Deck 3: Audit Planning I

Question 1

Mitigating factors that reduce going concern risk include the ability to raise additional funds
through the sale of shares.

Answer 1

True

Question 2

During the risk assessment phase of a grocery chain, Seren Dagdeviren tried to determine which procedures would be appropriate. Which of these procedures, if any, would you use in the planning phase of the audit?

A) observation and inspection
B) analytical procedures
C) both a and b
D) none of the above

Answer 2

C

Question 3

When Sean Green started the preliminary risk identification process at a local dairy during the risk assessment phase of the audit he endeavoured to gather sufficient appropriate evidence. Which of the following elements were involved in the preliminary risk identification?

A) going concern risk
B) client's corporate governance
C) understanding the IT environment
D) all of the above

Answer 3

D

Question 4

An example of an attitude or rationalization used to justify a fraud is high volume of
transactions close to year-end.

Question 5

Misappropriation of assets fraud involves intentionally misstating items or omitting important
facts from the financial statements.

Question 6

Wilfred Dominic was meeting with his manager to plan audit strategy in order to determine the amount of time to spend testing the client's internal controls and conducting detailed testing
Of transactions and account balances. Determining the audit strategy occurs during which phase
Of the audit?

A) client acceptance stage
B) risk assessment phase
C) risk response phase
D) reporting stage

Question 7

Preliminary risk identification can be affected by

A) fraud risk.
B) corporate governance.
C) both a and b
D) none of the above

Question 8

Preliminary risk identification can be affected by

A) fraud risk.
B) corporate governance.
C) both a and b
D) none of the above

Question 9

An auditor is not concerned with transactions and events being recorded in the correct accounting period.

Question 10

The more competitive an audit client's industry, the less pressure is placed on the client's
profits.

Question 11

The risk response phase of an audit involves

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

Question 12

Under the going concern assumption, assets are valued on the basis that they will continue to
be used for the purpose of conducting a business.

Question 13

The risk response phase of an audit involves

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

Question 14

Mathias Mousseau was at a client's offices and was preparing his work for the following day. He was considering the risk that a material misstatement due to significant error or fraud could occur in the client's financial statements. Which of the three main stages of the audit was he performing?

A) risk assessment phase
B) risk response phase
C) reporting phase
D) none of the above

Question 15

The purpose of planning an audit is to

A) conduct the audit in an efficient and effective manner.
B) reduce audit risk to an acceptably low level.
C) ensure that sufficient appropriate audit evidence is obtained to reach an appropriate audit opinion.
D) all of the above

Question 16

Application controls are policies and procedures that relate to many applications.

Question 17

The risk assessment phase of an audit involves the performance of detailed tests of controls and substantive testing of transactions and accounts.

Question 18

Auditors must gain an understanding of their client at the outset of every audit.

Question 19

Fraud is an intentional act to obtain an unjust or illegal advantage through the use of
deception.

Question 20

A client's corporate governance structure is assessed when planning an audit.

Question 21

In assessing the client's relationship with its employees, the auditor will consider

A) the level of unionization among the workforce.
B) the attitude of staff to their employer.
C) how well a client pays its employees.
D) all of the above

Question 22

Which of the following is an example of a misappropriation of assets fraud?

A) unauthorized discounts or refunds to customers
B) inappropriate application of accounting principles
C) unrecorded liabilities
D) improper asset valuations

Question 23

Which of the following is an example of information used by auditors in gaining an understanding of a client at the entity level?

A) the level of competition in the client's industry.2
B) whether the client is an importer or exporter of goods
C) the client's ability to withstand currency fluctuations
D) the level of government support in the client's industry

Question 24

The going concern assumption is made when it is believed that

A) a company will become insolvent within the next accounting period.
B) the board of directors does not believe the company's financial statements are fairly presented.
C) a company will remain in business for the foreseeable future.
D) a company is a separate legal entity.

