Deck 1: The Demand for Audit and Other Assurance Services

Question 1

In the audit of a corporate tax return,the report provided by the Canada Revenue Agency auditor would describe

A)an opinion on the likelihood of tax return error.
B)the likely accounting errors that could contribute to tax errors.
C)management issues with respect to accurately reporting taxes.
D)that the corporate income tax return is in compliance with the Income Tax Act.

Answer 1

D

Question 2

The auditor and the entities being audited should agree on the criteria to be used in the audit

A)well in advance before the audit starts.
B)after the audit planning has been done.
C)as they progress with the audit,as they can determine which criteria are most suitable.
D)at the end of the audit.

Answer 2

A

Question 3

Use your knowledge of the definition of auditing and Figure 1-1: Audit of a Corporate Tax Return to explain how an auditor would conduct a Corporate Tax Return audit.

Answer 3

First,the concept of a competent,independent person requires that the practitioner who is conducting an assurance engagement should have "adequate proficiency," which means that the tax auditor should be competent in the fields of taxation and the fields that need to be assessed,such as accounting,information systems,data management and access and internal controls.The auditor should also use due care and have an objective state of mind.This means that the auditor should be independent of the client and do their best using their skills when conducting the audit.
The second part of Figure 1-1 relates to accumulation and evaluation of evidence using a risk-based approach.This means that the auditor would collect evidence based upon risks of violations in the tax return by the client.
The next three parts are connected.The auditor determines the correspondence of the information provided by the client (which could be the financial statements,tax return and the quality of the calculations within the tax return)to established criteria (the Income Tax Act).
Finally,the auditor issues a report (Notice of Assessment)to summarize the findings.

Question 4

In the audit of historical financial statements by PA firms,the criteria used are

A)generally accepted auditing standards.
B)relevant accounting frameworks.
C)regulations of the Canada Revenue Agency.
D)regulations of the provincial securities commissions.

Question 5

In the audit of an individual's tax return,the criteria used would be

A)an accounting framework.
B)the Income Tax Act.
C)the client's policies for taxable income.
D)the auditor's judgment.

Question 6

Joe is recording sales transactions in the accounting system so that they can be summarized in a logical manner for the purpose of providing financial information for decision-making.Joe is performing

A)accounting.
B)auditing.
C)review.
D)management consulting.

Question 7

A large PA firm has assessed evidence collected during an engagement.Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS).A high level of assurance was obtained.The type of engagement conducted was

A)an audit.
B)a review.
C)management consulting.
D)a compilation.

Question 8

The independent auditor's report is the

A)communication of the outcome of auditor's evaluation to the users.
B)set of audited financial statements.
C)invoice of the auditor detailing the work they have performed.
D)report presented to management about the possible improvements.

Question 9

As an external auditor is paid a fee by a client company,he or she

A)is absolutely independent and may conduct an audit.
B)may still be sufficiently independent to conduct an audit.
C)is never considered to be independent.
D)must receive approval from the relevant provincial securities commission before conducting an audit.

Question 10

Auditing should be done by a qualified

A)chartered accountant.
B)certified management accountant.
C)competent and independent person.
D)professional accountant.

Question 11

George had a conversation with the accounting personnel and documented information about how the accounting systems function.He has also placed copies of accounting forms in his files.George is performing which task?

A)accounting procedures
B)evidence gathering
C)tax audit
D)audit report preparation

Question 12

Which of the following is an example of accounting rather than auditing?

A)gathering evidence about the quality of accounts receivable
B)entering sales transactions into the sales order system
C)reviewing sales invoices to see if they have been calculated correctly
D)comparing bank deposit documents to the recorded cash received

Question 13

One of the reasons that an auditor must be competent is so that they can

A)select the type and amount of evidence to accumulate.
B)explain to staff how the bookkeeping should be done.
C)record the transactions properly for the underlying records.
D)capture the information properly in the computer files.

