CPAPEP Quizzes

Duties of the audit committee should include which of the following:

Oversee the financial reporting process. Answer 'D' is correct. Every member of the audit committee must possess financial and accounting knowledge and thus they can provide an objective assessment of the financial reporting process.

Title: Functional Currency When deciding if the functional currency of a foreign subsidiary is the Canadian dollar, all of the following should be considered, except:

Percentage of ownership by parent Answer D is correct. This factor would not be considered when determining whether the functional currency of the foreign subsidiary is the Canadian dollar.

Which of the following statements best describe the auditor's responsibility with respect to the misstatements recorded on the summary of unadjusted audit differences.

If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor must determine whether the financial statements as a whole are free from material misstatement. Answer D is correct. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor needs to understand management's reasons for not making the corrections. They should then determine whether the financial statements as a whole are free from material misstatement. (CAS 450(9))

Which of the following best describes the roles, responsibilities and duties of various levels of the organization in the strategic management process?

The Board should approve the company's risk appetite and ensure that the strategy is risk appropriate. Answer 'B' is correct as per the CPA Canada - 20 Questions Directors Should Ask About Strategy

Title: Functional Currency Translation When consolidated financial statements are being prepared for a partially owned subsidiary, the elimination entry required to adjust opening balance sheet would include adjustments for the following:

Unamortized fair value differentials, subsidiary share capital, subsidiary retained earnings, unrealized gains or losses on intercompany sales of property plant and equipment, and the NCI balance sheet account. Answer A is correct. All of these adjustments would be included in the elimination entry that is required to adjust the opening balance sheet.

Which of the following transactions would follow IFRS 3 - Business Combinations to account for the transaction?

None of the above Answer D is correct because IFRS 3 only applies to assets and liabilities that have been assumed that constitute a business. According to IFRS 3.2, joint ventures, asset acquisitions and entities combined that are under common control are not in the scope of this standard.

Pierce Inc. purchased an 80% interest in O'Hara Ltd. on March 1, 2014. Pierce Inc. paid cash of $1,850,000 and agreed to pay $100,000 in contingent consideration for the fiscal years ending May 31, 2014, 2015 and 2016 if O'Hara had sales exceeding $8 million in each respective year. The fair values at March 1, 2014 were: Identifiable assets 2,900,000 Identifiable liabilities 1,050,000 Contingent consideration 220,000 Legal and other professional fees related to the business combination were $20,000. Pierce Inc. did not own any shares of O'Hara Ltd. before this acquisition. Calculate Non-Controlling Interest for Pierce Inc. under IFRS 3 using the net asset approach under IFRS 3 paragraph 19. Assume the fair value of 100% of O'Hara Ltd. is $2,205,000.

$370,000 Answer B is correct. Using the net asset approach, the company would calculate the NCI by applying the percentage of the company not owned (20%) to the net assets of the company (i.e. 20% x [2,900,000 - 1,050,000]).

Pierce Inc. purchased an 80% interest in O'Hara Ltd. on March 1, 2014. Pierce Inc. paid cash of $1,850,000 and agreed to pay $100,000 in contingent consideration for the fiscal years ending May 31, 2014, 2015 and 2016 if O'Hara had sales exceeding $8 million in each respective year. The fair values at March 1, 2014 were: Identifiable assets 2,900,000 Identifiable liabilities 1,050,000 Contingent consideration 220,000 Legal and other professional fees related to the business combination were $20,000. Pierce Inc. did not own any shares of O'Hara Ltd. before this acquisition. What is the total goodwill to be recognized by Pierce Inc. under IFRS 3. Assume NCI is calculated using the % of net asset approach.

$590,000 Answer A is correct. Goodwill has been calculated as follows: Cash Consideration $ 1,850,000 FV of contingent Consideration 220,000 Plus: NCI 370,000 Total Consideration $ 2,440,000 Less: FV of net identifiable assets 1,850,000 Goodwill $ 590,000

Which one of the following would not be considered a procedure in a financial statement analysis?

Comparing the accounts receivable collection rate to internal accounts receivable policies. Answer C is correct. This would be an audit procedure for accounts receivable (not part of a financial statement analysis).

Which of the following would improve the quick ratio?

Sell fixed assets to reduce accounts payable. Answer A is correct. A decrease in fixed assets would not affect the quick ratio, however a decrease in accounts payable would increase the quick ratio.

Consolidated common stock includes:

100% of the parent's common stock only. Answer B is correct. Only the parent's common stock is included in consolidated common stock.

McKay Corp has 400 employees, each of whom is entitled to seven working days of paid sick leave each calendar year. Any unused days not taken as of December 31 will be carried forward for 1 year. McKay Corp has a policy, however, that the current year entitlement must be used prior to the usage of any days that were carried forward (i.e. LIFO). For the year ended December 31, 2013, the average unused entitlement was 3 days per employee. McKay Corp has experienced that given this, 94% of employees will likely take no more than six paid sick leave days in the upcoming year, and that the remaining 6% of employees will take an average of 9 days. In accordance with IAS 19.16, how many sick days need to be accrued for McKay Corp at December 31, 2013?

48 sick days should be accrued as a liability Answer B is correct. Per IAS 19.16, an entity shall measure the expected cost of accumulating paid absences as the additional amount that the entity expects to pay as a result of the unused entitlement that has accumulated at the end of the reporting period. As such McKay corporation only needs to accrue for the unused entitlement that is expected to be used in the following year. 94% of employees will stay with in their annual entitlement, and therefore no liability is required to be accrued for unused days at the current year end. Of the 6% that will exceed their annual entitlement, they are expected to do use 9 days therefore only exceeding their entitlement, and using 2 days carried forward from the current year. (6% x 400 employees x (9 days - 7 days))

Manning Oil acquired 100% of the common shares of Steeler & Co on January 5, 2013 for $2.1 million. Steeler & Co had 1 million common shares issued and outstanding. At acquisition, the common stock and retained earnings were $470,100 and $730,900 respectively. Manning Oil's tax rate is 30%. On the date of acquisition the fair value of all of the assets and liabilities of Steeler & Co equaled book value with the exception of the following: · Equipment with an original cost of $1.8 million and a net book value of $1.175 million had a fair value of $1.5 million. The remaining useful life of the equipment at the time of acquisition was 8 years. · Steeler & Co had goodwill on its legal entity books recorded at a net book value of $105,000. On acquisition, calculate the deferred income taxes that Manning Oil will recognize as a result of the above acquisition.

97,500 deferred asset Answer D is correct. Deferred income taxes are calculated as follows: (Fair value of the asset - Book value of the asset) * Tax rate (1,500,000 - $1,175,000) * 30%

Which of the following is an application control?