Question 25

Red flags that auditors can use to alert them to the possibility that a fraud may have occurred include

A) strong internal controls.
B) routine transactions.
C) a high turnover of key employees.
D) effective internal auditing staff.

Question 26

Gerry Jones has been asked to review manual or automated procedures that typically operate at a business process level and apply to the processing of transactions by individual
Applications. What kind of controls is Gerry going to be assessing?

A) output controls
B) general controls
C) both a and b
D) application controls

Question 27

Which of the following statements regarding the level of demand for the goods sold or services provided by companies is correct?

A) If a client's products or services are seasonal, this will affect revenue flow.
B) If a client operates in an industry subject to changing trends, the client does not risk inventory obsolescence.
C) If a client's products or services are seasonal, this will not affect revenue flow.
D) When a product or process is subject to technological change, there is never a risk that the client will be left behind by its competitors.

Question 28

If auditors identify risk factors that indicate that the going concern assumption is in doubt, they will

A) undertake procedures to gather evidence regarding each risk factor.
B) refuse to continue as the auditor of their client.
C) report the client to the Canada Revenue Agency.
D) reduce the extent of further audit testing that they undertake.

Question 29

Related parties include

A) subsidiaries.
B) management.
C) family members of management.
D) all of the above

Question 30

When Sheila Copes, CPA audited a new client she asked questions about what the client does, how the client functions, the ownership structure of the client and its sources of financing.
She was getting an understanding of the client at the

A) entity level.
B) industry level.
C) economy level.
D) all of the above

Question 31

When assessing fraud risk, an auditor will adopt an attitude of

A) confidentiality.
B) professional scepticism.
C) belief in management.
D) none of the above

Question 32

Kaz Nowakowski performed several procedures, including observation and inspection of the company's plans and business strategies. He also made inquiries of those individuals that were
Involved in the governance of the company, the internal auditors, and operating personnel.
These procedures will help Kaz to

A) determine fraud possibilities.
B) prepare year end closing procedures.
C) gain an understanding of the client.
D) none of the above

Question 33

Eva Islam, CPA is auditing a company where it is experiencing strikes regularly, has been under investigation with non-compliance with legislation and is falling behind competitors.
What kind of risk is being assessed?

A) fraud risk
B) going concern risk
C) both a and b
D) none of the above

Question 34

Monica Marcelloni's team has been asked to tackle three ongoing frauds and her partner has asked her to follow up only on the financial reporting fraud. Which of the following items
Will she be pursuing?

A) theft of stock by employees or customers
B) employees remaining on the payroll after ceasing employment
C) recording fictitious sales
D) unauthorized refunds to customers

Question 35

The purpose of planning an audit is to

A) conduct the audit in an efficient and effective manner.
B) reduce audit risk to an acceptably low level.
C) ensure that sufficient appropriate audit evidence is obtained to reach an appropriate audit opinion.
D) all of the above

Question 36

When gaining an understanding of their client, at which level do auditors not usually consider the relevant issues?

A) audit committee level
B) economy level
C) entity level
D) industry level

Question 37

When assessing the risk of fraud, an auditor can consider

A) attitudes and rationalization to justify a fraud.
B) incentives and pressures to commit fraud.
C) opportunities to perpetuate a fraud.
D) all of the above

Question 38

Attitudes and rationalization to justify a fraud include

A) significant related party transactions.
B) an excessive focus on profit maximization.
C) a significant decline in demand for the client's products or services.
D) a high volume of transactions close to year-end.

Question 39

Claudia Martel knows that financial reporting fraud transactions require disclosure. However, she is not sure whether related party transactions require disclosure. You advise her
That related party transactions require

A) disclosure.
B) no disclosure.
C) disclosure only if there is risk of fraud.
D) auditor judgment.

Question 40

Saad Zuberov is a rookie auditor who has asked you about financial reporting frauds and how they differ from misappropriation of assets frauds. Identify for Saad Zuberov which one of
The following frauds consists of misappropriation of assets.

