Question 1

When a higher than normal ratio of long-term debt to net worth is coupled with a lower than average ratio of profits to total assets,the company

Accepted Answer

A high ratio of long-term debt to net worth indicates that the company has a significant amount of debt relative to its equity. If this is coupled with a lower than average ratio of profits to total assets, it suggests that the company is not generating sufficient earnings to cover its debt obligations. This makes the company vulnerable to financial failure if it is unable to service or repay its debt in the future. Therefore, the best choice is C, which indicates that the company has a high risk of financial failure.

Question 2

An important benefit of industry comparisons is as

Accepted Answer

Industry comparisons can help auditors better understand their client's performance by providing a benchmark for comparison. This can aid auditors in identifying areas where their client is doing well or where they may need to improve. Options B and C refer to errors and irregularities, which can also be identified through industry comparisons, but these are not the primary benefit. Option D is not accurate as industry comparisons do not necessarily relate to audit costs.

Question 3

The audit working papers serve as a record of the evidence accumulated and the results of the audit tests.This helps to demonstrate that the audit was

Accepted Answer

The audit working papers serve as evidence that the audit was conducted in accordance with Canadian generally accepted auditing standards. Option A relates to confidentiality, Option B relates to accounting principles, and Option C relates to organization and accuracy, which are not the primary purposes of the audit working papers.

Question 4

Renaldo compared shipping reports to sales documents,checking to see that the sales invoice dates matched the shipping dates,and that quantities invoiced matched quantities shipped.On his working paper,he said that he vouched invoices.What else should his working paper include with respect to the audit procedure conducted?

Accepted Answer

Renaldo's working paper should include details of the tests conducted and their results. This is important to provide evidence of the audit procedures performed and the conclusions reached.

Answer: B 
 While analytical review procedures on the aging of accounts receivable may be relevant and useful in the overall audit, it is not specifically related to the audit procedure conducted by Renaldo in comparing shipping reports to sales documents.

Answer: C 
 Including employee numbers and wage rates of the employees Renaldo spoke to is not relevant or necessary for this specific audit procedure.

Answer: D 
 While maintaining confidentiality is important in an audit, it is not necessary to include a statement about it on the working paper for this specific audit procedure conducted by Renaldo.

Question 5

Which of the following would you expect to find in a corporation's bylaws?

Accepted Answer

The bylaws of a corporation typically include the rules and procedures adopted by the shareholders, such as how meetings are conducted and how directors are elected.

Question 6

Each working paper should include enough information to fulfill the objectives for which it was designed.For example,if a working paper is designed to list the detail and show the verification of support of a balance sheet account such as prepaid insurance,it is essential that the detail on the working paper

Accepted Answer

The working paper should include detail that reconciles with the associated general ledger account to verify the support of a balance sheet account such as prepaid insurance. The other options do not directly relate to the objective of verifying the support of the account.

Question 7

List and describe the process of developing substantive analytical procedures as per CAS 520.

Accepted Answer

The answer of List and describe the process of developing...

Question 8

For some audit objectives and in some circumstances,analytical procedures may be the most effective procedure to apply.The objectives that most likely would benefit from the use of analytical review with respect to the allowance for uncollectible accounts would be

Accepted Answer

Analytical review procedures can be helpful in assessing the collectability of individual customer account balances, as they involve comparing account balances with historical trends, industry benchmarks, or other relevant data. This type of analysis can provide insights into the adequacy of the allowance for uncollectible accounts, which is a critical estimate used in determining the net realizable value of accounts receivable. While the other objectives listed may also benefit from analytical procedures, they are not as directly related to the allowance for uncollectible accounts.

Question 9

During final review of working papers and financial statements,possible oversights in the audit can be identified by

Accepted Answer

The partner's knowledge of the client's business combined with effective analytical procedures is the best choice for identifying possible oversights during the final review of working papers and financial statements. This is because the partner's knowledge of the client's business can help them identify any irregularities or inconsistencies in the financial statements, while analytical procedures can help them identify any unexpected fluctuations or trends. Conducting a closing interview with management or a meeting with the audit team or reviewing the minutes from board meetings may also help identify oversights, but they are not as effective as relying on the partner's knowledge and analytical procedures.

