC stands for International Financial Reporting Interpretations Committee, and SIC stands for Standard Interpretations Committee.

Which of the following statements describes the IFRS conceptual framework and not the ASPE framework? A. Timeliness is a distinct and separate enhancing characteristic. B. When there are competing qualitative characteristics, a trade-off must be made between competing characteristics. C. Representational faithfulness is a sub-characteristic of reliability. D. Materiality is a separate principle outside of qualitative characteristics.

A. Timeliness is a distinct and separate enhancing characteristic. Correct! Under ASPE, timeliness is a subset of relevance, not a distinct and separate enhancing characteristic, which it is under the IFRS conceptual framework.

Which of the following statements best describes the purpose of the Canadian AcSB? A. To establish accounting standards for all Canadian entities outside the public sector B. To provide a harmonized and unified approach to securities regulation across Canada C. To develop accounting standards for publicly accountable Canadian entities D. To incorporate feedback from the public into the development of accounting standards in Canada

A. To establish accounting standards for all Canadian entities outside the public sector Correct! The AcSB is an independent body that has the authority to establish accounting standards for all Canadian entities outside the public sector. It also contributes to the development of IFRS. The AcSB only develops accounting standards for Canadian private enterprises, not-for-profit entities, and pension plans. The AcSB works closely with the IASB in contributing to the development of IFRS, and therefore most of these standards are adopted into Part I of the Handbook, which must be applied by Canadian publicly accountable enterprises.

Which of the following is an effective internal control measure that encourages receiving department personnel to count and inspect all merchandise received? a) Quantities ordered are excluded from the receiving department copy of the purchase order. b) Vouchers are prepared by the accounts payable department personnel only after they match item counts on the receiving report with the purchase order. c) Receiving department personnel are expected to match and reconcile the receiving report with the purchase order. d) Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving report

Answer a) is correct because this measure would prevent receiving staff from overlooking or removing any additional merchandise that may have been received.

Steven, CPA, has completed his audit of Abbots Machining Inc. (AMI). The confirmation of accounts receivable did not go well, and the majority of AMI's customers were unresponsive to the confirmations and follow up requests. Steven is now preparing the auditor's report.This failure to be able to obtain external confirmation of customers' outstanding balances was determined to potentially have a material but not pervasive impact on the financial statements.As a result, the auditor's report will have: a) A qualified opinion b) A disclaimer of opinion c) An emphasis of matter paragraph d) An adverse opinion

Answer a) is correct. A qualified opinion is required when a scope limitation could limit the ability to identify errors that may be material but not pervasive.

Which of the following user's objectives would be best met with a review using CSAE 3531 Direct Engagements to Report on Compliance? a) MAP Inc. requires some assurance as to whether a potential acquiree is onside with its bank covenants. b) Bee Ltd.'s majority shareholder requires a high degree of assurance over Bee Ltd.'s ability to meet legal requirements. c) Gunn's Corp. is operating on a small budget and wants to know whether it is compliant in payroll remittances before it files them to the Canada Revenue Agency (CRA). d) Motley's Tool Inc. would like to know if its controller has correctly recorded research and development costs relating to its new internally generated asse

Answer a) is correct. A review using CSAE 3531 will provide guidance on performing a limited assurance engagement over whether MAP Inc.'s potential acquiree is in compliance with the bank covenants specified in its loan agreement.

Which of the following is included in the calculation of the current ratio? a) Property, plant, and equipment b) Goodwill c) Demand loan d) Bond payable, maturing in three years

Answer c) is correct. The current ratio is defined as current assets divided by current liabilities. Demand loans are classified as current liabilities and are included as part of the current ratio calculation. ALSO called working capital ratio - liquidity

You, CPA, are conducting an audit of your client, Georgetown Plastic Corp. (GPC). Early in the fiscal year, GPC suffered a gas explosion, which had a significant impact on its results and will continue to have a significant effect on its financial position. The gas explosion has been properly recognized and disclosed in the financial statements. You were able to obtain sufficient appropriate audit evidence to ensure that the financial statements at year end are free of material misstatements.As part of your auditor's report, which of the following must be included? a) An emphasis of matter paragraph b) A scope limitation c) A qualified opinion d) An adverse opinion

Answer a) is correct. An emphasis of matter paragraph is used by a practitioner when it is necessary to draw the users' attention to a matter presented or disclosed in the financial statements that is, according to the practitioner's judgment, fundamental to the users' understanding of the financial statements.

Which of the following would NOT be included in a Section 9100, Report on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements report? a) A statement that the audit was performed in accordance with Canadian generally accepted auditing standards b) An identification of the financial information to which the procedures were applied c) A description of the procedures performed d) The factual results of applying the procedures

Answer a) is correct. Since the procedures are specified and there is no requirement to express an opinion, the audit standards are not referenced. This report simply provides factual results on predetermined procedures and is not considered an audit.

Substantive procedures are designed to: a) Detect material misstatements at the account level b) Detect material misstatements at the overall financial statement level c) Detect all misstatements. d) Detect changes from the prior year's financial statements.

Answer a) is correct. Substantive procedures are designed to detect material misstatements at the account level.

Hawkins Inc. has a year end of June 30, 20X2. The auditor's report is dated August 16, 20X2. The statements were issued on August 20, 20X2. Which of the following procedures would have been the MOST relevant to the purpose of discovering subsequent events? a) Reviewing board meeting minutes from July 1 to August 16, 20X2. b) Selecting significant journal entries five days before and five days after year end and vouching to support. c) Performing final analytics on the final financial statements on August 16, 20X2. d) Making inquiries of management regarding any significant events on August 20, 20X2.

Answer a) is correct. The auditor is required to gather evidence up until the audit report date and review board minutes to provide evidence on whether there are any subsequent events, as significant events would typically be discussed at board meetings.

JT Enterprises (JT), located in Calgary, Alberta, films weddings and other events with the purpose of creating keepsake and promotional DVDs. JT also restores old film images and converts slide pictures into an electronic format. JT has just signed a letter of intent to purchase the assets of Archibald Film (Archibald), a film production and restoration company located in Vancouver, British Columbia.Given the recent surge in demand for film production, Archibald hasn't used its restoration equipment in over two years. Archibald's owners feel that the fair value of this equipment is still close to market value, and they have listed the market value in the letter of intent.Archibald recognizes revenue related to each project at the point when the DVD is picked up and paid for by the customer. Archibald's customers are required to pay for their DVDs at the time of pickup.Archibald has banked with the same credit union since the company's inception. It has a long-term contract with the credit union.Archibald has disclosed that it is involved in an ongoing lawsuit with a local family who claims that the company damaged a 35-millimetre film reel during the restoration process.Which of the following best identifies the key risk area associated with this acquisition? a) The valuation of the restoration equipment b) The valuation of customer receivables c) The existence of the long-term contract with the credit union d) The valuation of the contingent liability for the ongoing claim

Answer a) is correct. The restoration equipment has not been in use for two years, and technology may have changed. An independent appraiser should inspect and provide a valuation of Archibald's restoration equipment if JT does not have the expertise to do so.