A) improper asset valuation
B) unrecorded liabilities
C) both a and b
D) none of the above

Question 41

When gaining an understanding of a client, the auditor will consider the risks associated with information technology. Risks associated with information technology include

A) unauthorized access to computers, software, or data.
B) errors in programs.
C) lack of back-up procedures.
D) all of the above

Question 42

Which statements about the going concern assumption are correct?

A) The company will not be able to continue operating in the next accounting period.
B) The auditor is responsible for the company to be able to continue operating in the foreseeable future.
C) The company will be able to continue operating in the foreseeable future.
D) none of the above

Question 43

Which of the following statements relating to application controls is correct?

A) They impact on the procedures used for data entry, data processing and output.
B) They include procedures for purchasing new computers.
C) They are not designed to prevent or detect a material misstatement in the financial statements.
D) They include the use of passwords and other security measures to minimize the risk of unauthorized access.

Question 44

Which of the following is not a risk associated with the installation of a new IT system?

A) loss of data in transfer to the new system
B) inadequately trained staff
C) data not processed correctly
D) selection of an inappropriate system for reporting needs

Question 45

If auditors believe there is a risk that expenses incurred before year-end will be excluded from the current year's expenses, they will

A) send out confirmation requests to a sample of the client's debtors.
B) trace transactions recorded close to year-end to source documentation.
C) perform analytical review analysis on the client's statement of financial position.
D) none of the above

Question 46

Why must auditors gain an understanding of their client at the start of every audit?

Question 47

Which of the following is not an example of a risk when a client installs a new IT system?

A) Client staff are not adequately trained to use the new system effectively.
B) The system may not be appropriate for the client.
C) The client has appropriate procedures for selecting new IT systems.
D) Data may be lost or corrupted.

Question 48

Unauthorized access to a company's data can occur when

A) inadequate backups of data are maintained.
B) there are poor password protection procedures.
C) computer programs are tested thoroughly.
D) there are sufficient security procedures.

Question 49

The auditor is concerned about the audit client's closing procedures to ensure

A) transactions and events have been recorded in the correct accounting period.
B) closing procedures have been correctly applied.
C) the financial statements accurately reflect the results of the audit client's closing procedures.
D) all of the above

Question 50

Corporate governance means

A) the viability of a company to remain in business for the foreseeable future.
B) the rules, systems and processes within companies used to guide and control them.
C) an intentional act through the use of deception to obtain an unjust or illegal advantage.
D) the processes used by a client when finalizing the accounts for an accounting period.

Question 51

Explain the three main phases of an audit of financial statements.

Question 52

Auditors can assess the adequacy of their client's closing procedures by

A) checking the accuracy of accrual calculations around year-end.
B) looking at earnings trends to assess whether reported income is in line with similar periods in prior years.
C) both a and b
D) none of the above

Question 53

The task of assessing the company's ability to continue as a going concern is the responsibility of

A) the external auditor.
B) the internal auditor.
C) management.
D) the audit committee.

Question 54

Risks associated with information technology include

A) loss of data.
B) errors in programs.
C) unauthorized access to computers.
D) all of the above

Question 55

Which of the following is not an example of a mitigating factor that reduces the risk that the going concern assumption may be in doubt?

A) the ability to raise additional funds via borrowings
B) a letter of guarantee from a parent company
C) the ability to sell an unprofitable segment of the business
D) significant rapid increase in competition

Question 56

What is fraud and what are some of the red flags that can alert auditors to the possibility that a fraud may have occurred?

Question 57

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Related party transactions require proper identification and consideration when considering risk. However, there is no requirement to disclose related party transactions unless they have an impact on material misstatements.
b) When assessing fraud risk, auditors should adopt an attitude of professional scepticism to ensure that any indicator of a potential fraud is properly investigated.
c) The responsibility for preventing and detecting fraud rests with those charged with governance at the client as well as the auditors.
d) The auditor should not ask management and those charged with governance if they are aware of a known fraud or suspect there has been fraud.
e) Elvie Lee explained to her friend how application controls work: "Application controls are designed to prevent and detect a material misstatement in the financial statements."