A Social Insurance Number (SIN) validation check. Answer 'B' is correct. This is an application control that would be embedded within a system. The user would input the number and the system would use an algorithm to determine if it is a valid SIN. This could be considered as either an input or a processing control within an application.

Which of the following statements is true in relation to factors that influence the sample size for tests of control?

A decrease in the tolerable rate of deviation will increase sample size. Answer 'B' is correct. Per CPA Canada Handbook-Assurance, CAS 530, Audit Sampling, App 2, lower tolerable rate of deviation will increase the sample size and vice versa because if the auditor has set the tolerable rate of deviation as low, they will tolerate less deviation in the population, hence sample size must increase.

Which of the following user's objectives would be best met with the CPA Canada Handbook - Assurance, Section 8600 Review of Compliance with Agreements and Regulations report?

A moderate level of assurance on a company's compliance with bank covenants Answer 'A' is correct. CPA Canada Handbook - Assurance, Section 8600, Review of Compliance with Agreements and Regulations report is a "Review of Compliance with Agreements and Regulations".

Acquire Co. is interested in purchasing the sales rights to a product sold by Widget Co., the Widget3000. Widget Co. sells many widget-related products, but is willing to sell the sales rights to this particular product if the right offer comes along. Before an offer is made to purchase the rights, Acquire Co. would like assurance regarding the revenue derived from the Widget3000 during Widget Co.'s most recently completed fiscal year. Which of the following engagements would best satisfy Acquire Co.'s needs?

A review report of financial information other than financial statements. Answer 'C' is correct. Although a review report provides a lower level of assurance than an audit report, some level of assurance could be provided regarding Acquire Co.'s recorded revenue for the Widget3000. For example, a review report could be provided regarding a schedule of Widget3000 sales for the year.

Which of the following is not a factor that affects the overall financial statement level risk?

Barter transactions for inventory items. Answer C is correct. This is an inherent risk factor for the inventory account and is not pervasive to the financial statements as a whole.

The objective of an audit is to provide reasonable assurance that the financial statements taken as a whole are free of material misstatement. Qualitatively, in determining materiality the auditor should:

Consider external users and why they are interested in the financial results. Answer C is correct. The assessment of materiality must include qualitative considerations that includes users and what they are sensitive to - CAS 320.A3

You work for a large accounting firm in Toronto, Ontario. Your firm is considering accepting a new client - Mike's Office Desks Ltd. If client is accepted, you will be assigned to the audit. You have let the audit partner know that your cousin, Bradley, is the assistant controller at Mike's Office Desks. Which safeguard below is the most reasonable to address any potential independence concerns?

Document the potential threat to independence and ask that another audit staff member be assigned to the audit. Answer 'B' is correct. While other safeguards may work (i.e. increased supervision of your audit work, etc...), this is the safest course of action. Your audit firm is large and would have sufficient staff to properly re-assign the audit.

On October 1, Alberta Camp Services Ltd. (ACSL) purchased 100% of the shares of Wholesale Foods Inc. (WFI) for $3,100,000. On October 1, WFI reported share capital of $150,000 and retained earnings of $2,600,000. All assets and liabilities had a fair value equal to book value, except for inventory and buildings. Inventory had a fair value of $360,000 and a book value of $280,000; buildings that originally cost $2,500,000 had a book value of $1,875,000 and a fair value of $1,775,000. ACSL's tax rate is 30%. The elimination entry needed to consolidate the balance sheet on October 1 will include which of the following elements related to fair value differentials:

Dr. Inventory 80,000; Cr. Buildings $100,000; Dr. DIT liability $6,000 Answer B is correct. The inventory had a fair value that exceeded the book value and the building had a fair value that was less than the book value. Accordingly, the fair value differential on the inventory should be debited and the fair value differential on the building should be credited.

During the financial statement audit of Andrea's Equipment Rentals Ltd. (AER), the lawyers' response to the legal enquiry letter noted that AER is being sued as one of their equipment rentals exploded, injuring multiple people. The amount is significantly higher than materiality. The outcome of this litigation is uncertain, but would significantly impact AER. Management has disclosed this in their notes to the financial statements.

Draw attention to the litigation in the Emphasis of Matters paragraph. Answer 'D' is correct. The litigation is significant to the users and the auditor would want to draw this situation to the user's attention through the Emphasis of Matters paragraph. The auditor would also state that they have obtained sufficient appropriate audit evidence that the statements are not materially misstated as a result of this litigation.

Alex, CPA, who is auditing Meg Manufacturing (MM), is assessing accounts receivable. What should Alex do to get the most appropriate evidence of valuation?

Examine payments received on accounts in the period subsequent to the year end. Answer B is correct because the receipt of amounts due at the year-end provides evidence of both existence (i.e. that the amount was receivable) and valuation (i.e. that the customer agreed with the valuation and remitted the amount) per CPA Canada Handbook - Assurance, CAS 500, Audit Evidence, par. A28.

General Monitoring (GM) provides a defined contribution plan for its employees. The plan dictates that GM must make a monthly contribution to the plan on the first of each month. This contribution is equal to 3% of each employee's gross annual salary. Karen earns an annual salary of $150,000. Which of the following entries would GM be required to make to record their monthly contribution to the plan for Karen?

DR. Employee benefit expense $375 CR. Cash $375 Answer D is correct. Each month, the company pays and records a contribution of $375. ($150,000 x 3% / 12)

Stacey owns 90% of the common shares of Kors Inc. During the year ended December 31, 2011, Kors sales of inventory to Stacey totaled $1,600,000 and 30% of those sales remain in Stacey's inventory as at December 31, 2011. Kors prices its inventory at a 25% markup on cost and the effective tax rate for both companies is 40%. The required adjustments to consolidated retained earnings and the non-controlling interest (NCI) balance sheet account, as a result of the inventory transaction, at the end of the current year are:

Decrease consolidated RE $51,840; decrease NCI $5,760 Answer D is correct. The decrease in retained earnings is 90% of the after-tax unrealized profit in ending inventory and the decrease in the NCI is 10% of the after-tax unrealized profit in ending inventory. This is an upstream transaction. The adjustments are determined as follows: Decrease in consolidated RE = After-tax unrealized profit in ending inventory x 90% = (1-40%) x $96,000 x 90% = $51,840. Decrease in NCI = After-tax unrealized profit in ending inventory x 10% = (1-40%) x $96,000 x 10% = $5,760.

Mirabelle Inc. has recently completed its first year of operations and its controller is evaluating the differences between Mirabelle Inc's accounting income and taxable income. Which of the following differences gives rise to a deferred income tax liability?