Barnes Whitby, an audit senior on the Clown Fish Inc. engagement, is explaining to the junior on the engagement the relationship between audit risk and materiality. Which of the following explanations about the relationship between audit risk and materiality is accurate? a) Audit risk and performance materiality are not related to one another. An auditor should not consider audit risk in the determination of performance materiality. b) A change in the assessment of audit risk will consequently change an auditor's assessment of overall materiality for the audit. c) Performance materiality is set by the auditor with the objective of reducing the likelihood of undetected material misstatements and the audit risk to an acceptably low level. d) Audit risk and performance materiality have a direct relationship with each other.

Answer a) is incorrect because risks identified in the financial statements are a consideration in the determination of performance materiality. As explained in CAS 320, paragraph A13: "The determination of performance materiality is not a simple mechanical calculation and involves the exercise of professional judgment. It is affected by the auditor's understanding of the entity, updated during the performance of the risk assessment procedures; and the nature and extent of misstatements identified in previous audits and thereby the auditor's expectations in relation to misstatements in the current period." Answer c) is correct. As stated in paragraph A13 of CAS 320: "Performance materiality (which, as defined, is one or more amounts) is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial statements as a whole." Specifically, performance materiality guides the timing, nature and extent of audit procedures with the objective of reducing detection risk to the point that audit risk overall is at an acceptably low level.

Your client, Tom and Sons Inc., has outsourced its payroll operations to Pay Co. The owner, Tom Thompson, wants to provide employees with a high level of comfort that the controls at Pay Co. can be trusted and were reliable for the fiscal year that just ended. What report would you recommend to Tom to best provide this comfort? a) CSAE 3416 Reporting on Controls at a Service Organization Type 1 report b) CSAE 3416 Reporting on Controls at a Service Organization Type 2 report c) CAS 805 Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement d) An audit using CSAE 3531 Direct Engagements to Report on Compliance

Answer a) is incorrect. A Type 1 report attests to the design and implementation of the service organization's system of controls for a point of time but would not indicate whether the controls were reliable for the fiscal year that just ended. Answer b) is correct. A Type 2 report attests to the design, implementation, and ongoing operating effectiveness of the organization's system of controls for a period of time, which is what Tom is looking for.

As a practitioner, in which of the following situations would you be considered associated with an organization? a) Your immediate family member performs services for the organization. b) You refuse to give permission to the organization to use your name in connection with the financial information. c) A third party indicates that you are involved with the organization's financial information (with or without your consent). d) Another CPA performs services for the organization.

Answer a) is incorrect. A practitioner is not associated with an organization when his or her immediate family member performs services for the organization. The practitioner needs to have performed the services himself or herself. Answer c) is correct because a practitioner is associated with an organization when a third party indicates that he or she is involved with the organization's financial information (with or without the practitioner's consent).

For the year just ended, materiality was based on actual income from continuing operations before taxes for the year. Which of the following factors would have affected the level of overall materiality set by the auditor? a) The controller was terminated during the year and not replaced, increasing control risk. b) The company's cash balance increased significantly. c) The company completed an equity raise, attracting a broad number of new investors to the business. d) The industry in which the company operates has been more volatile over the last year, increasing inherent risk.

Answer a) is incorrect. An increase in control risk will increase the risk of material misstatement. This would impact audit risk, but not overall materiality, as indicated in CPA Canada Handbook - Assurance, CAS 320 Materiality in Planning and Performing an Audit, paragraph A1. Answer c) is correct. According to CAS 320.4, the auditor's determination of materiality is affected by the auditor's perception of the financial information needs of users of the financial statements, and the needs of the new investors may differ from those of the previous users.

Which of the following statements regarding compilations are true? a) They provide only a low level of assurance. b) The objective is to determine if financial statements are plausible. c) The practitioner selects the basis of accounting. d) The practitioner performing the service does not need to be independent.

Answer a) is incorrect. Compilations do not provide any assurance. Answer d) is correct. Independence is not a requirement of a compilation engagement. However, if the practitioner is not independent, this would be disclosed in the compilation engagement report in a separate paragraph.

You, CPA, are conducting an audit of your client, Bread Baker Corp. You have just completed your audit of the accounts receivable and found that the company has recorded an allowance for doubtful accounts of $560,000. Based on your audit, you have determined the allowance for doubtful accounts should be $970,000. The difference arises due to disagreement on what assumptions have been used to recognize the allowance. Thus, there is a misstatement of $410,000 in Bread Baker's year-end statements.What type of misstatement does this represent? a) Factual b) Projected c) Judgmental d) Fraud

Answer a) is incorrect. Factual misstatements are misstatements regarding which there is no doubt. In this case, the misstatement arises due to differences in assumptions used. Answer c) is correct because the allowance for doubtful accounts is based on assumptions and estimates, and therefore represents a judgmental misstatement because you, as the auditor, consider management's estimate to be unreasonable or inappropriate.

Which of the following would be most likely to be considered part of a representative population? a) Related parties b) Management expenses c) Smaller-value items d) Higher-value items

Answer a) is incorrect. Related parties would be considered to be an identifying characteristic and indicate a higher risk of misstatement, and so should be stratified. Answer c) is correct because smaller-value items could be considered to be a part of a representative population.

Obtaining written communication from a third party and footing a subledger are examples of which two types of substantive procedures, respectively? a) Inspection and observation b) Confirmation and recalculation c) Analytical reviews and reperformance d) Inquiry and reperformance

Answer b) is correct because a written communication from a third party is a confirmation type of substantive procedure and footing a subledger is a recalculation type of substantive procedure.