Question 14

Which of the following is an example of auditing rather than accounting?

A)recording purchase amounts in the expense accounts
B)posting the daily sales totals to the general ledger
C)recording cash received in the customer account files
D)evaluating whether accounts receivable are collectible

Question 15

In the audit of a corporate tax return,the CRA auditor should demonstrate competence in the use of

A)external databases that contain economic statistics.
B)standard personal and corporate tax preparation software.
C)the Income Tax Act and accompanying regulations.
D)database management software for the use of client based research.

Question 16

In auditing accounting data,the concern is with

A)evaluating whether recorded information reasonably reflects the economic events that occurred during the accounting period within specified dollar ranges.
B)determining if fraud has occurred.
C)determining if taxable income has been calculated correctly.
D)analyzing the financial information to be sure that it complies with government requirements.

Question 17

Which of the following illustrates the definition of auditing with respect to the reporting process?

A)accumulation and evaluation of evidence about balance sheet accounts
B)reporting on the degree of correspondence between financial statements and ASPE/IFRS
C)writing an operational audit report that is tailored to the client's situation
D)making sure that the auditor is competent and understands evidence gathering

Question 18

One of the reasons that an auditor must be competent is so that they can

A)understand the engagement risks and the criteria used by the client.
B)explain to staff how the bookkeeping should be done.
C)record the transactions properly for the underlying records.
D)capture the information properly in the computer files.

Question 19

It is important for the auditor to be independent because

A)otherwise the auditor would not charge a fair rate to the client.
B)otherwise the auditor might not be as knowledgeable of the subject matter and the criteria.
C)this will prevent bias in accumulating and evaluating evidence.
D)the Canadian tax authorities require that the auditor be independent.

Question 20

Which of the following illustrates the definition of auditing with respect to the evidence analysis process?

A)accumulation and evaluation of evidence regarding assertions
B)learning about different types of computing technology,such as mainframes
C)writing an operational audit report that is tailored to the client's situation
D)making sure that the auditor is competent and understands evidence gathering

Question 21

Blader Ng.Inc.has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations.An auditing firm has been engaged to assess air quality and compare results to legislated requirements.What type of audit or engagement is the auditor conducting?

A)financial statement
B)compliance
C)operational
D)review

Question 22

A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n)

A)audit of financial statements.
B)compliance audit.
C)operational audit.
D)production audit.

Question 23

As part of its loan agreement,Big Bank requires that only accounts receivable less than 60 days old be used as collateral.An auditor has been engaged to provide assurance that the accounts receivable on the list provided to the bank are indeed less than 60 days old.What type of engagement is the auditor conducting?

A)financial statement
B)compliance
C)operational
D)review

Question 24

An accountant records information.When conducting an audit,the auditor must possess

A)an ability to interpret relevant accounting frameworks.
B)an education beyond the bachelor's degree.
C)an ability to classify transactions by type.
D)an ability to organize and summarize economic events.

Question 25

Which of the following organizations establishes ethical standards and standards for the practice of Internal Auditing?

A)Information Systems Audit and Control Association (ISACA).
B)Institute of Internal Auditors (IIA).
C)Society of Management Accountants of Canada (SMAC).
D)Chartered Professional Accountants of Canada (CPA).

Question 26

A typical objective of an operational audit is for the auditor to

A)determine whether the financial statements fairly present the entity's operations.
B)evaluate the feasibility of attaining the entity's operational objectives.
C)evaluate the effectiveness of an internal process.
D)report on the entity's relative success in attaining profit maximization.

Question 27

Which of the following is most difficult to evaluate objectively?

A)efficiency and effectiveness of operations
B)compliance with government regulations
C)presentation of financial statements in accordance with a generally accepted accounting framework
D)internal controls in use at a small company

Question 28

Which of the following audits can be regarded as being solely "compliance" audits?

