Deck 13: Completing and Reporting on the Audit

Question 1

Subsequent events procedures are normally performed through to and including the date of
the auditor's report.

Answer 1

True

Question 2

Generally, the further into the future an event is likely to take place, the greater the
uncertainty surrounding the event.

Answer 2

True

Question 3

The going concern assumption means the viability of a business to

A) remain in business for the foreseeable future.
B) maintain the current level of sales.
C) the viability of the business to operate in its current market.
D) none of the above.

Answer 3

A

Question 4

When misstatements or deviations from controls are found in planned procedures, consideration should always be given to:

A) the need to modify or perform further audit procedures.
B) the reason for the misstatement or deviation.
C) both a and b.
D) none of the above.

Question 5

The client's compliance with contractual requirements of operating agreements is an example
of a qualitative factor that may cause misstatements of quantitatively immaterial amounts to be
considered material.

Question 6

An error is an intentional misstatement in the client's financial statements.

Question 7

Matters of governance that the auditor may wish to discuss with those charged with
governance include any practical difficulties encountered in performing the audit.

Question 8

As soon as practicable, the auditor should communicate weaknesses in internal controls to
management or those charged with governance.

Question 9

The auditor's responsibility for the financial statements includes selecting and applying
appropriate accounting policies.

Question 10

The uninsured loss of inventory as a result of fire subsequent to year-end is an example of a
type 2 subsequent event.

Question 11

Ron Nucci is trying to gather sufficient appropriate evidence. Which of these are factors to consider in evaluating the sufficiency and appropriateness of audit evidence?

A) audit risk
B) control risk
C) quality of information obtained
D) none of the above

Question 12

An auditor's consideration of the going concern assumption does not include considering

A) knowledge of conditions and events obtained during planning and performing the audit.
B) any material uncertainties about the entity's ability to meet obligations as they fall due.
C) changes in the industry in which the entity operates which could affect future operations.
D) the auditor's final assessment of audit risk.

Question 13

A type 1 subsequent event provides evidence with respect to conditions that developed
subsequent to year-end.

Question 14

Mostafa Torabi, the partner on the Torabi, Jimenez LLP audit called a meeting of his senior staff during the engagement wrap-up. Which of the following areas would be the least likely to be covered during the wrap up?

A) consideration of the amount used for materiality
B) removal of all unnecessary documentation from the engagement files
C) performing analytical procedures on the adjusted financial statements
D) preparation of budgets for the following year's audit

Question 15

A public auditor in practice can only perform audits and review and is prohibited from
completing non-assurance engagements such as compilations of financial information and tax
engagements.

Question 16

A limitation on the scope of the auditor's work could result from an inability to perform
procedures or an imposition by the entity.

Question 17

An unqualified audit report with an emphasis of matter should be issued if a subsequent
event has occurred that has resulted in a new audit report being prepared on a revised financial
statement.

Question 18

Which of the following are areas normally covered during the wrap-up of an audit engagement?

A) Perform subsequent events procedures.
B) Consider the amount used for materiality.
C) Reconsider the assessments of internal control at the entity level and the risk of fraud.
D) All of the above.

Question 19

Sufficiency relates to the quality of audit evidence gathered.

Question 20

The final phase of an audit is to assess all of the audit evidence obtained and determine
whether it is sufficient and appropriate.

Question 21

Which of the following statements regarding judgmental misstatements is incorrect?

A) They are the same as errors.
B) They can arise as a result of a difference in underlying assumptions by the client and the auditor.
C) They are not the same as errors.
D) They can arise as a result of a difference in the application of judgment by the client and the auditor.

Question 22

When Kelly Lake was training her staff about the auditor's responsibility for subsequent events she made the two following statements:
Which of the above statements, if any, is true?

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Question 23

When Ken Baez released the audit report of Imperial Corp., he did not anticipate that there would follow an announcement two days later that several days after year-end his client's
Foreign subsidiary had been nationalized by Libya for non-compliance to environmental laws of
The country. What type of subsequent event was this?

A) Type 1
B) Type 2
C) Type 1 and 2
D) this was not a subsequent event

Question 24

Which of the following dates is least relevant when considering subsequent events?