During the year, LMN Inc. had: sales of $2,500,000 gross profit of $1,000,000 net income of $125,000 Inventory was $275,000 at the beginning of the year and $300,000 at the end of the year. Assume the company used average balances when measuring its performance. What is the inventory turnover for the year? a) 5 times b) 5.22 times c) 5.45 times d) 8.70 times

Answer b) is correct because the inventory turnover of 5.22 times is correctly calculated as ($2,500,000 sales - $1,000,000 gross profit) / [($300,000 ending inventory balance + $275,000 beginning inventory balance) / 2]. Inventory turnover is calculated as cost of goods sold (sales less gross profit) divided by the average inventory balance.

Warm Your Heart Foundation, a not-for-profit organization focused on providing hot meals to the less fortunate, made the following promise in its promotional campaign: "For every dollar donated, 80 cents will go directly to the cause." Which of the following would provide a high level of assurance on this assertion at the lowest cost? a) Section 9100 Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements b) CAS 805 Special considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement c) CSAE 3531 Audit - Direct Engagements to Report on Compliance d) CSAE 3530 Review - Attestation Engagements to Report on Compliance

Answer b) is correct. CAS 805 would provide an audit of the statement of operations, presented by function, which would provide high assurance over donations collected and expenses spent on the cause.

Which of the following is an internal control weakness relating to IT? a) Backups are made regularly and stored off-site. b) Each function is password protected, and employees change their passwords whenever they feel it is warranted. c) The server is located in a locked room accessible only by authorized personnel. d) Each department has its own dedicated printer located within the department.

Answer b) is correct. Employees should be required to change their passwords on a regular basis to avoid unauthorized access to the company's computer systems.

You, CPA, are conducting an audit of your client, Books Publisher Corporation (BPC). In auditing long-term investments, you found that BPC had NOT used the equity basis of accounting required under IFRS, but instead had used cost. As a result, dividends received of $150,000 on this investment were recognized as income. After discussions with the CFO, BPC made an adjusting journal entry to record the earnings from the investee of $78,000 as income and the dividends as a reduction of the investment. These adjustments were material.As part of your auditor's report, which of the following must be included? a) An emphasis of matter paragraph b) An unqualified opinion c) An unqualified opinion with an emphasis of matter paragraph d) A scope limitation

Answer b) is correct. Since the misstatement has been corrected, an unqualified opinion can be issued.

Which of the following represents a difference between an audit and a review? Independence requirement Practitioner's objective Treatment of departures from the accounting framework Requirement of a management representation letter

Answer b) is correct. The objective of an audit is to determine if the financial statements are fairly presented in all material respects. The objective of a review is to determine if the financial statements are plausible.

Eastern Company follows ASPE. On November 1, 20X4, Eastern paid $12,000 for 24 months of insurance coverage. The company has a December 31, year end.What is the prepaid insurance amount that should be reported at December 31, 20X5, on an accrual basis? a) $1,000 b) $5,000 c) $6,000 d) $11,000

Answer b) is correct. The prepaid insurance as at December 31, 20X5, is $12,000÷24 months × 10 months remaining = $5,000.

For 20X5, Queen Company reported sales of $60,000 on a cash basis. This amount includes $8,000 that was collected during 20X5 but relates to sales made in 20X4. Also included in the cash collections is $4,000 for customer deposits made on future sales that will occur in 20X6. In addition, the company collected $10,000 in 20X6 for sales that occurred in 20X5.What is the sales amount that should be reported in 20X5 on an accrual basis? a) $48,000 b) $58,000 c) $62,000 d) $66,000

Answer b) is correct. The sales amount on an accrual basis is $60,000 - $8,000 (cash collection for 20X4 sales) - $4,000 (deposits for 20X6 sales) + $10,000 (cash collected in 20X6 for 20X5 sales) = $58,000.

A small private company obtained a loan from a local bank, secured by the company's inventory on hand. The company will repay the loan within the next two years. The bank is only concerned with how much inventory the company has on hand. The company has never had its financial statements audited or reviewed. Given the small size of the company's operations, the company and bank both agree that the cost of obtaining a financial statement review or audit exceeds the benefit provided — the bank simply wants to know how much inventory is on hand.Both the bank and the company have agreed to split the cost of the engagement, but both want to keep costs low. Which type of engagement would you recommend? a) CSAE 3530 Audit - Attestation Engagements to Report on Compliance b) Section 9100 Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements c) CSAE 3531 Audit - Direct Engagements to Report on Compliance d) CAS 805 Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement

Answer b) is correct. To keep engagement costs to a minimum, the bank and the company could agree upon procedures to determine how much inventory is in fact on hand. The procedures would not provide an opinion or any assurance but would help the bank in determining how much inventory the company holds

Audit, inherent, and control risk are all assessed as low; detection risk is assessed as high. Therefore, which of the following statements is true? a) Risk of material misstatement is assessed as high. b) The number of substantive tests is low. c) Controls cannot be relied on. d) Fraud risk is assessed as high.

Answer b) is correct. When detection risk is high, it means there are fewer substantive procedures. This is a result of risk of material misstatement being low enough that detection risk can be high and still keep the audit risk at low.

Which of the following would be a consideration in determining materiality for the audit of Bells and Whistles Enterprises? a) Bells and Whistles is planning to move head office locations this year. b) Employees are unionized and salaries are scheduled to increase. c) The financial statements and the audit report must be completed within three weeks. d) The current shareholders want to minimize income taxes.

Answer b) is incorrect. Employees without a specified incentive tied to financial statement performance are not considered users of the financial statements and are not a consideration in determining materiality. Answer d) is correct. As the current shareholders will want to minimize earnings in order to minimize income taxes, they will be relying on the financial statements of Bells and Whistles. The users of the financial statements must be considered when determining materiality.

When considering the effectiveness of internal control over financial reporting, one must recognize that inherent limitations exist. Which of the following is an example of an inherent limitation in internal control? a) The effectiveness of procedures depends on the segregation of employee duties. b) Procedures are designed to ensure the execution and recording of transactions in accordance with management's authorization. c) In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment. d) Procedures for handling large numbers of transactions are processed by computer systems.

Answer c) is correct because, at some point in any process, individual judgment will be relied on, and it is neither controllable nor always correct.

If the expected misstatement is high, then: a) A larger population may be appropriate b) A test of controls may be appropriate c) 100% examination may be appropriate d) Decreasing materiality may be appropriate

Answer c) is correct. During the test of details, if the expected misstatement is high, then 100% examination may be appropriate.