A)Canada Revenue Agency's examinations of the returns of taxpayers.
B)the Auditor General's evaluation of the computer operations of governmental units.
C)an internal auditor's review of his employer's payroll authorization procedures.
D)a public accounting firm's audit of the local school district.

Question 29

Which of the following is not a cause of information risk?

A)simple exchange transactions
B)voluminous data
C)remoteness of information
D)biases and motives of the provider

Question 30

What is the primary difference between internal and external auditors?

A)the methodology used to conduct financial statement audits
B)the level of competence required
C)the parties to whom the auditor is responsible
D)the level of objectivity required

Question 31

Discuss the differences and similarities between the roles of accountants and auditors.What additional expertise must an auditor possess beyond that of an accountant?

Question 32

Frederic is an account manager at a large Canadian bank.Frederic has to decide if the bank will make a loan to Frost Corp,a snow removal company.Further,Frederic has to decide how much they will lend to Frost and at what rate.
Assuming that Frederic makes the loan,what factors will he use to decide the rate of interest? What factors are impacted by auditing and how?

Question 33

Information risk can be caused through any one of the following except

A)remoteness of information.
B)low volume of data.
C)biases and motives of the provider.
D)complex exchange transactions.

Question 34

Information risk can be reduced through any one of the following except

A)having the user verify the information.
B)having the chief financial officer certify and sign-off on the financial statements.
C)having the user share information risk with management.
D)providing audited financial statements to users.

Question 35

What is the most appropriate method for an organization to lower information risk related to its financial statements?

A)Have good bookkeeping work completed on the accounts.
B)Use a high quality software package to keep track of information.
C)Have an independent financial statement audit conducted.
D)Have an independent operational audit conducted on effectiveness.

Question 36

The risk that financial statements may be materially false and misleading is called

A)information risk.
B)client risk.
C)business risk.
D)assessment risk.

Question 37

Which of the following is an example of a financial statement audit?

A)determining whether ABC's financial statements overall do not violate any debt covenants
B)determining whether ABC's overall financial statements are stated in conformity with IFRS
C)evaluating the effectiveness and efficiency of internal controls used to create account balance
D)evaluating the effectiveness and efficiency of internal controls used to record transactions

Question 38

The underlying conditions that create demand by users for reliable financial information include the fact that

A)more reliable information will allow investors to calculate the rate of return on their investment.
B)governments rely on such information to create tax policies.
C)there is a need for the expression of an opinion as to the fairness of financial statements.
D)users are separated from accounting records by distance and time.

Question 39

How does a financial statement audit affect a bank manager's decisions in providing loans to a corporate client?

A)Information risk is reduced and the bank manager can lower the interest rate charged.
B)The bank manager will lower the risk-free interest rate that applies to the corporation.
C)The business risk for the client will be reduced,so the borrowing costs will decline.
D)The business risk for the client will be increased,so the borrowing costs will be lowered.

Question 40

Which of the following terms best describes the increased likelihood that unreliable information will be provided to decision makers?

A)audit risk
B)information risk
C)inherent risk
D)business risk

Question 41

What impact is the presence of factors such as real-time information (such as via the Internet)expected to have upon the demand for assurance services?

A)Demand is expected to decline due to the lack of adequate resources.
B)Demand is expected to grow due to the increase in large corporations.
C)Demand is expected to grow due to the need for forward-looking information.
D)Demand is expected to decline as small businesses use the Internet more.

Question 42

The need to implement philosophies and practices commonly referred to as "improved business practices" comes from

A)increased competition resulting in public accounting firms being concerned about keeping clients and maintaining a reasonable profit.
B)a CAS pronouncement.
C)an IFRA pronouncement.
D)a need to increase profitability on assurance type mandates.

Question 43

Two types of services provided by public accounting firms are audits and reviews.Discuss the similarities and differences between these two types of services.Which type provides the most assurance?

Question 44

The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations,child labour guidelines,and other employee welfare issues.What type of service is No-Name providing?