A) the date on which the financial statements are approved
B) the audit report date
C) the date on which the financial statements are issued
D) the date the auditor completes the field-work

Question 25

Which of the following statements is correct regarding a type 1 subsequent event?

A) They are events that do not result in changes to amounts in the financial statements.
B) They occur before the end of the client's financial year.
C) They may be of such significance as to require disclosure in the financial statements.
D) The financial statements are adjusted for any material changes in estimates from these types of events.

Question 26

Which of the following is not a step in forming an opinion on the financial statements?

A) evaluation of the audit evidence obtained
B) evaluation of the effects of unrecorded misstatements
C) evaluating the fair presentation of the financial statements
D) none of the above

Question 27

Which of the following factors is not relevant when management is assessing the going concern assumption?

A) whether the auditor specializes in the client's industry
B) the time into the future that an event is likely to take place
C) the nature and condition of the entity's business
D) the size and complexity of the entity

Question 28

Which of the following is a procedure used to identify subsequent events?

A) obtaining evidence from the entity's legal representative concerning litigation and claims
B) assessing continued compliance with borrowing limits and loan covenants
C) performing analytical procedures up to the date of the audit report
D) all of the above

Question 29

The final phase of an audit includes which of the following?

A) performing substantive tests of account balances
B) gaining an understanding of the client's internal control system
C) confirming the terms of the audit engagement with the auditor
D) determining whether the audit evidence obtained is sufficient and appropriate to reduce the risk of material misstatements in the financial statements to an acceptably low level

Question 30

Under the going concern assumption:

A) an entity is viewed as not likely to continue in operation for the foreseeable future.
B) an entity's assets and liabilities are recorded at liquidation values.
C) an entity is viewed as continuing in business for the foreseeable future.
D) an entity is considered to be a separate legal entity from its owners.

Question 31

When an auditor expresses an unqualified audit opinion, it means the

A) entity has complied with the reporting obligations as required by CPAB.
B) internal controls of the entity are operating efficiently and effectively.
C) financial statements are accurate in all respects.
D) financial statements have been prepared in accordance with an applicable accounting framework.

Question 32

When an error or exception is identified during substantive testing, the first response is to:

A) qualify the audit report.
B) understand why the error or exception has arisen.
C) increase the sample size.
D) report the error or exception to the audit committee.

Question 33

Type 1 subsequent events are events that

A) occur after the issuance of the financial statements.
B) require changes to amounts in the financial statements.
C) do not require changes to amounts in the financial statements.
D) occur after the end of the financial year and do not affect the financial statements.

Question 34

Which of the following is not an example of a type 2 subsequent event?

A) the loss of inventory after year-end
B) the issuance of shares
C) the bankruptcy of a customer subsequent to year-end
D) the purchase of a business

Question 35

Which of the following are examples of qualitative considerations that may cause misstatements of quantitatively immaterial amounts to be considered material?

A) the client's compliance with contractual requirements of operating or other agreements
B) key ratios monitored by analysts or other key users of the financial statements
C) both a and b
D) none of the above

Question 36

Procedures used by an auditor when conducting a subsequent events review include:

A) assessing continued compliance with borrowing limits and loan covenants.
B) enquiring of those charged with governance as to whether any subsequent events have occurred that may affect the financial statements.
C) reading minutes of the meetings of the board of directors.
D) all of the above.

Question 37

At year-end Annette Viau sent out accounts receivable confirmations. One of the major customers of her client confirmed that they would not be able to pay off the receivable. The
Client subsequently went bankrupt and an aggrieved shareholder of Annette's client sued her
Firm. What type of subsequent event was this?

A) Type 1
B) Type 2
C) Type 1 and 2
D) this was not a subsequent event

Question 38

For contingent liabilities, an auditor is required to review which of the following?

A) legal expense accounts for unexpected fluctuations
B) minutes of meetings of those charged with governance
C) correspondence with taxation authorities
D) all of the above

Question 39

When Vince Cummings was reviewing existing or possible obligations on the balance sheet, he was told that the outcome for these obligations was uncertain and that the company was awaiting a future event. Vince Cummings was reviewing

A) accruals.
B) going concern.
C) materiality.
D) contingent liabilities.