Waterworks Inc. reported maintenance service costs on a cash basis for 20X6 of $100,000. In 20X5, Waterworks paid $20,000 for maintenance services to be performed in 20X6. In 20X6, Waterworks paid $7,000 in advance for services to be provided in 20X7. Waterworks received maintenance services of $12,000 in 20X6, which were not paid until 20X7.What amount should Waterworks report for maintenance services for 20X6, if it reports on an accrual basis? a) $85,000 b) $105,000 c) $125,000 d) $139,000

Answer c) is correct. The correct amount is $100,000 + $20,000 + $12,000 - $7,000 = $125,000.

Sarah, CPA, is conducting an audit for her client, Jimmy's Trattoria Restaurants (JTR). After gathering sufficient and appropriate audit evidence, Sarah is faced with the following misstatements that JTR refuses to adjust: marketing expenses of $150,000 that relate to next year and should not have been accrued at year end a provision for warranty costs in the amount of $280,000 that was not recognized a purchase of land for $125,000 that was incorrectly recorded as an intangible asset The total impact of JTR's uncorrected misstatements is that pre-tax income is: a) Understated by $430,000 b) Understated by $5,000 c) Overstated by $130,000 d) Overstated by $555,000

Answer c) is correct. The impact of these unadjusted differences is calculated as follows: $150,000 (marketing expenses) minus $280,000 (warranty costs). The adjustment for the land is to reduce intangible assets and increase property, plant, and equipment, so there is no impact on pre-tax income.

You, CPA, are concerned about one of your firm's clients, Farm Acre Foods Inc. (Farm). Although very profitable, you suspect that Farm may be experiencing problems paying off short-term debt. Which one of the following analytical review calculations will highlight this concern? a) Gross profit percentage b) Inventory turnover ratio c) Quick ratio d) Times interest earned

Answer c) is correct. The quick ratio provides information about Farm's ability to meet its liabilities in the short term.

An important aspect of analyzing a client's information is the use of ratios. Which one of the following statements is true? a) The proper ratios to use to determine if a company can meet existing obligations as they become due are the debt-to-equity and profit margin ratios. b) The most useful analytical tool to assess long-run solvency is the solvency ratio. c) When return on equity or return on investments is the critical concern, the most useful ratios include earnings per share, gross profit margin, and receivables turnover. d) Contribution margin analysis is useful in evaluating the company's ability to manage its productive assets efficiently.

Answer c) is incorrect. Earnings per share would not provide investors with the rate of return on their investment (in percentage terms), which is often the information that interests an investor. Profit margin does not provide the bottom line income, nor an indication of cash flows, which is also usually of concern to investors. Receivables turnover is important for generating cash flows, but does not provide much information about the return on an investment. Answer b) is correct. The solvency ratio is often used by banks to assess a company's ability to repay its debt over time.

You are planning the annual financial statement audit of a not-for-profit organization (NPO) that provides meals to underprivileged children throughout the province. The NPO requires significant capital assets, such as trucks and cooking equipment, to provide these services. Its total donations received have been stable over the past 10 years.Recently, there was an article in the local newspaper underscoring how the organization is spending its cash donations unwisely, particularly in how it procures purchases. As a result, donations have slipped slightly.A note from the prior year's audit file indicates that the board consistently questions management on spending. However, the board rarely questions donor collection processes and expects the level of donations to return to normal shortly.Which materiality base would be the most appropriate for the annual audit? a) 1% to 3% of total assets b) 3% to 5% of net assets c) 1% to 3% of revenue d) 1% to 3% of expenses

Answer c) is incorrect. Even though contributions have recently decreased, the board does not appear to be concerned with how the organization collects funds. Answer d) is correct. Given the article regarding spending issues resulting in reduced contributions, it appears that donors are sensitive to changes in the organization's expenses. Furthermore, the board focuses on spending and would be sensitive to any changes in expenses.

Nabors Enterprises has 14 desktop computers in its accounting department, as well as six laptop computers. All the computers are password protected and connected by a secured wireless network. Staff can use the computers for personal use outside of working hours.What should Nabors do to prevent a possible loss of information? a) Nabors should ensure the computers have up-to-date virus and spyware protection. b) Nabors should monitor the personal use of the computers at work. c) Nabors should perform regular backup procedures. d) Nabors should eliminate the use of laptop computers.

Answer c) is incorrect. Regular backups help to recover from a loss of information, but do not help to prevent the loss of information. Answer a) is correct because if the computers are used for personal reasons, employees may be visiting sites that contain viruses and/or spyware. By ensuring that the computers have up-to-date virus and spyware protection, Nabors is guarding itself against a possible loss of information.

During an audit, which of the following characteristics of the population must a practitioner consider before sampling? a) The known misstatement b) The completeness of the population c) The risk of the population d) The change in population from prior period

Answer c) is incorrect. Risk is not a characteristic of a population. Answer b) is correct because the practitioner must consider whether the population is complete when assessing the characteristics of the population.

Which of the following is the most reliable type of audit evidence? Question options: a) Calculating the current ratio b) Inspecting bank statements from the client c) Footing (recalculating) the accounts receivable subledger d) Performing test counts of inventory

Answer c) is incorrect. The accounts receivable subledger is internally generated audit evidence and is the least reliable of the three types of audit evidence. Answer d) is correct because the auditor's execution of procedures or controls is an externally generated type of audit evidence, which is the most reliable of the three types of audit evidence (internally generated, externally generated but held by the client, and externally generated).

Which of the following statements should be included in ABC Ltd.'s compilation communicationengagement report? "Readers are cautioned that the financial information se statements may not be appropriate for their purposes." "On the basis of information provided by management, we have audited the financial statements of ABC Ltd. as at December 31,20X5." "I have not performed an audit engagement and, accordingly, I express limited assurance thereon." "We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion."

Answer c) is incorrect. The compilation engagement report communicationshould state that no there is noform ofassurance is provided. Answer a) is correct. The compilation engagement report munication should caution readers that the financial informationstatements may not be appropriate for their purposes.

Eberle & McDavid LLP (E&M) have been engaged to perform an audit on Sticks Ltd., which is owned by Matt Millner and produces high-quality hockey sticks. After one of its products was informally promoted on MeTube by hockey legend Leslie Goode, Sticks has had a volatile year. It moved from being in breach of its bank covenants at the beginning of the year to then having excess cash flows to invest in research and development (R&D) for new sticks at the end of the year. Matt has been approached by venture capitalists (VCs) eager to invest in Sticks. Due to the fluctuations in Stick's income and operations, the VCs require annual audited financials as a condition of their financing.Which of the following would affect the level of overall materiality set by E&M? a) Sticks' being in breach of its covenants less than 12 months ago b) Sticks' investment in R&D c) The volatility of Sticks' industry d) Sticks' potential VC investors

Answer c) is incorrect. The volatility of the industry would impact risk, not materiality. Answer d) is correct. Materiality is based on users, not risk. Additional users could affect the level of overall materiality set by E&M.