Question 58

The corporate governance principle of most concern to the auditor is

A) safeguarding the integrity in financial reporting.
B) making timely and balanced disclosures.
C) promoting ethical and responsible decision making.
D) respecting the rights of shareholders.

Question 59

Which of the following is an indicator that the company may not be able to continue as a going concern?

A) issuing bonus shares to shareholders instead of cash dividends
B) a high level of borrowing
C) negative cash flows from operating activities
D) introduction of a new product into the market

Question 60

In order to report strong results, an audit client may

A) include revenue earned in the next income year in the current year's income.
B) bring forward expenses to the current income year.
C) defer revenue earned in the current year to the next income year.
D) omit closing procedures.

Question 61

Bill Dodds was the accounts payable manager of Big Build Property Management Ltd. Bill started with the company as a bookkeeper and worked up to his current management position. He was promoted due to his dedication to the company and his reliability- he often worked evenings and weekends, rarely called in sick and he never took holidays. Despite making a good wage, Bill enjoyed living large, and the majority of his paycheque went to pay for his luxury car and designer clothes. As Bill was living paycheque to paycheque he was disappointed he did not have a "nest egg" set aside for retirement or emergency purposes.
Big Build Property Management had a history of profitability. To reward its employees, the company had established a bonus scheme for meeting profit targets. It was a shock to all employees when at the end of 2020, the company announced it had had the worst year in the company's history. The losses were significant and the company planned significant lay-offs in an attempt to turn this situation around. As a result, the accounting department was reduced by 35%, and the remaining staff was asked to do more. Bill found not only was he managing an unhappy accounts payable group, he was also now signing cheques, processing payables, and reconciling the bank account. This meant Bill was required to work even more without any pay increase or bonus in sight. For the first time in his career at Big Build, Bill was unhappy. While he was fearful further lay-offs may be coming, he also felt unappreciated and after all of his hard work, he was unhappy he was being asked to do more.
Required:
Discuss the incentives, opportunities and rationalizations to commit fraud in this case.

Question 62

What should auditors do if there are risk factors that indicate that the going concern assumption is at risk?

Question 63

Corporate governance is the rules, systems and processes within companies used to guide and control them. Why are auditors concerned with the corporate governance structures of their clients and what is the current status of corporate governance regulation in Canada?

Question 64

Last year the review of Lethbridge Broadcasting did not go well for Bossy & Bossier CPAs. In an attempt to meet budget, Mike Bossy, the auditor-in-charge, left out the review of closing procedures. His Group Partner's review notes were professional but his annual review commentary was not as complimentary. Mike was not convinced that he was at fault and felt that according to his firm's mandate, as spelled out in the engagement letter, it was the client's responsibility to ensure the adequacy of closing procedures.
This year the firm will be starting the audit of a new broadcasting client and the partner is planning the risk assessment procedures. His partner's review note reads: "Ensure that Mike Bossy gains a detailed knowledge of the Quebecor Media broadcasting operations at the entity level."
Required:
a) Comment on the partner's Lethbridge Broadcasting concerns and explain how the closing process is supposed to work.
b) Discuss the entity-level audit procedures Mike will have to follow in order to gain an understanding of Quebecor Media operations and why the entity-level procedures you identify are important.

Question 65

CAS 300 Planning an Audit of Financial Statements requires that auditors plan their audits. Why is planning such an important stage of every audit and explain the various aspects of the preliminary risk identification process?

Question 66

When gaining an understanding of their clients, auditors consider the particular information technology risks faced by their clients. Explain the particular risks associated with information technology and discuss the main controls that companies can have in place to mitigate these risks.