Development costs incurred of $1,000,000 were capitalized on the Statement of Financial Position. These costs were deducted in full for tax purposes. Answer 'C' is correct because the carrying value of this asset ($1,000,000) exceeds its tax basis of $0. When tax deductions take place in advance of the associated accounting expense being recorded, a deferred income tax liability occurs.

At the end of the year, XYZ Marketing Inc. lost its largest client to a competitor. Approximately 20% of XYZ's annual revenues came from this client. Prior to losing this client, XYZ's profit had been declining due to loss of smaller clients and increased competition. Management assessed the situation and has just informed your audit partner that they will continue to assume that the company is a going concern. Management stated that they will not alter this assumption. Your audit partner feels this is inappropriate based on additional audit evidence obtained during the audit regarding the material uncertainty. You are presenting the audit opinion to the XYZ board of directors tomorrow. What is the best course of action?

Express an adverse opinion on the XYZ financial statements. Answer 'B' is correct. CAS 570.21 notes that if the financial statements have been prepared on a going concern basis, but in the auditor's judgment management's assumption is inappropriate, the auditor expresses an adverse opinion.

A reporting issuer other than a venture issuer, as defined by the OSC must:

File comparative annual financial statements with an auditors' report prepared by a participating firm in compliance with any restrictions or sanctions imposed by the CPAB within 90 days of their fiscal year end regardless of the amount of total assets or total revenue. Answer D is correct. A reporting issuer, other than a venture issuer must file annual financial statements within 90 days per Rule 51-102 - Continuous Disclosure Obligations. Per Rule 52-108 - Auditor Oversight, a reporting issuer that files its financial statements accompanied by an auditor's report must have the auditor's report prepared by a public accounting firm that is, as of the date of the auditor's report, (a) a participating audit firm, and (b) in compliance with any restrictions or sanctions imposed by the CPAB

You are auditing the financial statements of a company that has a significant amount of suppliers. Approximately 25% of their suppliers are in the United States. Your audit manager has assessed the risk of material misstatement for completeness of accounts payable at high. Which procedure addresses this assertion?

Obtain a listing of subsequent payments up to the audit report date and agree a sample back to supporting invoices. Answer 'C' is Correct. Subsequent payments testing is done up to the audit report date. Completeness is addressed as this helps determine if any payments made after year end should have been set up as a payable in the year being audited.

Stacey owns 90% of the common shares of Kors Inc. During the year ended December 31, 2011, Kors sales of inventory to Stacey totaled $1,600,000 and 30% of those sales remain in Stacey's inventory as at December 31, 2011. Kors prices its inventory at a 25% markup on cost and the effective tax rate for both companies is 40%. Profit to be eliminated from December 31, 2011 consolidated inventory is:

$ 96,000 Answer B is correct. This is calculated as $1,600,000 x 30% x 25/125 = $96,000. The sales in ending inventory are multiplied by the gross profit percentage of 20% (markup is 25% so gross profit is 20%). NCI is not considered in the elimination as per IFRS 10 B86.c, profits or losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full.

In the current fiscal year, Xiu Xiu Limited acquired equipment for a price of $1,000,000. Delivery and installation of this equipment cost $32,500. At the end of its five year useful life, this equipment must be disassembled and disposed of according to specific environmental legislation. It is estimated that this will cost Xiu Xiu Limited $50,000. Xiu Xiu Limited has an incremental borrowing rate of 7%. How much will Xiu Xiu capitalize as an asset on the SFP with respect to this equipment?

$1,068,150 Answer 'C' is correct because it includes all elements of cost that are to be capitalized. $1,000,000 + $32,500 + ($50,000 * .71299)

MDB purchased a 75% interest in Spade Incorporated on June 30, 2014 for $5.85 million, in cash. The fair value of Spade Incorporated is $7.8 million. The fair values at June 30, 2014 were as follows: Identifiable assets 8,900,000 Identifiable liabilities 3,550,000 MDB did not own any shares of Spade Incorporated before this acquisition. Assume that MDB uses the % of net assets approach to calculate goodwill. How much goodwill will MDB record in their consolidated financial statements as a result of this acquisition?

$1,837,500 Answer A is correct. Goodwill is calculated as follows: Cash Consideration $ 5,850,000 Plus: NCI (25% x (8,900,000-3,550,000)) 1,337,500 Total Consideration $ 7,187,500 Less: FV of net identifiable assets 5,350,000 Goodwill $ 1,837,500

Your client Sauble Corp has a wholly owned foreign subsidiary Varadito Inc. The functional currency of Varadito is considered to be the Canadian dollar. Varadito has a year-end of December 31. The information required to calculate the foreign exchange gain or loss for the Sauble for the current year is as follows: Net monetary liabilities at the beginning of the year - 460,000 FCU Net increase in net monetary liabilities in the year (all changes are assumed to have occurred evenly over the year) - 240,000 FCU Exchange rate beginning of the year: 1FCU = $0.90 CAD Average exchange rate for the year: 1FCU = $0.80 CAD Exchange rate end of the year: 1FCU = $0.70 CAD

$116,000 gain Answer B is correct. The expected net monetary liability is $606,000 (460,000 x 0.90 + 240,000 x 0.80), but the actual translated liability is 700,000 FCU x $0.70 CAD = $490,000.

Pierce Inc. purchased an 80% interest in O'Hara Ltd. on March 1, 2014. Pierce Inc. paid cash of $1,850,000 and agreed to pay $100,000 in contingent consideration for the fiscal years ending May 31, 2014, 2015 and 2016 if O'Hara had sales exceeding $8 million in each respective year. The fair values at March 1, 2014 were: Identifiable assets 2,900,000 Identifiable liabilities 1,050,000 Contingent consideration 220,000 Legal and other professional fees related to the business combination were $20,000. Pierce Inc. did not own any shares of O'Hara Ltd. before this acquisition. Calculate the purchase price in accordance with IFRS 3:

$2,070,000 Answer C is correct. The purchase price is equal to the cash payment plus the fair value of any contingent consideration ($1,850,000 + $220,000).