Denver Company has an online, real-time order entry system. Denver Company has two key business objectives: Ensure products are shipped only to good credit risk customers. Minimize any undue shipping delays. Which one of the following controls would best contribute to meeting both of these key business objectives? a) All orders that cause the customer's accounts receivable balance to exceed the credit limit are printed on an exception report for follow-up after the goods are shipped. b) All orders that cause the customer's accounts receivable balance to exceed the credit limit are printed on an exception report and are reviewed by the credit manager on a daily basis before the shipment is released. c) Orders will not be accepted by the system once the customer's accounts receivable balance is greater than the customer's credit limit. d) All orders that cause the customer's accounts receivable balance to exceed the credit limit are printed on an exception report and are reviewed by the credit manager on a weekly basis before the shipment is released.

Answer c) is incorrect. This control will not meet Denver's business objective of ensuring that products are only shipped to good credit risk customers. Allowing customers to place orders that cause their accounts receivable balance to temporarily exceed their credit limit provides Denver with some flexibility as long as these orders are only being shipped to customers with good credit risk, thereby reducing the risk of uncollectable accounts receivable. Answer b) is correct because this control will both minimize any undue shipping delays and ensure that products are only being shipped to customers with an ability to pay for it. Because the manager reviews the exception report on a daily basis, there will be minimal shipping delays once the order is approved. Because the manager reviews the exception report and only releases shipments to customers with a good credit risk, the risk of uncollectable accounts receivable is reduced.

During an audit, a deviation occurs: a) When the reported amount differs from the actual amount that is determined when applying the audit procedure b) When audit procedures are applied to less than 100% of the population and each unit has a chance of selection c) When the practitioner decides to examine the entire population of items that make up a class of transactions or account balance d) When the control is not performing as it was designed and expected to perform

Answer d) is correct. A deviation occurs when the control is not performing as it was designed and expected to perform.

Acquire Co. is interested in purchasing Widget Co., which sells many widget-related products. Before an offer is made to purchase Widget Co, Acquire Co. would like assurance regarding the revenue, expenses, and any contingent liabilities during Widget Co.'s most recently completed fiscal year. Which of the following engagements would best satisfy Acquire Co.'s needs? a) Section 9100 Reports on the Results of Applying Specified Auditing Procedures to Financial Information Other than Financial Statements b) CSAE 3531 Audit - Direct Engagements to Report on Compliance c) CSRE 2400 Engagements to Review Historical Financial Statements d) An engagement to audit the financial statements

Answer d) is correct. A financial statement audit would provide assurance on whether tterm-74he financial statements are prepared, in all material respects, in accordance with the applicable reporting framework.

Which one of the following methods would be most effective to assess a potential new client's character and integrity? a) Request information from the client on what business organizations it belongs to, and a detailed explanation of the nature of its association with these business organizations. b) Ask the client about its history with the Canada Revenue Agency and whether it has been assessed penalties and fines. c) Inquire of references such as relatives and in-laws. d) Ask the prospective client's banker for his or her opinion of the client.

Answer d) is correct. An independent third-party inquiry is a more effective method for gathering this type of evidence.

In which of the following situations would a practitioner use a purely substantive approach instead of a combined approach when planning the audit? a) The company's chief financial officer is a CPA. b) The company has many transactions. c) The company has controls that can be relied on. d) The company has few transactions.

Answer d) is correct. For a company with few transactions, the practitioner may decide to use a purely substantive approach because it would be faster to test the accounts than to spend time performing tests of controls.

SkyHigh Inc. is a company that owns and operates a commercial rental building. Due to the age and condition of the building, occupancy rates have been low. Given the declining operations, the company was determined to no longer be a going concern. The company has a bank loan with a covenant of a minimum debt service coverage ratio of 1:2, secured by a first charge over all assets of the corporation. Other than the bank, other users of the financial statements include management and owners who use the financial statements to assess profitability of the business.Your firm was engaged to perform an audit of the company's financial statements. What would be the best benchmark to be used as a basis for materiality? a) Net assets b) Pre-tax income c) Revenues d) Total assets

Answer d) is correct. Given the going-concern issue, the bank, who is the primary user, is likely interested in exercising its claim on the assets of the corporation, which makes this benchmark the most relevant.

Rogercom Inc. currently follows ASPE and is considering adopting IFRS for its 20X3 fiscal year. It has a December 31 year end. Which of the following statements is correct for Rogercom as a first-time adopter of IFRS. a) In preparing its statement of financial position for 20X3 under IFRS, Rogercom will show only one comparative statement as at December 31, 20X2, that is based on IFRS. b) On transitioning to IFRS in 20X3, Rogercom will account prospectively for any changes in accounting policies resulting from the transition, from January 1, 20X2. c) As a first-time adopter, Rogercom will follow the standards outlined in ASPE Section 1500 First-time Adoption. d) Rogercom will qualify as a first-time adopter when it issues its first financial statements using IFRS for its 20X3 year end.

Answer d) is correct. In 20X3, when Rogercom issues its first statements under IFRS, it will qualify as a first-time adopter.

Which of the following is the appropriate action when the practitioner decides to amend the financial statements for an isolated event after they have already been issued? a) Withdraw the financial statements, amend, and reissue using the same audit report date. b) Withdraw the financial statements, amend, and reissue using an audit report dated no earlier than the approval of the amended statements. c) Withdraw the financial statements and amend the audit report to include a qualification on the subsequent event. d) Withdraw the financial statements and reissue the audit report using the same date, with a new date added to the report where the amendment is referenced.

Answer d) is correct. In cases where it is decided that the financial statements need to be amended but the event has an isolated impact on the financial statements, the practitioner may choose to double date the auditor's report.

Which of the following is the correct definition of an element that is reported on financial statements? a) Liabilities are obligations that will arise from future events and are expected to be settled with a future outflow of cash. b) Expenses are costs that arise only from the ordinary activities of the business and exclude losses that may arise outside of the normal activities of the entity. c) Assets are resources that the entity controls that result from past events and that will require a future outflow of cash. d) Gains are increases in equity (net assets) resulting from incidental transactions.