Question 10

A)There are four important purposes of analytical procedures.Identify each of these four purposes and for each purpose give a specific example of an analytical procedure that an auditor might perform.B)Identify each of the five major types of analytical procedures and give an example of each.C)One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition.Explain how the assessment of a client's financial condition can affect the auditor's decisions concerning evidence accumulation in later phases of the audit.

Accepted Answer

The answer of A)There are four important purposes of analytical...

Question 11

The working papers contain data useful for evaluating the adequacy of the audit scope and the fairness of the financial statements.These data help the auditor to conclude whether

Accepted Answer

The working papers provide evidence and documentation that support the auditor's conclusions, including whether the financial statements are fairly presented, which is necessary to determine if an unmodified audit report can be issued.

Question 12

When the current year's unaudited trial balance amounts are compared to the prior year's audited trial balance amounts,

Accepted Answer

Comparing the current year's unaudited trial balance amounts to the prior year's audited trial balance amounts highlights significant changes in balances. Errors, discrepancies, and irregularities may also be identified through the comparison, but the primary purpose is to identify any significant changes in account balances from one year to the next.

Question 13

When an auditor calculates the gross margin as a percent of sales and compares it with previous periods,this type of evidence is called

Accepted Answer

The auditor's calculation of gross margin as a percentage of sales and comparison with previous periods is an example of analytical procedures. These procedures involve the analysis of data and relationships to identify unusual fluctuations, ratios, or trends that might indicate potential material misstatements. This type of evidence provides a basis for the auditor to form an overall conclusion about the financial statements.

Question 14

The new Canadian Auditing Standards require the auditor to complete the audit working papers within how many days of the audit report date?

Accepted Answer

The Canadian Auditing Standards require auditors to complete the audit working papers within 60 days of the audit report date.

Question 15

A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance.The auditor's expected account balance may be determined by

Accepted Answer

The auditor's expected account balance may be determined by relating it to some other balance sheet or income statement account or accounts. This is usually done using analytical procedures, where the auditor compares the account in question with other accounts that have a known relationship to it. This helps the auditor to identify any significant fluctuations or deviations from the expected balance, which may indicate errors or fraud. Using industry standards or credit bureau reports may be useful in some cases, but they may not always be relevant or reliable. Inquiring with the client may also provide useful information, but it should not be the only source of evidence.

Question 16

If most companies in the industry use FIFO inventory valuation and straight-line depreciation,and the audit client uses weighted-average cost inventory valuation and double-declining balance,comparisons of client and industry data

Accepted Answer

Since the client uses different accounting methods compared to the industry, comparisons of client and industry data may not be meaningful and affect the comparability of data. It does not necessarily mean that there are errors or irregularities in the client's financial statements, but it may make the auditor's evaluation of the client's financial performance and position more challenging. Therefore, the best choice is D.

Question 17

List and explain the three times during an audit engagement the auditor performs analytical procedures.

Accepted Answer

The answer of List and explain the three times during...

Question 18

The working papers are

Accepted Answer

Working papers are the primary means of documenting that an adequate audit was conducted in accordance with Generally Accepted Auditing Standards (GAAS). The purpose of working papers is to provide evidence that supports the auditor's opinion and conclusions. They are not the property of the client or used as a basis for the partners to review and reward the work of the audit team. While internal auditors may also prepare working papers, they are typically prepared by the external auditors who are conducting the audit.

Question 19

At the first day of work at a PA firm,staff are given their own laptop computer for use in working with clients and other data.
Required:A)What is the typical structure of client working paper files? B)How is client data protected from unauthorized change?

Accepted Answer

The answer of At the first day of work at...

Question 20

The auditor will obtain a copy of the client's articles of incorporation (if applicable)and retain a copy in the permanent file.Important information in the articles of incorporation includes

Accepted Answer

The articles of incorporation contain information about the voting rights of each class of shares issued by the company, which is important for assessing the control and ownership structure of the company. The other options listed are unrelated to the articles of incorporation.

Quiz 5: Audit Evidence