Cantle Inc. purchased a 30% interest in Rockton Ltd. in Year 1. It was determined that Cantle had significant influence over Rockton and therefore reports its investment in Rockton using the equity method. Upon purchasing Rockton, Cantle reported the following fair value differentials: · Land: Fair value greater than book value by $21,000 · Equipment: Book value greater than fair value by $24,000. The equipment had a useful life of six years and none has been sold to date. In Year 3, Rockton sold 1/3 of its land. Assuming Rockton reported net income of $125,000 for Year 3, its net income included an $18,000 gain on the sale of the land, what amount of equity income would Cantle report for its investment in Rockton for Year 3? (Note: Cantle and Rockton's tax rate is 35.3%)

$34,324 Answer A is correct.. This is calculated as follows: $37,500 - $125,000 x 30% $4,000 - Amortization of FV differential on equipment ($24,000 / 6 yrs) ($1,412) - DIT of 35.3% on $4,000 amortization of FV differential on equipment ($7,000) - Amortization of FV differential on land (1/3 x $21,000) $1,236 - DIT on amortization of FV differential on land (50% x 35.3% x 7,000) $34,324

On October 1, Alberta Camp Services Ltd. (ACSL) purchased 100% of the shares of Wholesale Foods Inc. (WFI) for $3,100,000. On October 1, WFI reported share capital of $150,000 and retained earnings of $2,600,000. All assets and liabilities had a fair value equal to book value, except for inventory and buildings. Inventory had a fair value of $360,000 and a book value of $280,000; buildings that originally cost $2,500,000 had a book value of $1,875,000 and a fair value of $1,775,000. ACSL's tax rate is 30%. What is the amount of goodwill on this purchase?

$364,000 Answer A is correct. This was determined as follows: Purchase price $3,100,000 Book value of net assets -2,750,000 Purchase premium 350,000 Fair value differentials: Inventory -80,000 DIT 24,000 Buildings 100,000 DIT -30,000 Goodwill $364,000

You are planning the annual financial statement audit of a not-for-profit organization (NPO). The NPO provides meals to under-privileged children throughout the province and requires significant capital assets, such as trucks and cooking equipment, to provide these services. The NPO's total donations received have been stable over the past 10 years. Recently, there was a recent article in the local newspaper underscoring how the organization is not effectively spending their cash donations, particularly in how they procure purchases. As a result, donations have slipped slightly. A note from the prior year's audit file notes 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?

1 to 3% of expenses Answer 'D' is correct. Given the article regarding spending issues resulted 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.

Which of the following control narratives best addresses the existence assertion?

All returned goods are logged when received. The log details such items as customers, goods, defects, inspections, and assessment by quality control. Return details per the log are compared to credit notes issued to ensure that credit is issued in accordance with company policy. Answer 'B' is correct because this test of control ensures that credit notes are issued for goods returned to the customers. This addresses the existence of accounts receivable.

Your client's financial statements have been prepared under the going concern assumption; however significant doubts exist with regards to the company's ability to continue as a going concern. Appropriate note disclosures have been included. What are the implications, if any, on the audit report?

An unqualified report with an Emphasis of Matter paragraph should be provided Answer 'B' is correct. The financial statements meet the required disclosures for uncertainties related to the going concern assumption and therefore are in accordance with both ASPE and IFRS. An Emphasis of Matter paragraph is required to draw the users' attention to the potential going concern issue.

In order to assess the risks of material misstatement due to fraud, the auditor uses professional judgement. Which item below is false when assessing the risk of material misstatement?

Assume that fraud has occurred as a result of the risk of misstatement and contact the audit committee. Answer B is correct. The auditor is still considering the risk of potential misstatement, as well as materiality. Actual situations of fraud have not yet been identified

An entity has received a government grant for research and development. In order to receive the grant, there is a clause that requires an assurance report on the amount of bonuses disbursed during the year. The entity also separately engages a third party to manage the bonus calculations and payments. Which of the following standard is most appropriate for this type of engagement?

CPA Canada Handbook - Assurance, CAS 805 Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. Answer 'A' is correct because the government grant requires an assurance report to be issued on the bonuses paid out during the year. Consistent with CAS 805 par. A3, a schedule of employee bonus constitute specific elements, accounts or items of a financial statement.

Which of the following statements is true?

Control risk is the risk of misstatement that could occur in an assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected on a timely basis by related controls. Some control risk will always exist because of the inherent limitations of internal control. Answer B is correct. This statement is true - see CAS 200.13 (n)(ii).

Warm Your Heart Foundation, a non-for-profit organization focused on providing hot meals to less fortunate, made the following promise in its promotional campaign: "For every dollar donated, eighty 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?

CPA Canada Handbook - Assurance, CAS 805, Special considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement Answer 'B' is correct. An audit of the statement of operations, presented by function, would provide high assurance over revenues collected and expenses incurred, separately identifying administrative expenses and expenses spent on the cause.

Surf's Up Inc. has a significant loan outstanding with NB Bank. NB Bank has requested that Surf's Up Inc. provide them with financial statements prepared using the cash basis of accounting. These financial statements must be audited as per the loan agreement between NB Bank and Surf's Up. You are an auditor working for Chapman and Chapman, a regional CPA firm that has been engaged to perform the financial statement audit of Surf's Up Inc. This is your first engagement auditing financial statements that are not prepared using accrual accounting. What is true about the standards applicable to this engagement?

CPA Handbook - Assurance, CAS 800, Special Considerations — Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks is the standard Chapman and Chapman must refer to when performing the Surf's Up audit. This standard deals with special considerations that auditors must consider when they apply the general standards (100-700 series) to this unique audit. Answer 'C' is correct because although CAS 800 does deal directly with considerations particular to an audit of financial statements prepared using the cash basis of accounting, the general standards also apply. The general standards apply to any audit of financial statements, regardless of how those financial statements are prepared.

Knit and Pearl Incorporated, a private company that reports under ASPE, has recently decided to motivate and reward employees by allowing them to share in profits based on a specific formula. The profit participation is reported as "employee bonuses" on Knit and Pearl's income statement. To ensure transparency and build trust with employees, it was decided that an independent audit firm should be engaged to provide assurance over the calculation of employee bonuses. The Knit and Pearl accountant is not familiar with assurance reports but wishes to provide employees with the greatest comfort possible that the calculation of employee bonuses was performed accurately. Which report is appropriate in this situation?

CPA Handbook - Assurance, CAS 805 Special Considerations - Audits of Single Financial Statements and Special Elements, Accounts or Items of a Financial Statement Answer 'C' is correct because a CAS 805 report would provide audit level assurance on a specific item/account from the financial statements of Knit and Pearl. Specifically, this report would provide assurance over the employee bonuses.

In assessing Cipolla Inc.'s risk assessment process, the auditor shall conclude on which one of the following risk assessment processes as being inadequate:

Cipolla has assessed the business risks relative to its corporate strategy and mission statements determining the significance of those risks and assessing their likelihood of occurrence. Answer 'B' is correct. The entity's risk assessment process requires the identification of business risks relative to the financial reporting objectives, not the strategy or mission statement as per the CPA Canada Handbook - Assurance, CAS315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.

