Deck 1: Introduction and Review of Audit and Assurance

Question 1

Insurance hypothesis is a means whereby the investor can guarantee the success of their investment.

Answer 1

False

Question 2

A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform

Answer 2

True

Question 3

The nature of audit procedures refers to the reliance on evidence provided by the client and its management.

Answer 3

True

Question 4

The sources of demand for audit and assurance services does not include

A) independence.
B) complexity.
C) reliability.
D) competing incentives.

Question 5

Only current investors (not potential investors) are considered to be users of the financial statements.

Question 6

A reasonable level of assurance is the highest level of assurance that an auditor can provide.

Question 7

All modified audit reports are qualified audit opinions.

Question 8

The most common types of assurance engagements are financial statement audits, confirmation audits, performance audits, comprehensive audits and assurance on corporate social responsibility (CSR) disclosures.

Question 9

An operational audit is an example of a compliance audit.

Question 10

It is the auditor's responsibility to prepare the financial statements.

Question 11

The expectation gap is caused by unrealistic user expectations such as the auditor providing a moderate level of assurance.

Question 12

A limitation of an audit is caused by

A) the nature of financial reporting.
B) the nature of audit procedures.
C) the need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
D) all of the above

Question 13

An auditor can provide a reasonable level of assurance on information other than historical financial information.

Question 14

Martha Minnati was reviewing the previous year's audited financial statements of a clothing manufacturer. Her manager explained to her that for a financial statement audit, the clothing company was the accountable party, its shareholders were the users, and the subject matter was the financial statements. What kind of audit engagement was her manager describing?

A) consulting engagement
B) assurance engagement
C) review engagement
D) compliance engagement

Question 15

An audit is one way for investors to insure against at least part of their loss should the company they invest in fail - this is an example of

A) agency theory.
B) information hypothesis.
C) insurance hypothesis.
D) competing incentives.

Question 16

An engagement performed by an auditor or consultant to enhance the reliability of the subject matter can best be described as a(n)

A) compilation engagement.
B) review engagement.
C) consultancy engagement.
D) assurance engagement.

Question 17

A no assurance engagement is of little use as no assurance is given to the client.

Question 18

Which of the following groups would be considered users of the financial statements?

A) governments
B) current shareholders
C) general public
D) all of the above

Question 19

A negative expression of opinion is only given when there is a disagreement with management and the auditor.

Question 20

An example of the three parties in an assurance engagement would be:

A) audit client, employee, customer.
B) audit client, supplier, auditor.
C) auditor, shareholder, general public.
D) auditor, general public, employees.

Question 21

Which of the following would be an example of a reasonable assurance engagement?

A) the review of annual financial statements
B) the audit of annual financial statements
C) the reporting of procedures performed by the auditor as agreed by the client
D) all of the above

Question 22

Maggie Oh performed an audit of a client that had undergone flooding to its operations in St-Jean Sur Richelieu. The client was insured and was able to keep operating. However,
There was material damage to the client's warehouse and Maggie felt it would be appropriate
To inform the users of the financial statements of this fact in the audit report. This form of audit
Report is called

A) an adverse opinion.
B) unmodified opinion - emphasis of matter.
C) modified opinion.
D) disclaimer of opinion.

Question 23

Jimmy Bunting, the senior auditor at Yanzhou Coal Mining and Minerals, performed the following tasks: he used analytical procedures and he had discussions with management. These activities were a basis for a conclusion on the financial information. What did Jimmy Bunting perform?

A) a qualified report
B) an unmodified opinion
C) a compilation
D) a review engagement

Question 24

Michael Stiller performed work for a client in the real estate business and issued a Notice to Reader. What degree of assurance does a Notice to Reader provide to the user of the
Statements?

A) reasonable assurance
B) moderate assurance
C) no assurance
D) none of the above

Question 25

While awaiting a meeting in his firm's boardroom, the senior partner, Bill Goldsworthy, read the following statement in an article in the Globe & Mail: "The greater the perceived
Quality of the information contained in the financial statements, the more likely it will be relied
Upon by the users of that information." This statement best describes

A) the expectations gap.
B) agency theory.
C) information hypothesis.
D) insurance hypothesis.

Question 26

An example of an unmodified audit opinion is

A) qualified audit opinion.
B) adverse audit opinion.
C) unqualified audit opinion with an emphasis of matter.
D) none of the above

Question 27

Agency theory can be described as the theory of

A) hiring an agency to review the work of the management, in this case it is the auditor.
B) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party's work.
C) the relationship between the owner and the management of the business when the owner is not the manager of the business.
D) none of the above

Question 28

In a review engagement, which of the following is least likely to occur during the engagement?