Answer d) is correct. Income is comprised of both revenue and gains. Gains may or may not arise from the ordinary activities of the entity.

You, CPA, are provided with the following financial information of your audit client Green Tee Ltd: Net income before tax is $200,000. Net income after tax (20%) is $160,000. The sale of public company shares resulted in a $50,000 gain. There was a one-time bonus paid to the production manager for $75,000. Green Tee paid severance of $25,000 to the production manager. Green Tee's assets include the purchase of a new chocolate mould for $25,000. Liabilities include a new bank loan to cover the cost of the new mould. Using normalized net income before tax as a base and 5% as a threshold, what is the estimated materiality for Green Tee? a) $7,500 b) $8,000 c) $10,000 d) $12,500

Answer d) is correct. Normalized net income before tax is correctly used as a base: $200,000 - $50,000 + $75,000 + $25,000 = $250,000 × 5% = $12,500.

You, CPA at Hollar and Shout LLP, are auditing Sparky's Ltd., a struggling IT consulting services firm. Sparky's financial statements have been prepared on a going-concern basis, but based on the results of several going concern audit procedures, you disagree with management's use of the going concern basis of accounting in the preparation of the financial statements.Which of the following statements is true? a) Hollar and Shout LLP shall express an unmodified opinion. b) Hollar and Shout LLP shall express an unmodified opinion and include an Emphasis of Matter paragraph. c) Hollar and Shout LLP shall resign from the audit engagement. d) Hollar and Shout LLP shall express an adverse opinion.

Answer d) is correct. Per CPA Canada Handbook - Assurance, CAS 570, paragraph 21, that auditor shall express an adverse opinion if management's use of the going concern basis of accounting is inappropriate. The auditor shall also express an adverse opinion if the use of the going concern basis of accounting is appropriate but there was inadequate financial statements disclosure relating to material uncertainty per CAS 570.23.

In performing due diligence procedures on a corporate tax return, which of the following would not prove useful to the practitioner? a) Incorporation documents b) Canada Revenue Agency (CRA) correspondence c) Share registers d) Industry analysis

Answer d) is correct. While industry analysis is useful to the practitioner in determining potential risks or opportunities for the new venture, industry analysis isn't directly related to a company's tax issues.

Chapman and Chapman Chartered Professional Accountants are the auditors of Hoax Inc. The audit senior on this engagement, Freddie Penguin, is discussing with management the risk of material misstatement due to fraud. Hoax Inc. is a very small, owner-managed landscaping business that conducts the majority of its business between the months of May and October.Hoax Inc. requires audited financial statements to satisfy requirements attached to a grant received from the government. The grant is awarded to Hoax Inc. annually under the conditions that Hoax Inc. employs a specified number of students each summer. Hoax Inc.'s financial statements are prepared by an experienced bookkeeper who is always well prepared for the auditors' arrival. The owner is very hands on and regularly reviews work completed by all employees.Which of the following would you expect to be a risk factor for material misstatement due to fraud at Hoax Inc.? a) Significant use of estimates for the accounting for complex and non-routine transactions b) Pressure to meet earnings forecasts c) High susceptibility of assets to theft d) Domination of the management functions by a single individual or small group of individuals

Answer d) is incorrect because it is typical in small, owner-managed businesses for one individual or a small group of individuals to control the management functions. In the case of an owner-managed business, owner oversight is an important aspect of internal control. In this case the owner is involved in operations regularly reviewing work completed by employees. This would reduce the risk of material misstatement due to fraud. Answer c) is correct. As stated in CPA Canada Handbook - Assurance, CAS 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, A14: "In some entities, particularly smaller entities, the focus of management's assessment may be on the risks of employee fraud or misappropriation of assets." This applies to Hoax Inc. not only because it is a smaller entity but also because the nature of Hoax Inc.'s business suggests a high rate of employee turnover and the need for employees to have access to a wide range of inventory items required to perform landscaping work.

Which of the following policies is an internal accounting control weakness? a) Acquisitions are to be made through, and approved by, the department in need of the equipment. b) Advance executive approvals are required for equipment acquisitions. c) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management. d) Depreciation policies are reviewed only once a year.

Answer d) is incorrect. A yearly review of depreciation policies is likely of sufficient frequency. Answer a) is correct because this is a control weakness related to the acquisition of equipment. There is no authorization process to approve acquisitions. The department that needs the equipment may not be authorized to purchase such equipment.

P&M Ltd. is a property development company. Lately, it has been struggling, as the turmoil in the economy has caused the real estate market and P&M's assets to decline in value. P&M has debt coming due in the current year, and the covenants are only marginally being met at this time. P&M has also just reported operating losses and was forced to cancel its dividend. You have assessed and performed audit procedures on management's action plan and found that the plan appropriately supports that the company will be able to renegotiate terms of the maturing debt.Which issue exists? a) No issue exists. b) A going-concern issue exists. c) A material uncertainty exists. d) A going-concern issue and a material uncertainty exist.

Answer d) is incorrect. An event cannot be both a going-concern issue and a material uncertainty. Answer c) is correct. You found management's action plan to be reasonable. This means management's action plan is likely to be successful in carrying on the business, and therefore a going-concern issue does not exist. However, there should still be disclosure around this significant uncertainty.

You have assessed the risk for property, plant, and equipment, and now must begin additional substantive testing. Which of the following tests provides the leastcompelling audit evidence? a) Adding and cross-adding the client's property, plant, and equipment balances, and recalculating the amortization provisions b) Comparing current-year property, plant, and equipment balances to the prior year c) Examining the repairs and maintenance account for material items that may be property, plant, and equipment d) Physically inspecting the new capital additions

Answer d) is incorrect. In order to ensure that the property, plant, and equipment actually exist, physical inspection of additions is important. Answer b) is correct because additions, dispositions, and/or depreciation have likely occurred during the year, meaning that comparisons to prior years are not as meaningful.

Which of the following statements regarding audit evidence is true? Question options: a) Sufficiency is the measure of the quality of audit evidence. b) The higher the relevance and reliability of evidence, the lower the quality of results c) The higher the quality of evidence, the less evidence may be required. d) Reliability refers to the connection between audit procedures and assertions.

Answer d) is incorrect. Relevance refers to the connection between audit procedures and assertions. Answer c) is correct because the higher the quality of evidence, the less evidence may be required.