You are auditing the long-term debt account and the risk of material misstatement of completeness has been assessed as high. On a stand-alone basis, which procedure provides the strongest source of audit evidence?

Confirm outstanding long-term debt amounts with all of the entity's financial institutions and lenders. Answer 'A' is correct. External sources are the best form of audit evidence. By confirming with all of the entity's financial institutions and lenders, you obtain evidence that management has accounted for all of the long-term debt in the financial statements. While other procedures are still needed, this is the strongest audit evidence in this situation.

In preparing consolidated financial statements, the following statement is true with respect to the determination of consolidated property, plant and equipment (PP&E):

Consolidated PP&E will equal 100% of the book value of the parent's PP&E, plus 100% of the book value of the subsidiary's PP&E, plus 100% of the unamortized fair value differential on the subsidiary's PP&E from acquisition (where fair value is greater than book value), less 100% of the unrealized gain on intercompany sale of PP&E by the subsidiary to the parent. Answer C is correct. On consolidation, 100% of the book value of the assets and liabilities of the parent and the fair market value of the assets and liabilities of the subsidiary would be added together. When the fair value is greater than book, an increase in consolidated PP&E is required. It is also necessary to eliminate the impact of any intercompany gains reported by the parent or the subsidiary.

R.O.A.D. Construction Inc. uses the percentage of completion method to recognize the revenue and costs associated with its construction contracts. Senior management receives a bonus equal to up to 50% of their salary if they meet their EBITDA target. Which assertion(s) should you primarily address when you develop audit procedures for contract revenues and contract costs?

Contract revenues -Occurrence Contract costs - Completeness Answer 'C' is correct because there is a risk of overstatement of contract revenues and understatement of contract costs to meet the EBITDA target. Audit procedures that address the occurrence of contract revenues will help us ensure the revenue transactions took place. Audit procedures that address the completeness of contract costs will help us ensure all costs that should have been recorded were recorded.

You have just started auditing ABC Electronics Ltd. and have just gathered knowledge regarding the company. ABC has separate systems for inventory, purchasing, receivables, etc...that interface into their general ledger. You learn that ABC's general ledger system is more than 20 years old, requires significant upgrades, and consistently crashes. In your audit, what level of risk of material misstatement is primarily impacted?

Control environment risk at the overall financial statement level Answer 'D' is correct. The general ledger system problems impact all financial statement accounts. Since, this cannot be isolated to any account it impacts the overall financial statement level. ABC can change this risk by upgrading to a new general ledger system

Which control reduces the risk of material misstatement for the valuation & allocation of accounts receivable?

Credit limits on sales. Answer 'A' is correct. Limits restrict the issuance of large credit balances that the entity cannot collect. While limits do not completely mitigate collection risk, if the credit provided becomes uncollectible, they help reduce the size of the potential receivable write-offs.

Chapman and Chapman Chartered 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.

High susceptibility of assets to theft 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, A13: 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 statement is true in relation to the auditor's responsibilities relating to fraud in an audit of financial statements?

If the auditor concludes that fraud risk exists for a particular material classes of transactions, account balances and disclosures, the auditor shall treat those assessed risks of material misstatement due to fraud as significant risks. Answer 'D' is correct and consistent with CAS 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, par.27. In addition to treating such risks as significant risks, the auditor is required to obtain an understanding of the entity's related controls, including control activities, relevant to such risks.

Which of the following statements is true in relation to going concern?

If the financial statements have been prepared on a going concern basis but, in the auditor's judgment, management's use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion. Answer 'D' is correct as this is noted in CPA Canada Handbook - Assurance, CAS 570 par. 21. The auditor can also express an adverse opinion if the use of going concern assumption is appropriate but there was inadequate financial statements disclosure relating to material uncertainty per CAS 570.19.

Stomp Limited reports under ASPE standards. During this fiscal year, the senior management of Stomp Limited decided to discontinue a major line of business and, therefore, dispose of the associated asset group. Just before the fiscal year end, the assets of the discontinued business line were sold for a gain of $100,000. Net income before taxes for Stomp Limited for the fiscal year in question totalled $1,300,000, of which $150,000 related to operations of the discontinued line of business (revenues of $575,000 less expenses of $425,000). Stomp Limited's tax rate is 16%. Which of the following income statement excerpts correctly presents the above facts?

Income from continuing operations before taxes: $1,050,000 Income tax expense: 168,000 Net income from continuing operations: 882,000 Income from discontinued operations: 210,000 Net income: $1,092,000 Answer 'C' is correct because the income from operating the discontinued line of business as well as the gain on sale of the assets of the discontinued line of business are reported as a separate line item on the income statement, net of taxes. This is in accordance with S.3475.

In general, if a company's internal audit department was eliminated due to budget constraints, which one of the following statements best describes how audit risk may be affected?

Increase in control risk. Answer A is correct. An effective internal audit department will help to reduce control environment risk.

You are auditing the accounts payable section of ABC Computer Ltd.'s annual financial statements. ABC is growing very fast and also has high accounts payable staff turnover, making it difficult to segregate duties. After your first day, you head to the casino. On your way in, you see ABC's accounts payable clerk, Tom, give the valet staff keys to a very expensive BMW. Once inside, you see that he is gambling with a significant amount of money. What should you do?

Increase your sample sizes throughout your accounts payable testing. Answer 'C' is correct. While Tom may not be stealing from ABC, his position does create an opportunity to commit fraud. This fraud risk needs to be mitigated. Increasing sample sizes would increase the chance of detecting fraud, if it is occurring.

Blake Hudson is the audit senior on the Blueberry Limited engagement. Blueberry Limited manufactures and distributes a full range of electronic educational toys for young children. This is a challenging industry to operate in due to quickly evolving technology that costs a lot to develop. When costs incurred to develop new products meet the six criteria for internally generated intangible assets they are capitalized on the SFP. Blake is developing the audit program for deferred development costs and is currently designing procedures to address the measurement assertion. Which procedure best addresses measurement of deferred development costs?

Inspect supporting documents for expenditures capitalized in the deferred development costs account. Answer 'C' is correct because this procedure enables the auditor to determine whether expenditures are correctly capitalized to this account or not. This provides evidence to support the measurement of the asset on the SFP.

Through a risk assessment process, your organization has identified and assessed the following risk - "Loss of computer hardware availability through unforeseen event, such as fire, water, building collapse, etc..." As part of your organization's risk management strategy and response, which of the following transfers the risk?

Insure the hardware against certain unforeseen events. Answer 'D' is correct. By insuring the hardware, the risk associated with water, fire, or other kinds of damage is essentially transferred over to someone else (i.e. the insurance company). While the organization does have some operational risk, such as downtime, the financial risk is transferred outside of the organization.