A)assurance
B)attest
C)review
D)compilation

Question 45

The extent and the scope of the audits conducted by Auditors General are determined by

A)legislation in the Auditor General's jurisdiction.
B)audit partner planning and audit program development.
C)the Auditor General and his/her staff.
D)the financial statement auditors of the client.

Question 46

What is the nature of the service provided when an auditor evaluates information using suitable criteria and issues a report that attests to the reliability of the information?

A)internal audit engagement
B)review engagement
C)compilation engagement
D)attestation engagement

Question 47

We discuss four types of auditors: public accountants,government auditors,Canada Revenue Agency auditors,and internal auditors.Briefly describe the work and responsibilities of each type of auditor.

Question 48

Which of the following is an example of an attestation engagement?

A)accounting and bookkeeping services for the accounts
B)an audit of internal controls over financial reporting
C)preparation of the annual financial statements with notes
D)completion of provincial and federal tax returns

Question 49

A major type of assurance service performed by large public accounting firms is

A)auditing.
B)reviewing.
C)compilation.
D)management consulting.

Question 50

In Canada,publicly traded companies are

A)required to have audits.
B)strongly encouraged to have audits.
C)not required to have an audit if they have a review.
D)not required to have an audit.

Question 51

To do an audit,it is necessary to have information in a verifiable form and some criteria by which the auditor can evaluate the information.
Required:A)What information and criteria would a public accounting firm use when auditing a company's financial statements? B)What information and criteria would a Canada Revenue Agency auditor use when auditing that same company's tax return?C)What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively?

Question 52

When do individuals and organizations typically need assurance services?

A)usually only when organizations obtain debt or other loans
B)for five years from the start of an organization until debt is retired
C)only when historical data,such as financial information,needs to be audited
D)whenever assurance is provided by a practitioner who is independent and unbiased

Question 53

To operate effectively,an internal auditor must be independent of the

A)line functions of the organization.
B)entity that is being audited.
C)employer-employee relationship that exists for other employees in the organization.
D)outsourcing organizations used.

Question 54

Jordan set up a not-for-profit corporation several years ago to provide scholarships to disadvantaged youth in his community.Scholarships Get Up and Go Foundation now has assets of over $5 million and provides about ten university scholarships every year.Jordan is proud of the new doctors,dentists,and other healthcare practitioners that his foundation has funded.
Jordan is thinking of starting another foundation in an old building that he has purchased.It would be a youth drop-in centre offering music lessons,art facilities,and gym facilities,and would have links to local high schools to offer homework clubs to encourage good grades.
Required:A)Why should Jordan have the financial statements of both of these foundations audited? B)Who would be the users of the financial statements of the foundations? C)What other types of services could PAs provide to Jordan and the foundations?

Question 55

An example of a forensic accounting assignment might be

A)determining whether overall financial statements are stated in conformity with IFRS.
B)estimating the value of inventory lost in a warehouse theft.
C)evaluating the effectiveness of an internal process.
D)ensuring compliance with specific legislation.

Question 56

An example of a forensic accounting assignment might be

A)determining whether overall financial statements are stated in conformity with IFRS.
B)estimating the value of inventory lost in a warehouse theft.
C)evaluating the effectiveness of an internal process.
D)ensuring compliance with specific legislation.

Question 57

Mega Manufacturing Company (Mega)is thinking about acquiring Localized Small Producer Inc.(LSP),a small manufacturing company that produces related products.Mega has examined the financial statements of LSP,which show only a small profit in the last five years.Management of LSP has taken reasonable salaries,and cost of goods sold is higher than the industry average for LSP.Mega believes that it will be able to introduce operational efficiencies at LSP,improving the profitability of the small company,if acquired.
Required:A)What type of engagement should be conducted to assess the operational efficiencies of LSP? Justify your response.B)Who should be engaged to conduct the engagement? C)What major problems might the auditors encounter when conducting the audit and writing the report?