A) analytical procedures
B) enquiries with management and other personnel
C) substantive audit procedures
D) review of the internal controls of the entity.

Question 29

Insurance hypothesis tells us that

A) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.
B) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail.
C) investors cannot insure themselves against loss when investing in an entity.
D) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements.

Question 30

The wording of a limited assurance engagement expresses a conclusion that generally states

A) there is nothing wrong with the subject matter.
B) there is something wrong with the subject matter.
C) there is nothing that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.
D) there is something that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.

Question 31

Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because

A) it is the basis for the calculation of taxes owed to the government.
B) it can determine whether certain regulations have been complied with.
C) to gain a better understanding of the entity's activities.
D) governments need to assess the entity so that they can provide the entity with grants that will benefit society.

Question 32

Ming Yao reviewed the operations of a basketball academy. His objectives were to determine how effectively the academy delivered its many programs. What kind of an audit
Did he perform?

A) operational
B) compliance
C) financial
D) comprehensive

Question 33

Theodore Heinrich prepared a set of financial statements based on information provided to him. He checked mathematical accuracy of the data, and the client complimented him on
The reasonable cost of the work he performed. Theodore performed

A) a compilation.
B) a review.
C) an audit.
D) none of the above

Question 34

According to the agency theory, demand for audit is due to conflicts between

A) managers and owners.
B) managers and agents.
C) owners and principals.
D) auditors and owners.

Question 35

As users of the financial statements, suppliers would least consider which of the following aspects of the financial statements?

A) solvency of the entity
B) profitability of the entity
C) return on investment of the entity
D) corporate social responsibility of the entity

Question 36

Vera Sobczyk spent a week at a client's wholesale operation determining whether the client's remittances to the tax authorities were in accordance with tax regulations. This is an
Example of a(n)

A) taxes payable mandate.
B) financial audit.
C) operational audit.
D) none of the above

Question 37

Which of the following is not true about Corporate Social Responsibility assurance?

A) reporting is voluntary and is becoming more widespread
B) includes both financial and non-financial information
C) is required to be performed by an auditor
D) disclosures include environmental, employee and social reporting

Question 38

An unqualified opinion is also known as a(n)

A) clean opinion.
B) adverse opinion.
C) unmodified opinion.
D) both a and c

Question 39

Matt Fuller reports to the board and evaluates how the company can improve risk management practices, internal control procedures, and certain governance issues. Who is
He?

A) President
B) Controller
C) Treasurer
D) Internal Auditor

Question 40

Based on the evidence gathered, if an auditor concludes all noted misstatements in the financial statements to be immaterial, individually and collectively, then the auditor would

A) resign from the engagement.
B) emphasize the errors in the audit report.
C) issue an unqualified opinion.
D) issue a qualified opinion.

Question 41

When conducting an audit, an auditor should use

A) professional scepticism.
B) professional judgement.
C) due care.
D) all of the above

Question 42

Auditors of reporting issuers are required to be a member in good standing with

A) CPAB.
B) CSA.
C) CPA Canada.
D) OSFI.

Question 43

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Maurice Lecuyer feels that an internal auditor that reports to the chief financial officer of the company can be as independent as an auditor that reports to the audit committee.
b) Jillian Humphrey discovered a very material overstatement in the financial statements of Humphrey's Holistic Medicine. She felt that the misstatement would have an impact on the decisions of users of the financial statements, and indicated to her audit senior that she would be including it as an "emphasis of matter" paragraph in the audit report.
c) An auditor is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
d) An assurance engagement involves evaluation or measurement of subject matter against criteria.

Question 44

The top tier of accounting firms is comprised of

A) Deloitte, Ernst & Young, PricewaterhouseCoopers (PwC) and KPMG.
B) Ernst & Young, PricewaterhouseCoopers (PwC), KPMG and BDO.
C) Deloitte, Ernst & Young, KPMG and Grant Thornton.
D) WHK Group, Deloitte, KPMG and PricewaterhouseCoopers (PwC).

Question 45

The audit expectation gap is the difference in the expectations of the

A) assurance providers and the financial statement users.
B) assurance providers and the audit client.
C) audit client and the financial report or other users.
D) audit client and the regulator.

Question 46

Which of the following is not a type of opinion?

A) qualified opinion
B) modified opinion
C) adverse opinion
D) disclaimer of opinion

Question 47

The following can be said about an emphasis of matter:

A) it is included when the auditor's opinion has changed and the auditor wants to bring the users' attention to a particular matter.
B) it is only used in unqualified audit opinions.
C) it is included when the auditor's opinion has not changed and the auditor wants to bring the users' attention to a particular matter.
D) it can not be used when expressing audit opinion that has pervasive misstatements.