Assuming IFRS is being used, which of the following scenarios does not require the company to prepare consolidated accounts?

Murray obtained control over the net assets of Sniffles by making a direct purchase of those net assets Answer C is correct. In the purchase of net assets the related assets and liabilities are recorded directly in the financial statements of Murray upon acquisition. Consolidation is therefore not required.

Which of the following statement is true in relation to the auditor's requirement in identifying and assessing the risks of material misstatement?

Obtaining an understanding of an entity's controls is sufficient to test operating effectiveness of the entity's control if there is automation that provides for the consistent operation of the controls. Answer 'B' is correct as this is consistent with CPA Canada Handbook - Assurance, CAS 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, par. A75. Due to the inherent consistency of IT processing, performing audit procedures to determine whether an automated control has been implemented may serve as a test of that control's operating effectiveness, depending on the auditor's assessment and testing of controls such as those over program changes.

You are planning the audit of Tom's Tools Ltd.'s annual financial statements. Their bank requires an audit. As part of your risk of material misstatement assessment at the financial statement level, you note many factors that result in high fraud risk. What is a reasonable planned audit response to the fraud risk?

Perform additional analytical procedures across multiple cycles and accounts. Answer 'D' is correct. This is a reasonable planned audit response as it addresses multiple cycles and accounts that impact the financial statements as a whole. Additional analytical procedures at the financial statement level would help you identify anomalies and unusual items that need to be followed up and perhaps examined further.

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?

Performance materiality is set by the auditor with the objective of reducing audit risk to an acceptably low level. Answer 'C' is correct because, as stated in paragraph A12 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.

The purpose of an internal control process, from the financial reporting perspective, is to:

Produce reliable information. Answer 'D' is correct since the shipping records would indicate only one shipment while sales records would show a duplicate record.

R.O.A.D. Construction Inc. uses the percentage of completion method to recognize the revenue and costs associated with its construction contracts. How should it account for an increase in the expected costs to complete a fixed price construction contract? Total contract revenue is still expected to exceed total contract costs.

Prospectively, as a change in an accounting estimate. Answer 'B' is correct because the percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs. Therefore, the effect of the increase is accounted for as a change in an accounting estimate.

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 their financial statements audited or reviewed. Given the small size of their 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 only 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?

Report on the results of applying specified auditing procedures Answer 'B' is correct. To keep engagement costs to a minimum, the bank and the company could agree upon specific audit 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.

You have finished the fieldwork in the audit of Paul's Carpets Ltd's financial statements. The company is privately held by a wide range of shareholders represented by a board of directors. The board does not have any committees. Audit materiality is $1,000,000. During the audit, your audit team placed 10 errors on the Summary of Identified Misstatements. Management corrected 8 of the 10 errors and those remaining totalled $250,000. You are meeting with the board tomorrow. What are you going to do at the meeting?

Request the board to adjust the remaining two errors. Answer 'D' is correct. You are not required to present the adjusted misstatements to those charged with governance. However, you are required to request those charged with governance to adjust any misstatements that were not adjusted by management. (CPA Canada Handbook - Assurance, CAS 450, Evaluation of Misstatements Identified During the Audit par 12)

Your firm is auditing R&R Business Consulting, an owner-managed company. A judgmental sample of 20 operating expenses was selected haphazardly to test existence of expenses. Tolerable misstatement for the engagement is $10,000. Results of the test were as follows: Total expenses $100,000 Total sampled $30,000 Total identified errors (due to personal expenses of the owner recorded as business expenses) $6,000 What actions should the auditor take in light of these test results?

Request the management to review all expenses and make necessary adjustments. After adjustments are made by management, carry out the test again. Answer 'D' is correct. Given that the extrapolated error exceeds tolerable misstatement, audit sampling has not provided a reasonable basis for conclusions about the population that has been tested. Therefore, it would be best to request the management to review the entire population, correct the errors and for the auditor to carry out their procedures again.

Fraser's Fireplaces Ltd. (FF) is interested in purchasing Andrea's Barbeques Ltd. (AB) to expand their outside barbeque market. If the purchase goes through, AB operations will be merged with FF. Before making the purchase, FF is concerned about a few aspects of AB's business and has engaged you to conduct due diligence on already identified specific risks. One risk they have identified is "AB employees may not be compatible with FF employees, reducing synergies in operations".

Review AB training programs and employee skill sets. Answer 'D' is correct. By performing this procedure, FF would be able to determine if the AB employees' skill set integrates well with FF's operations. Incompatible employee skillsets would negatively impact any operational synergies.

Which of the following procedures provides the best audit evidence regarding valuation of an entity's allowance for doubtful accounts?

Reviewing the entity's accounts receivable aging schedule. Answer 'B' is correct. An analysis of accounts receivable aging would reveal past due accounts that may not be collectible. Amounts that may not be collectible should be considered when assessing the valuation of an entity's allowance for doubtful accounts.

The associate auditing the Property Plant and Equipment account suddenly left on sick leave. You are now reviewing their work. The associate left a note in the file that simply said "Examined land titles". In addition, an unfinished working paper left on their desk had a sticky note that said "Examined bank loan agreements and recalculated the current ratio covenant." What assertion is the associate trying to address with these two procedures?

Rights & Obligations Answer 'A' is correct. The examination of land titles would help determine if the organization owns and has rights to the property. Examining the loan agreements would determine if any of the Property Plant and Equipment was used as collateral. If so, the recalculation would help determine if the bank may call the loan and obtain the rights to the assets.

Blake Hudson is the audit senior on the Blueberry Limited engagement. Blueberry Limited manufactures and distributes a full range of electronic educational toys for young children. This is a challenging industry to operate in due to quickly evolving technology that costs a lot to develop. Blake is developing the audit program for inventory and is currently designing procedures to address the valuation assertion. Which procedure best addresses valuation of finished goods inventory?

Sales forecasts for the upcoming fiscal year are compared to inventory on hand at year-end. Answer 'B' is correct because this procedure considers whether the inventory on hand is expected to be sold in the next fiscal year. Since technology evolves quickly in this industry, the risk of obsolescence is high and auditors would have to question whether inventory on hand would be able to be sold at an amount greater than cost.

You are the auditor of Scoop Limited, a publicly traded company. During the year Scoop issued some bonds. The convertible bonds have a face value of $1,000,000, a term of 5 years, and pay annual interest at a stated rate of 8%. The bonds are convertible into 10 shares for every $1,000 bond at the option of the investor. To assess the valuation and allocation assertion, on the amount reported on the Statement of Financial Position of Scoop Limited you must determine the appropriate accounting for these bonds. How should these bonds be reported by Scoop?