Question 58

The internal audit group typically reports directly to the

A)board of directors.
B)management of the company.
C)external auditor.
D)audit committee.

Question 59

Auditors General are responsible for auditing which types of organizations?

A)public companies with shares issued to investors
B)private companies that have loans outstanding to banks or other creditors
C)ministries,departments,agencies that report to Government
D)any organization that submits tax returns to the tax authorities

Question 60

In operational auditing,the auditor studies business operations and makes recommendations about all of the following except

A)economic and efficient use of resources.
B)the fairness of the financial statements.
C)effective achievement of business objectives.
D)compliance with company policies.

Question 61

Which of the following services provides no assurance about the client's financial statements?

A)compilation
B)review
C)audit
D)SysTrust

Question 62

There is an increasing demand for assurance about computer controls surrounding financial information transacted electronically and the security of the information related to the transaction.This is in large part due to

A)the increasing presence of Internet sales in many businesses.
B)the use of computer-assisted auditing tools.
C)the large volume of transactions and information shared online and in real-time by companies.
D)client's uncertainty about the proper functioning of their computer systems.

Question 63

Which of the following services provides a moderate level of assurance about the client's financial statements?

A)forecasts and projections
B)compliance
C)review
D)audit

Question 64

A shareholder of a public Canadian firm can have access to the audited financial statements

A)on the Internet.
B)by calling the accounting department of the company.
C)by requesting a copy from the auditors.
D)if he/she holds more than 1% of the shares of the company.

Question 65

The Sarbanes-Oxley Act requires the auditor to attest to the

A)accuracy of the financial statements.
B)efficiency of the internal controls in financial reporting.
C)effectiveness of internal controls.
D)compliance of the company with the generally accepted accounting framework.

Question 66

What type of information is available from www.sedar.com (System for Electronic Document Analysis and Retrieval)?

A)minutes of shareholders and directors meetings
B)transaction reports from major credit card companies
C)annual reports and management discussion and analysis
D)listings of all of the shareholders on record

Question 67

The reasoning behind the requirements of the Sarbanes-Oxley Act's section 404 (attestation on internal control over financial reporting)is that

A)effective controls result in greater profits to organizations,reducing business failures.
B)effective controls reduce the likelihood of future misstatements in the financial statements.
C)better internal controls can be implemented at lower cost,improving product quality.
D)automated controls improve customer service,resulting in higher product sales.

Question 68

When readers are cautioned that the financial statements may not be appropriate for their purposes,the non-assurance service is called a(n)

A)SysTrust.
B)compilation.
C)review.
D)audit.

Question 69

As a PA,you have been asked to prepare your sister Betty's year-end financial statements.Betty is a photographer and is the sole shareholder of a small company called Best Weddings Ltd.She photographs weddings,graduations,and schools,and earns about $75 000 per year.Betty has said that she only needs the financial statements for her tax returns and would like you to prepare the tax returns too.
Required:A)Would you be able to prepare the financial statements for your sister? Why or why not? B)If yes,what type of report would you prepare to accompany the financial statements? C)Would you be able to prepare the tax returns for your sister? Why or why not?

Question 70

Which of the following is an advantage of a review engagement as compared to an audit engagement?

A)For the review engagement,information risk is reduced more than for an audit.
B)For the review engagement,the documentation to be provided by the client is greater.
C)For the review engagement,the financial statements assessed will have more detail.
D)The review engagement requires considerably less work,so is less costly.

Question 71

A reason for a not-for-profit organization to be audited is to

A)comply with the laws requiring them to be audited.
B)meet requirements of lenders or funding sources.
C)have a professional accountant perform their bookkeeping.
D)ensure that their financial statements do not contain errors.

Question 72

Herbert Zora is having financial statements prepared by his PA to accompany his tax return.His primary concern is cost.Of the following,the lowest-cost engagement that the PA can perform for Zora's financial statements is

A)compilation.
B)review.
C)audit.
D)WebTrust.