Question 48

In addition to the preparation of financial statements, it is also the responsibility of those charged with governance to

A) identify the financial reporting framework to be used in the preparation and presentation of their financial statements.
B) establish and maintain internal controls that are effective in preventing and detecting material misstatements.
C) selecting and applying appropriate accounting policies and making reasonable accounting estimates.
D) all of the above

Question 49

Professional scepticism does not involve

A) the professional requirement that all management representations be substantiated with supporting documentation.
B) seeking independent evidence to corroborate information provided by their client
C) being suspicious when evidence contradicts documents held by their client or enquiries made of client personnel
D) none of the above

Question 50

A financial statement auditor is required to audit all of the following, except

A) income statement and balance sheet.
B) statement of cash flows.
C) management discussion and analysis.
D) notes to the financial statements.

Question 51

Under the Canada Business Corporations Act, the auditor has a responsibility to form an opinion on the company's

A) operations.
B) independence.
C) financial statements.
D) none of the above

Question 52

For a financial report to be reliable, it must

A) be free from material misstatement.
B) have an impact on the decisions made by users regarding the performance of the entity.
C) be periodically audited by an independent auditor.
D) none of the above

Question 53

The expectation gap is caused by

A) realistic auditor expectations.
B) unrealistic user expectations.
C) realistic user expectations.
D) unrealistic auditor expectations.

Question 54

The expectation gap can be reduced by

A) auditors performing their duties properly.
B) enhanced reporting to explain what processes have been followed in arriving at an audit or a review opinion.
C) assurance providers reporting accurately the level of assurance being provided.
D) all of the above

Question 55

Mary Logan was careful to undertake her audits in a most responsible manner. Her audit manager complimented her on her diligence and how well she documented her work at the
Different stages of the audit process. Which element of responsibility did she display?

A) due care
B) professional judgment
C) professional scepticism
D) none of the above

Question 56

Which of the following is not true in relation to comparability?

A) able to identify trends, that may influence their perception of how well the entity is doing
B) able to assess performance of the entity over time and with other entities
C) able to evaluate
D) all of the above

Question 57

Larry Dibitonto is a partner in his firm and runs management consulting, mergers and acquisitions, insolvency, tax, and accounting services. How are these services referred to
Collectively?

A) audit
B) non-assurance services
C) reviews
D) none of the above

Question 58

For a financial report to be relevant, it must

A) be free from material misstatement.
B) have an impact on the decisions made by users regarding the performance of the entity.
C) be periodically audited by an independent auditor.
D) none of the above

Question 59

Outline the reasons for the demand for assurance services.

Question 60

The largest accounting firms in Canada are known collectively as the

A) 'Big-3'.
B) 'Big-4'.
C) 'Big-5'.
D) 'Big-6'.

Question 61

Describe the three levels of assurance. Name the types of engagements they would come up in and the expression of opinions that would be provided by the assurance provider

Question 62

Vince Deroy owns Val D'Or Vineyards, a successful winery in the Thousand Islands region. Annual sales are $3,500,000 and he has a $1,200,000 loan with a local bank.
Sales are split between wine sales (88%) and wine tasting and catering (12%).
Vince has excellent personal relationships with his suppliers and has been provided with special contractual terms which allow him delays of up to 120 days to make invoice payments. These arrangements run out this year and he will have 30 days to pay after being invoiced.
The bank has made the $1,200,000 loan to Val D'Or Vineyards based on an understanding that the company will undergo audits of its financial statements.
Vince is an astute entrepreneur and has set up an advisory board which consists of his bank manager, another wine grower in the region, his old high school ethics instructor and track coach, himself, and his accountant.
The board has discussed certain issues including the following:
• The need for assurance service providers to audit his financial statements so that users can be provided with assurance that his statements are relevant and reliable.
• Non-audit services that would provide advice on special projects he may be considering in the future.
• A proper accounting firm to conduct an audit mandate.
Required:
a) What is the objective of a financial statement audit and how does it relate to Val D'Or Vineyards?
b) Vince Deroy's financial statements must be relevant and reliable. What do these two terms mean in the context of this case?
c) What three characteristics should Val D'Or Vineyards' auditors possess when conducting an audit? Explain them briefly.
d) What are non-audit services? Can you describe possible non-audit services that Val D'Or Vineyards might employ?

Question 63

What does pervasive mean? When would an auditor use an audit report that was material and pervasive?

Question 64

How is the expectation gap caused and how can the effects on the expectation gap be reduced?

Question 65

The main assurance service the general public are familiar with are financial statement audits. Briefly describe the other services that an auditor can provide.