Scoop Limited must determine the present value of the face value of the bonds and the annual interest payments using the market rate of interest to determine the liability to be reported on the SFP. The excess of price over the liability is reported as equity on the SFP. Answer 'C' is correct because the bond has a fixed conversion ratio and conversion is at the option of the investor.

Cushy Cosy Inc. is a retailer of home furnishings. When a customer wishes to purchase a piece of furniture, an invoice is issued and paid for. A copy of the invoice is then sent to the warehouse to arrange for shipment on the date requested by the customer. Once shipped, a shipping slip is created and recorded in a shipping log. The shipping slip is then stapled with the invoice and provided to the accounting department to record the sale. Describe the procedure that would best address completeness of sales.

Select a sample from the shipping log and trace to the sales ledger. Answer 'A' is correct. Selecting from the shipping log will allow detection of shipments that were made with no corresponding sale recorded, thus addressing completeness.

CPA has been engaged to audit the financial statements of Shoe Limited (SL) for the fiscal period June 30, 2014. It is now August 8, 2014 and CPA has obtained sufficient appropriate audit evidences to issue the financial statements on August 10, 2014. CPA has prepared an audit report dated today when the CEO of Shoe Limited informed CPA that a client who accounts for 50% of SL's outstanding receivables has recently returned a significant portion of inventory some of which was sold before year-end. What is the correct procedure that CPA must perform in relation to the subsequent event?

Select a sample of credit notes issued before and after period-end. Test whether the receiving documents or invoices support the recognition of the credit in the correct period. Answer 'A' is correct. Through this procedure, the auditor can ensure that the sales return transactions occurring pre-/post- period-end have been recorded appropriately in the correct period, thus ensuring proper cut-off of revenue.

Which of the following procedures would be performed to ensure proper cut-off of revenue?

Select a sample of credit notes issued before and after period-end. Test whether the shipping documents or invoices support the recognition of the credit in the correct period or not. Answer 'A' is correct. Through this procedure, the auditor can ensure that the sales return transactions occurring pre-/post- period-end have been recorded appropriately in the correct period, thus ensuring proper cut-off of revenue.

You are reviewing your colleague's work on their audit of AAA Carpets' financial statements. AAA follows ASPE. Your audit team is concerned with the completeness of AAA's note on lease commitments. The amounts recorded in the notes are derived from a separate schedule created by AAA's controller. The controller obtains the lease information from AAA's legal department. In the audit file, your colleague documented that he addressed completeness of the note by simply reading through it. You conclude that additional work is needed for this presentation and disclosure assertion. Which procedure best addresses completeness?

Select a sample of lease agreements from AAA's legal department and ensure they are included in the controller's schedule and the note. Answer 'A' is correct. By selecting the sample from the legal department, it helps ensure that all leases are included accordingly in the controller's schedule and the note.

Which of the following factors would most likely affect the ability to audit a client's financial statements?

Serious concerns about management integrity Answer 'C' is correct. If the management integrity is of significant concern, the risk of management misrepresentation in the financial statements may be so high that an audit cannot be conducted.

Which of the following would affect the level of overall materiality set by the auditor?

There are a broad amount of users relying on the financial statements. Answer 'C' is correct because according to CPA Canada Handbook - Assurance, CAS 320, Materiality in Planning and Performing an Audit, par. 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.

Which of the following instruments has been correctly accounted for?

Subordinated 6% debentures payable with interest payable semi-annually. At maturity in five years' time, the face value of the debentures may be converted at the company's option into common shares at the future prevailing market price. The instrument has been recorded as debt. Answer 'B' is correct. Per the CPA Canada Handbook - Accounting, IAS 32, Financial instruments: presentation, since the conversion payment is dependent on the future market price, price risk remains with the company. Therefore, the instrument is correctly recorded as debt.

Marino Inc. is in the process of preparing its management discussion and analysis (MD&A) in compliance with the general disclosure principles pertaining to MD&A. The MD&A should:

Supplement and complement the information in the financial statements Answer 'C' is correct because the MD&A in conjunction with the financial statements form the basis for business reporting.

A company has forgotten to file a worker's compensation report for an employee that was injured on their jobsite. The employee has filed a human rights complaint with the employment standards branch. They have informed the company that their employer practices are being investigated. You are the audit manager for MannCon. You feel that if MannCon is found guilty, their business will be in jeopardy. You have requested that the financial statements include a going concern note in the notes to the financial statements. MannCon would like to understand the implication of the going concern note disclosure on the auditor's report:

The Human Rights investigation should be included in the Emphasis of Matter in the auditor's report. The investigation is so important that the auditor's want to make sure the users read it in the auditor's report rather than just including it in the notes to the financial statement. Answer B is correct. As per CAS 706(6), the use of the Emphasis of Matter paragraph would be appropriate because it would draw the users' attention to the going concern note regarding the investigation issue disclosed in the financial statements.

Which of the following is true in analyzing repairs and maintenance expense?

The auditor examines the repairs and maintenance general ledger to discover items that are expensed that should have been capitalized. Answer D is correct. The auditor examines the repairs and maintenance account to test the occurrence of repairs and maintenance expense, and the completeness of PP&E.

With respect to the auditor's association with annual reports, which one of the following is false?

The auditor should arrange to obtain the annual report immediately after its release and perform any required procedures. Answer B is correct. When an entity issues a designated public document, the auditor should arrange to obtain the document prior to its release and perform the procedures set out in section 7500.

Your client, Christie's camera supply Inc. (Christie's) owns 20% of the common shares of Lara's Lenses Inc. (Lara's). This investment had been acquired a number of years ago. The purchase price was $950,000 and Christie's has used the cost method to account for this investment to the end of the current year. At the end of the current year, after all cost method entries had been made, the controller determined that an error had been made and the equity method should have been used since the date of acquisition. Christie's share of dividends declared by Lara's in the year was $70,000 and net income reported by Lara's was $300,000. If the equity method had been used since the investment was first acquired, the correct investment account balance would have been $1,090,000 at the end of the current year. Which of the following is true?

The correct adjustment to opening retained earnings is a credit of $150,000. Answer A is correct. The adjustment is calculated as follows: Closing balance under the equity method 1,090,000 Christie's share of Lara's net income (300,000 x 0.20) - 60,000 Christie's share of Lara's dividends declared 70,000 1,100,000 Balance under the cost method - 950,000 150,000

Which of the following circumstances require an Emphasis of Matter paragraph to be added to the Audit Report?

The financial statements are prepared in accordance with the cash basis of accounting Answer 'D' is correct. An Emphasis of Matter paragraph is required when financial statements are prepared in accordance with a special purpose framework of accounting and, as a result, may not be suitable for all users.