Which of the following statements is TRUE regarding the auditor's responsibilities with relation to subsequent events? a) The auditor is responsible for gathering evidence for subsequent events up to the financial statement issuance date. b) The auditor is required to adjust financial statements for subsequent events up to the financial statement issuance date. c) The auditor has no obligation to gather evidence for events that occur after the auditor's report date. d) The auditor is required to adjust financial statements for subsequent events up to the auditor's report date.

Answer d) is incorrect. The auditor is only required to adjust the financial statements for adjusting subsequent events. Answer c) is correct. The practitioner has no obligation to gather evidence for events that occur after the date of the auditor's report; however, they may decide, at their discretion, that an amendment to the financial statements is required if they become aware of a subsequent event.

Which of the following would improve the quick ratio? a) Sell fixed assets to reduce accounts payable. b) Increase bank indebtedness to purchase equipment. c) Issue common stock to purchase inventory. d) Aggressively collect accounts receivable.

Answer d) is incorrect. The quick ratio is defined as current assets less inventory, divided by current liabilities. An increase in cash and a reduction in accounts receivable would have a nil effect on the quick ratio. Answer a) is correct because the quick ratio is defined as current assets less inventory, divided by current liabilities. A decrease in fixed assets would not affect the quick ratio, but a decrease in accounts payable would increase the quick ratio.

Larry, CPA, is conducting an audit for his client, Custom Furniture Inc. (CFI). After gathering sufficient and appropriate audit evidence, Larry is faced with the following misstatements that CFI refuses to adjust: Accrual for vacation pay is understated by $75,000. Sales invoices totalling $370,000 were incorrectly excluded from this year's revenue. The allowance for doubtful accounts was understated by $86,000. The total impact of CFI's uncorrected misstatements is that pre-tax income is: a) Understated by $381,000 b) Understated by $209,000 c) Overstated by $359,000 d) Overstated by $531,000

Answer d) is incorrect. The revenue needs to be added to pre-tax income, not deducted from it. Answer b) is correct because the impact of these unadjusted differences is calculated as follows: $370,000 (sales) minus $75,000 (vacation pay accrual) minus $86,000 (bad debts expense).

Which of the following options supports a practitioner using a combined approach instead of a purely substantive approach when planning the audit? a) The company has an employee code of conduct manual. b) The company has few transactions. c) The company does not have an internal audit department. d) The company has many foreign-currency transactions.

Answer d) is incorrect. This is an inherent risk and would not impact the practitioner's decision to implement either a combined or a purely substantive approach. Answer a) is correct because the employee code of conduct manual supports a formal set of policies and procedures that would decrease control risk.

You are planning a continuing audit engagement. Several new events and factors have been identified in the planning stage. Which of the following would prompt you to consider reducing materiality from the prior year? a) The client laid off 50% of the accounting department staff during the year. b) The client is currently negotiating the issuance of a new class of preferred shares to a potential investor. c) The client is in the process of renegotiating its operating line of credit with the bank. The client has used this bank for several years, and the bank's policy is to renegotiate every two years. d) The client introduced a new line of products that have a high risk of obsolescence.

Answer d) is incorrect. While the introduction of the new product line increases the risk of material misstatement, it does not need to be considered in the determination of materiality, as it does not impact the financial statement users. Answer b) is correct. The new investor will be relying heavily on the financial statements of the company to make investment decisions. Given the sensitivity of the user to misstatements in the company's financial statements, a reduction in materiality from the prior year should be considered.

Which of the following scenarios would represent the greatest amount of agency risk? A. A new bonus has been implemented that awards managers based on profitability. B. A new bonus has been implemented that awards managers based on revenue. C. A new bonus has been implemented that awards managers based on customer and employee satisfaction. D. A new bonus has been implemented that awards managers based on controllable costs.

B

Which of the following describes how XBRL is used in financial reporting? A. It facilitates the storage of audit trails. B. It allows the financial statements and notes to be uploaded and searched in a common format. C. It ensures that the reporting entity operates in accordance with CSA regulations. D. It provides real-time data to all users.

B. It allows the financial statements and notes to be uploaded and searched in a common format. XBRL (eXtensible Business Reporting Language) is an open-source data format for financial reporting. It provides a standardized method of exchanging financial information between companies, regulators, and other stakeholders. XBRL enables organizations to electronically tag and exchange their financial information, making it easier for companies to create and share their financial information, and for regulators and investors to analyze and compare financial data from multiple companies.

Which of the following is a responsibility of the IASB? A. Developing ASPE B. Establishing accounting standards for all Canadian entities C. Developing IFRS D. Providing a harmonized and unified approach to securities regulation across Canada

C. The IASB is responsible for developing IFRS, which are then adopted by the AcSB, and apply to Canadian publicly accountable enterprises.

Which of the following is the objective of financial statements of private enterprises? A. To allow an entity to obtain loans from creditors B. To provide management and employees with data needed to operate the entity C. To provide information to users about the entity that is useful in making investment decisions and/or assessing management stewardship D. To present the financial results of the entity in both the ASPE and IFRS financial reporting frameworks

C. To provide information to users about the entity that is useful in making investment decisions and/or assessing management stewardship

Which of the following new standards is being added to ASPE for reporting periods beginning on or after January 2022? A. Insurance contracts B. Revenue C. Employee Future Benefits D. Agriculture

D. Agriculture

Which of the following is a sub-characteristic of reliability in the ASPE framework? A. Understandability B. Comparability C. Predictive and feedback value D. Conservatism

D. Conservatism Correct! Representational faithfulness, verifiability, and neutrality are the other sub-characteristics of reliability. When choosing between alternatives, conservatism refers to the selection of the alternative that is least likely to overstate assets and/or income.

Which of the following IFRS standards will be replacing IFRS 4? A. IAS 16 Property, Plant and Equipment B. Section 3041 Agriculture C. IAS 37 Provisions, Contingent Liabilities and Contingent Assets

D. IFRS 17 Insurance Contracts

Which of the following is an attribute of a publicly accountable enterprise? A. It is owned privately by a small group of individuals. B. It plans to issue equity instruments on a domestic stock exchange in the future. C. It can be, but does not have to be, an NPO. D. It has debt instruments that are traded in a public market in a foreign country.