Question 40

A subsequent event occurs:

A) before the end of the financial year.
B) between the client's financial year-end and the date of the auditor's report.
C) after the auditor completes the tests of controls.
D) after the auditor signs the audit engagement letter.

Question 41

Which of the following are included in the main components of the auditor's report?

A) management's responsibility for the financial statements
B) the auditor's opinion on whether the financial statements are fairly presented
C) the date of the audit report
D) all of the above

Question 42

Matters of governance interest that the auditor may wish to discuss with those charged with governance include:

A) any practical difficulties encountered in performing the audit.
B) the potential effect on the financial statements of any material risks and exposures.
C) expected modifications to the audit report.
D) all of the above.

Question 43

Which of the following is not an area of disagreement with those charged with governance that may result in a modified audit opinion?

A) the acceptability of accounting policies selected
B) the terms of the audit engagement
C) the method of application of accounting policies
D) the adequacy of disclosures in the financial statements

Question 44

If the auditor is not able to obtain sufficient appropriate audit evidence, the appropriate audit opinion will either be:

A) a qualified opinion or an unqualified opinion.
B) a disclaimer of opinion or an emphasis of matter.
C) a qualified opinion or disclaimer of opinion.
D) an emphasis of matter or a qualified opinion.

Question 45

Those charged with governance are accountable for ensuring that the entity achieves its objectives with regard to which of the following?

A) compliance with applicable laws
B) the reliability of financial reporting
C) both a and b
D) none of the above

Question 46

An auditor may prepare or provide an opinion on information other than general purpose financial statement information, on all the following engagements except

A) reports prepared in accordance with a special purpose framework.
B) reports on the component of the financial statements.
C) reports on the expected market value of the shares price for the following five years.
D) reports on compliance with contractual agreements.

Question 47

When Sydney Burns was unable to perform work on inventory because of a client's insistence that she not perform an inventory taking, what kind of audit opinion would she most
Likely consider?

A) adverse opinion
B) emphasis of matter
C) limitation of scope
D) disclaimer of opinion

Question 48

The components of an audit report include all of the following except

A) title, address and introductory paragraph.
B) management's responsibility for the financial statements.
C) a statement that accounting estimates are reasonable.
D) other reporting responsibilities.

Question 49

A limitation on the scope of the auditor's work may result from:

A) damage to accounting records.
B) lack of access to key personnel.
C) absence of adequate accounting records.
D) all of the above.

Question 50

Material disagreements with management will result in either:

A) a qualified opinion or adverse opinion.
B) an emphasis of matter or adverse opinion.
C) an adverse opinion or an unqualified opinion.
D) an unqualified opinion or a qualified opinion.

Question 51

Which of the following would not be included in an audit report?

A) The auditor's address
B) An introductory paragraph
C) The audit fee charged to the client
D) Management's responsibility for the financial statements

Question 52

When Olena Vardon mentioned that the financial statements were materially misstated, what kind of opinion was this?

A) disclaimer
B) emphasis of matter
C) adverse
D) limitation of scope

Question 53

If it is not possible to obtain sufficient appropriate audit evidence, the auditor should:

A) express an unqualified opinion.
B) express a qualified, adverse or disclaimer of opinion.
C) report the client to CPA Canada.
D) express an unqualified opinion with an emphasis of matter.

Question 54

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Mathew Punkinnen, the senior auditor at Jackson & Wartkauf LLP made the following statement to his audit team: "What constitutes sufficient appropriate audit evidence is a matter of judgment."
b) Ingram Foods Company operates as a specialty food distributor. Philippe Parenteaux, auditor, has told his staff that the bankruptcy of a customer at year-end should not be considered a type 1 event.
c) Manitoba Ice Dogs auditor Henry Pilon found an omission of a disclosure in the financial statements of the hockey team. He called this an error.
d) Janice Olympus was told by the client that a limitation in the scope of his work would require a modification to the audit report.

Question 55

A key audit matter is:

A) a qualified report.
B) should be specific to the entity and highlight matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements
Of the current period.
C) never permitted in Canada
D) all of the above.

Question 56

Joshua Hanson knew that his clients financial statements were misstated but the misstatement was not pervasive. What kind of audit report was he considering?

