Question 1

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to

Accepted Answer

The preparation of the financial statements and accompanying footnotes is the responsibility of the management of the company, as they are in the best position to have accurate information about the company's financial position and operations. The auditor's responsibility is to perform an independent review of the financial statements to ensure they are presented fairly in accordance with accounting principles. However, the auditor may assist management with footnote disclosures or other areas where their expertise is needed.

Question 2

Auditing standards regarding the detection of illegal acts clearly state that the auditor provides

Accepted Answer

Auditing standards regarding the detection of illegal acts state that the auditor provides no assurance that they will be detected. This is because illegal acts are often hidden and difficult to detect, even with a thorough audit process. The auditor should, however, perform procedures to identify any potential illegal acts and report any findings to the appropriate parties.

Question 3

The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead

Accepted Answer

The primary user of the audit opinion is a prudent user, such as a potential investor, lender, or creditor, who relies on the financial statements to make informed decisions. While management and the reader may also benefit from the audit opinion, the main purpose is to provide assurance for external users.

Question 4

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is greater for

Accepted Answer

Management fraud has a higher risk of going undetected because managers have more power and can override or manipulate existing internal controls to perpetrate the fraud. Employee fraud may involve a larger number of individuals, but the nature of the fraud tends to be smaller in scale and less complex. The higher crime rate among blue-collar workers (option B) is a stereotype and not a reliable basis for assessing fraud risk. The assertion that managers are inherently smarter than employees (option D) is unfounded and irrelevant to fraud risk assessment.

Question 5

Prior to looking at the specific cycles, the auditor will first

Accepted Answer

The answer of Prior to looking at the specific cycles,...

Question 6

If the auditor were responsible for making certain that all the assertions of management in the statements were correct,

Accepted Answer

It is not economically practical for an auditor to be responsible for ensuring that all the assertions of management in statements are correct as it would require an extremely extensive and expensive audit process. Furthermore, even with such an extensive audit, it would not completely eliminate the possibility of bankruptcies occurring.

Question 7

The requirement for an attitude of skepticism means that the auditor should

Accepted Answer

An attitude of skepticism means that the auditor should not take everything at face value and should actively look for evidence that contradicts what they are seeing or hearing. This does not necessarily mean that the auditor should be distrustful or assume that management is lying. The auditor should still consider management's explanations but should not accept them blindly without additional evidence to support them. Additionally, performing additional tests of controls may be necessary to ensure the accuracy of the information provided.

Question 8

Which of the following is an example of fraudulent financial reporting (management fraud)?

Accepted Answer

Intentionally overstating sales to increase reported earnings is an example of fraudulent financial reporting, or management fraud. The other choices are examples of misappropriation of assets, which is a different type of fraud.

Question 9

There is agreement within the auditing profession and the courts that the auditor is

Accepted Answer

While an auditor has a responsibility to provide reasonable assurance that the financial statements are free from material misstatement, they are not a guarantor or insurer of the financial statements. This means that if a company suffers financial losses, the auditor is not liable unless they were grossly negligent in their audit work.  Therefore, A is the best choice.

Question 10

The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to

Accepted Answer

The auditor's duty is to provide reasonable assurance that material misstatements in the financial statements will be detected. This means that the auditor is responsible for performing an audit in accordance with auditing standards and gathering sufficient appropriate evidence to support their opinion on whether the financial statements are fairly stated. The auditor is not an insurer or guarantor of the fairness in the statements, nor are they equally responsible with management for the preparation of the financial statements.

Question 11

CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements. This opinion is an assessment of whether the financial statements are presented fairly using

Accepted Answer

The financial statement audit is conducted in accordance with an applicable financial reporting framework, which may include Canadian generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other frameworks. The auditor's opinion is based on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The auditor also considers management's assertions, but this is not the sole basis for the opinion. Rules of professional conduct guide the auditor's conduct, but are not directly related to expressing an opinion on the financial statements.

Question 12

What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?

Accepted Answer

The answer of What is one of the first things...

Question 13

Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met. During your audit planning process, management informed you that they have not taken any action but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has upon your audit planning process.

Accepted Answer

The answer of Your PA firm has been auditing Ontario...

Question 14

The factor that distinguishes an error from fraud or other irregularities is

Accepted Answer

The factor that distinguishes an error from fraud or other irregularities is intent. Errors are unintentional while fraud or other irregularities have intentional deception or misrepresentation. Materiality relates to the significance of the error or irregularity. Whether it is a dollar amount or a process does not really distinguish between an error and fraud or other irregularities. Lastly, the cause of the error or irregularity does not necessarily make it fraudulent or irregular.

Question 15

Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of

Accepted Answer

Incorrect calculation of income taxes payable is a direct-effect illegal act that could be performed by a client. This is because the act has a direct impact on the client's financial statements and could result in understating or overstating the client's income taxes payable, thus affecting the income statement and balance sheet.

Question 16

The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests

Accepted Answer

The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests ultimately with management. The auditor's role is to provide reasonable assurance that the financial statements are free of material misstatements, based on their audit procedures and professional judgement, but management remains responsible for the accuracy and completeness of the financial statements.

Question 17

Professional skepticism during the financial statement audit requires an appropriate state of mind, being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind?

Accepted Answer

Option D best illustrates an appropriate state of mind for professional skepticism during financial statement audit because it highlights the auditor's awareness of the possibility of material misstatements in the financial statements. Being aware of the possibility of misstatement helps the auditor remain objective and impartial during the audit engagement. Options A, B, and C are all important aspects of professional skepticism but do not best illustrate an appropriate state of mind.

Question 18

In May 2015, the firm of Chang and Crown (C&C) became the auditors of Laua Limited (LL) for the fiscal year ended December 31, 2014. LL's shareholders and Board approved the change from its previous audit firm on the recommendation of LL's senior management. One of the new board members is a bit confused about management's role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements. He was also glad that the auditors would be able to help prevent illegal acts and fraud.
Required:
A) Distinguish between management's responsibility and the auditor's responsibility for the financial statements under audit.
B) Explain to the board member why the auditor does NOT help prevent illegal acts and fraud. What is the role of the auditor with respect to illegal acts and fraud?

Accepted Answer

The answer of In May 2015, the firm of Chang...

Question 19

The objective of the audit of financial statements by the auditor is the expression of an opinion on

Accepted Answer

The objective of the audit of financial statements is to express an opinion on the fairness of the financial statements. The accuracy of the financial statements is one aspect of fairness, but the audit does not guarantee accuracy. The balance sheet and income statement are components of the financial statements. The audit is not focused on the annual report but rather on the financial statements included in the report.

Question 20

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility

Accepted Answer

The profession places more responsibility on auditors to detect errors rather than employee fraud. While auditors are also responsible for detecting employee fraud, preventing and detecting errors is seen as a more significant aspect of the auditor's responsibilities. This is reflected in the auditing standards, which provide more guidance and requirements for auditors regarding the detection of errors.

Quiz 5: Audit Responsibilities and Objectives