ABC Company is a new client of your firm and has previously been audited by another firm. Last year, the predecessor accountant issued an unqualified audit report. Which of the following is TRUE with regards to your firm's responsibilities with respect to the prior year's balances?

The firm is required to obtain sufficient evidence to decide whether prior year's balance contain misstatements that can affect the current year's financial statements. Answer 'D' is correct. Due to the fact that opening balances may have an impact on the current year's balances, an auditor is required to "obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period's financial statements by: i. Determining whether the prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated; ii. Determining whether the opening balances reflect the application of appropriate accounting policies; and iii. Performing one or more of the following - Where the prior year financial statements were audited, reviewing the predecessor auditor's working papers to obtain evidence regarding the opening balances; - Evaluating whether audit procedures performed in the current period provide evidence relevant to the opening balances; or - Performing specific audit procedures to obtain evidence regarding the opening balances." (CPA Canada Handbook - Assurance, Section CAS 510, Initial Audit Engagements - Opening Balances)

Which of the following would not be considered a fraud risk factor?

The owner's bonus is based on profit. Answer D is correct. It is acceptable for the owner to take a bonus based on profit; however, the bonus may create an incentive for fraud to increase profit.

Which of the following statements is false with respect to the translation of financial statements of a foreign subsidiary when the functional currency of the subsidiary is considered to be the Canadian dollar?

The parent company is only exposed to foreign exchange risk on the net assets of the subsidiary. Answer B is correct. This statement is false. When the functional currency of the foreign subsidiary is considered to be the Canadian dollar, the risk associated with foreign exchange goes beyond exposure to the effect of fluctuations in the exchange rate on the net assets of the subsidiary. The exchange rate risk is similar to the risk the parent would have faced if the parent had directly entered into the transactions in the foreign currency instead of entering into the transactions through the subsidiary.

Kelly, an audit junior, agreeing the quantity recorded on a sample of receiving reports to both the supplier invoice and the purchase order for each receiving report. What is the purpose of this procedure?

This test evaluates the operating effectiveness of a control designed to prevent or detect misstatements of accounts payable. Answer C is correct because this is a test of a control that ensures only goods ordered and received are billed for by a supplier. The test evaluates the effectiveness of the control. [CPA Canada Handbook - Assurance, CAS 330, The Auditor's Responses to Assessed Risks, par. 10]

Materiality is the basis used for determining whether an adjustment is required. When should materiality be calculated?

Throughout the entire audit. Answer B is correct. Materiality should be calculated at the beginning of the audit, during the planning stages, and subsequently reassessed as errors and issues are found, to incorporate the changes in users' sensitivities

Health Systems Inc. (HSI) has two business units that design and manufacture two distinct products for sale in Canada and around the world: Magnetic resonance imaging (MRI) and hi-technology airport x-ray scanning machines. Headquartered in Winnipeg, HSI has 3 manufacturing facilities in North America. Because each business unit is driven by different industry factors, HSI manages, measures the performance of, and makes strategic and operational decisions for these business units separately. The MRI business unit manufactures machines at plants in Winnipeg and Houston, Texas. At the May 31, 2012 year-end, total assets of these facilities were CDN $78 million and CDN $65 million respectively, while total sales from each were CDN $122 million and CDN $94 million respectively. X-ray scanners are produced in Edmonton, AB, whose total assets and sales were $88 million and $136 million respectively. 64% of MRI sales (after translation to CDN dollars) were to U.S. customers, 11% sold to Japanese customers, 15% sold in Canada and 10% to 8 other countries. The U.S. Government accounted for 37% of total MRI sales, and no other customer accounts for greater than 10% of total MRI sales. 91% of x-ray scanners were sold to U.S. airports, with the remainder sold in Canada. No single customer accounts for greater than 10% of total scanner sales. Given only the information provided, the following May 31, 2012 HSI segmented disclosure should be provided:

Total HSI U.S., Japanese and Canadian assets and sales; total MRI unit assets, sales and net income; x-ray unit assets, sales and net income; and U.S. Government MRI sales. Answer D is correct. The entity needs to disclose revenues and capital assets by geographical area. HSI has two reportable segments (MRI and x-ray) for which its disclosure must include: revenues, assets and a measure of profit or loss.

SkyHigh Inc. is a company which 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 not to 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?

Total assets Answer 'D' is correct. Given the going concern issue, the bank, who is the primary user, is likely interested in exercising their claim on the assets of the corporation, which makes this benchmark the most relevant.

You are auditing the Property, Plant and Equipment account on the XYZ Widgets Inc.'s balance sheet. You have noted the following inherent risks regarding the entity's equipment: • The selling price of the inventory made directly from the equipment has decreased. • The equipment is kept in the basement of the entity's main office. There have been multiple floods in the past two years. Which assertion is primarily impacted by these inherent risks?

Valuation & Allocation Answer 'C' is correct. Both risks would impact the value of the equipment as presented on the financial statements. If inventory prices decrease, then cash flows derived from the equipment will decrease. A reduction in cash flows may cause a reduction in the equipment's value. Flooding in the basement may damage the equipment, reducing the value.

You are auditing the accounts receivable of XYZ Manufacturing Ltd. Your IT specialist pulled data out from the accounts receivable sub-ledger using a Computer Assisted Auditing Technique (CAAT) to obtain information - Customer Name, Amount Owing, Age of Receivable, and Credit Limit. Using this information, which accounts receivable assertion are you primarily addressing once you develop audit procedures?

Valuation & allocation Answer 'A' is correct. You can use the amount owing, age, and credit limit information to develop audit procedures to help you determine if XYZ can collect the cash. This will help you determine if XYZ has properly valued the receivables.

Your firm is engaged to audit the financial statements of Ace Installations, a company specializing in installation and servicing of air conditioning units. Revenue is recorded as service calls are completed, at which time the customer is provided with a copy of the invoice. Your audit approach included sending confirmations for accounts receivable. 18 out of 20 confirmations sent came back with no exceptions. What procedures, if any, should be performed on the 2 accounts receivable balances for which the confirmations were not received?

Vouch amounts to the corresponding invoices. Answer 'B' is correct. Since invoices are issued as services are performed and revenue is recognized, agreeing to the invoices would address existence and accuracy.

Which of the following statement is true in relation to materiality in an engagement?

When establishing the overall audit strategy, the auditor shall determine materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures. Answer 'D' is correct and consistent with CPA Canada Handbook-Assurance, CAS 320, Materiality in Planning and Performing an Audit, par.11, this is referred to as performance materiality. Performance materiality will always be lower than the materiality for the financial statements in order 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.