A) qualified opinion
B) emphasis of matter
C) compilation
D) none of the above

Question 57

Which items are matters of governance interest that an auditor would wish to discuss with those charged with governance?

A) the general approach and overall scope of the audit
B) the potential effect on the financial statements of any material risks and exposures
C) material uncertainties related to events and conditions that may cast significant doubt on the entity's ability to continue as a going concern
D) all of the above

Question 58

Management's responsibilities for the financial statements do not include which of the following?

A) selecting and applying appropriate accounting policies
B) expressing an opinion on the financial statements
C) establishing and maintaining internal controls
D) making reasonable accounting estimates

Question 59

The auditor's report will not require a modified opinion where:

A) there is a disagreement with those charged with governance.
B) a limitation of scope of the engagement exists.
C) a significant uncertainty exists.
D) the financial statements are presented fairly.

Question 60

Governance relates to

A) the responsibility of the Audit Committee and its relationship to the auditor.
B) the responsibility of those charged with governance regarding compliance with GAAP.
C) responsibilities ensuring that the entity achieves its objectives regarding reliability of financial statements, effectiveness and efficiency of operations and compliance with laws.
D) none of the above.

Question 61

Demand for forensic accounting has grown following the collapses of Enron and Worldcom. Explain the important characteristics of forensic accountants and the main techniques they use to investigate fraud.

Question 62

Explain the potential threats to independence relating to audit fees and how an auditor can safeguard against these threats.

Question 63

Identify quantitative and qualitative considerations that are taken into account when the auditor evaluates whether misstatements either cause financial statements to be materially misstated or require additional disclosure.

Question 64

Explain the difference between type 1 and type 2 subsequent events and provide examples of each type of event.

Question 65

What are examples of matters of governance interest that the auditor may wish to discuss with those charged with governance.

Question 66

Explain the difference between management's and the auditor's responsibility for the financial statements.

Question 67

Explain why the global financial crisis has resulted in the number of potential and actual legal liability insurance claims and explain how auditors can deal with the risk of litigation in tough economic times.

Question 68

Discuss the factors that are relevant when management is assessing the going concern assumption.

Question 69

Mark Danyluk, the partner in charge of the Bombardier Aerospace audit, was reviewing the work his team had completed.
Bombardier is a Canadian company. They used to be involved in recreational equipment such as Ski-Doo snowmobiles and Sea-Doo watercraft. Their Aerospace division, however, is probably their best known operating segment and is known as a leading manufacturer of commuter jets containing 50-100 seats.
Bombardier's operations were by far the largest of the aerospace companies in Montreal and several of the new programs were very ambitious and very risky. It seemed to Mark that every review he performed had material misstatement possibilities.
Mark was thinking that an audit of this magnitude was challenging his abilities in evaluating what was sufficient and appropriate audit evidence.
When Mark started the audit of the current year's operations, he was surprised with the events that took place in 2015 at the Bourget and Farnborough air shows. The anticipation for Bombardier's new CSeries aircraft turned out to be less than positive as other manufacturers seemed to pile up the orders. Airbus executives had also been claiming for months that their company's introduction of a new engine option (NEO) for the A320 narrowbody voided the business case for the CSeries.
Although Bombardier has been able to get commitments up to 100 aircraft, the company is only one-third of the way to its goal of 300 orders for the CSeries scheduled service entry in late 2017. This also still leaves Bombardier 350 aircraft short of the sales required for the project to break even.
As Bombardier attempts to expand its aircraft product line into medium-sized aircraft (100-149 seats), it is entering a space that is getting very close to the market segment dominated by industry giants, Boeing and Airbus. While those companies tend to focus on even larger aircraft, they may want to protect themselves by defending against Bombardier in the medium-sized aircraft segment because Bombardier could later expand into the lucrative large-aircraft segment. Bombardier's $3.4-billion bet on the market for narrow-bodied aircraft faces a potential threat: a price war instigated by Boeing Co. and Airbus SAS.
Mark Danyluk had an uneasy feeling about the viability of the Aerospace sector of the company's operations.
Required:
a) Describe the factors that Mark Danyluk and his firm will have to consider in evaluating the sufficiency and appropriateness of audit evidence at Bombardier Aerospace.
b) What factors are relevant when management assesses the going concern issue at Bombardier?