D. It has debt instruments that are traded in a public market in a foreign country.

role of the CSA

D. Providing a harmonized and unified approach to securities regulation across Canada B. To protect Canadian investors through mandating full disclosure and other measures

Before accepting a new client, we must answer the following questions

Does the practitioner (or their firm) have the necessary resources available to perform the engagement, such as expertise, experience, and availability of staff? Are there any independence prohibitions, threats, or conflicts of interest between the practitioner and the client? Is the practitioner able to mitigate or accept engagement risk factors? Does the practitioner have a clear understanding of the user's requirements for this engagement? Is there industry legislation or regulations impacting the financial reporting requirements of the client? Has the client's management agreed to its responsibilities in writing? Are there any known scope limitations that may restrict the practitioner's ability to provide an opinion?

Hopper Ltd. has a year end of December 31, 20X2. Financial statements with an audit report date of March 1, 20X2, were issued on March 13, 20X2. Which of the following would have been an adjusting event that would have resulted in a required amendment to the financial statements? a) A fire that occurred in Hopper's warehouse on January 14, 20X3, causing significant damage to their inventory. b) A lawsuit filed against Hopper in November 20X2 that had a material settlement awarded on March 10, 20X2. c) One of Hopper's main suppliers, which owed a material outstanding receivable, declared bankruptcy on March 30, 20X2. d) In an effort to raise working capital, Hopper issued 150,000 common shares on March 7, 20X2.

Hide question 3 feedback Answer d) is incorrect. The issuance of common shares is a non-adjusting subsequent event because the event did not provide evidence of a condition that existed at the financial statement date. Answer b) is correct. Hopper's legal settlement is an adjusting subsequent event because the event provides evidence of a condition (the lawsuit being filed) that existed at the financial statement date. Because the event occurred between the audit report date and the date the financial statements are issued, the practitioner will require management to amend the company's financial statements.

Inherent risk vs Control Risk

Inherent risk is the risk facing the businesses that can contribute to misstatement or fraud whereas control risk is the risk that the misstatement/error remains undetected by the company's controls

Plant Passion Company (PPC), a small catering company specializing in vegan food, is privately held. It has a strong reputation in the marketplace and is the only catering company of its kind on Vancouver Island, where the company's head office and kitchen are located. PPC has been audited for many years, and the company's CFO, a CPA, is well regarded and competent. PPC's accounting department is centralized, and incompatible duties are segregated among three accounting staff. Based on this information, briefly explain how inherent risk and control risk would be assessed and determine an audit approach.

Inherent risk would be assessed as low for the following reasons: • PPC is a small, private company with few users of the financial statements, which decreases risk that users will rely on materially misstated financial statements to make their decisions. Control risk would be assessed as low for the following reasons: • PPC's accounting department is centralized. There is less opportunity for error, given that documents and roles are not being divided among multiple locations, which decreases risk • Incompatible duties are being split between PPC's three accounting staff members. By segregating incompatible duties, the risk of fraud and error is decreased. By assessing control risk as low, the practitioner has concluded that the client's system of internal controls can be relied on to prevent and detect material misstatements and audit risk can still be kept at an acceptably low level. As a result, the practitioner may choose a combined audit approach.

What information is material?

It depends on the primary users of the report, what information the users want or expect your report to include, factors that contribute to materiality both qualitative and quantitative, and reducing the amount of immateriality.

Familiarity threats

close relationship exists between the practitioner and the client, creating an environment where it is difficult for the practitioner to behave with professional skepticism, as in the following examples: The practitioner (or his or her firm), or an assurance team member, has a long-standing association with the client. o A former partner of the public accounting firm now holds a senior position (such as chief financial officer or chief operating officer) at the client. o The practitioner, or an assurance team member, has accepted other than very minor gifts from the client. o The practitioner, or an assurance team member, has accepted other than very minor gestures of hospitality from the client, such as tickets to a sporting event or meals.

Why is deferred revenue a liability?

because the company is obligated to provide goods or services in the future, this is a liability because liabilities are obligations for cash outflow in the future based on a current event. Deferred revenue fits this definition. Once the goods or services are delivered, the revenue is recognized.

Intimidation threats

client intimidates the practitioner (or his or her firm), as in the following examples: o The client threatens to replace the practitioner next year. o There is pressure from the client to reduce the number of audit hours in an effort to reduce assurance engagement fees.

Self-review threats

occur where the practitioner is in the position of having to form an opinion on his or her own work, as in the following examples: o The practitioner, or an assurance team member, has recently been an employee or a director of the client and has had an opportunity to prepare original data or records for the client. o The practitioner, or an assurance team member, has provided internal audit services, human resource services, valuations, information technology services, or corporate finance services to the client. The practitioner then provides assurance over these services.

Self-interest threats

practitioner (or his or her firm) has a financial interest in the client, as in the following examples: o Assurance team members involved in the assurance engagement and/or their immediate family members own shares of, or have made a loan to, the client. o The client's fees are significant in relation to the total fee base of the practitioner (or his or her firm). o A loan is made by a client to an assurance team member that is outside of normal lending terms.

Control risk

risk that a material misstatement will get through the internal control structure and into the financial statements

The purpose of the engagement letter

the objective and scope of the audit of the financial statements • the responsibilities of the practitioner • the responsibilities of management • identification of the applicable financial reporting framework for the preparation of the financial statements • reference to the expected form and content of any reports to be issued by the practitioner and a statement that there may be circumstances in which a report may differ from its expected form and content • the basis on which fees are computed and any billing arrangements

RAMP acroynym

used for audit planning Risk Approach Materiality Procedures

Inherent risk examples

• A company in poor financial health: The company may not be a going concern, thus impacting the presentation of the financial statements as a whole. • Significant market competition that is driving down prices and pressuring cost structures: Significant market competition may create aggressive revenue recognition. Management may be biased to overstate earnings in order to maintain the ability to raise financing. • The company has never been audited before: The opening and comparative balances may not be reliable. • An upcoming purchase or sale of the company: The sellers of the company will have an inherent bias to make the financial statements appear more favourable. The purchasers of the company will be relying on the audit report to make a decision. • Imposition of more stringent regulation on the industry and the company: Given that regulatory agencies may be reviewing and scrutinizing the client's financial statements, there will be new users of the financial statements. • An initial public offering, issuance of new debt, or bank covenants: Additional users relying on the audit report increases risk, as the preparers of the statements have an inherent bias to make the financial statements appear more favourable to their new users. • Employees with reliance on net income for compensation (bonuses): The employees will have an inherent bias to make the financial statements appear more favourable

CAS 210 specifically identifies the following situations where a new client or an existing client should not be accepted, unless required by law to do so

• where management does not acknowledge its responsibilities in writing • where the chosen financial reporting framework is not acceptable