Deck 3: Audit Planning I

Question 1

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) planning stage
C) performing stage
D) reporting stage

Answer 1

B

Question 2

Application controls are policiand procedurthat relate to many applications.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 these

Question 5

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

Question 6

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

Question 7

The planning stage of an audit involvthe performance of detailed tests of controls and substantive testing of transactions and accounts.

Question 8

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

Question 9

Mathias Mousseau was at a client's officand 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 stagof the audit was he performing?

A) planning stage
B) performing stage
C) reporting stage
D) none of the above

Question 10

Gerry Jonhas been asked to review manual or automated procedurthat 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) a and b
D) application controls

Question 11

Eva Islam, CPA is auditing a company where it is experiencing strikregularly, 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) a and b
D) none of the above

Question 12

During the planning stage of a grocery chain, Seren Dagdeviren tried to determine which procedurwould 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

Question 13

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 14

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 15

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

Question 16

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

Question 17

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

Question 18

MoniMarcelloni'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 19

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

Question 20

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 sourcof 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 21

Preliminary risk identification can be affected by:

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

Question 22

Which of the following statements regarding the level of demand for the goods sold or servicprovided by companiis 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 23

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 24

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 25

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 26

Attitudand 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 27

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 28

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 29

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 30

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 31

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 32

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 33

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 34

Which of the following is not an example of a mitigating factor that reducthe 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 35

Auditors can assess the adequacy of their client's closing procedurby:

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) a and b.
D) None of the above.

Question 36

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 37

Checking the accuracy of accrual calculations around year-end is an example of how auditors can assess the adequacy of their client's closing procedures.

A) risk identification and strategy
B) understanding the client
C) risk and materiality assessment
D) all of the above

Question 38

The execution stage 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 39

If auditors believe there is a risk that expensincurred 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 40

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
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 41

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 42

Jack Franks was the accounts payable manager of ProLight Property Management Ltd. Jack 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, Jack enjoyed living large, and the majority of his paycheque went to pay for his luxury car and designer clothes. As Jack was living paycheque to paycheque he was disappointed he did not have a "nest egg" set aside for retirement or emergency purposes. ProLight 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 employewhen at the end of 2015, the company announced it had had the worst year in the company's history. The losswere 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. Jack 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 Jack was required to work even more without any pay increase or bonus in sight. For the first time in his career at ProLight, Jack 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, opportunitiand rationalizations to commit fraud in this case.

Question 43

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

Question 44

Explain the three main stagof an audit of financial statements.

Question 45

Last year the review of Mansbridge Broadcasting did not go well for Raymond, Racicot, & Renaud, CPAs. In an attempt to meet budget, Peter Bossy, the auditor-in-charge, left out the review of closing procedures. His Group Partner's review notwere professional but his annual review commentary was not as complimentary. Peter 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 Peter Bossy gains a detailed knowledge of the Quebecor Media broadcasting operations at the entity level." Required:
a) Comment on the partner's Mansbridge Broadcasting concerns and explain how the closing process is supposed to work.
b) Discuss the entity-level audit procedures Peter 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 46

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 47

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

Question 48

Corporate governance is the rules, systems and processwithin companiused to guide and control them. Why are auditors concerned with the corporate governance structurof their clients and what is the current status of corporate governance regulation in Canada?

Question 49

CAS 300 Planning an Audit of Financial Statements requirthat 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 50

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 companican have in place to mitigate these risks. CASE