Question 1

When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level that is consistent with the objective of the audit, this means that the auditor has conducted enough work to
A) reduce inherent risks to an acceptable level.
B) increase detection risk to a satisfactory level.
C) detect errors in internal controls so that control risk can be set higher.
D) detect material misstatements to the targeted level of assurance.

Accepted Answer

When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level, it means that the auditor has conducted enough work to detect material misstatements to the targeted level of assurance. This targeted level of assurance is generally expressed as a reasonable level, which means that the auditor has obtained sufficient appropriate audit evidence to reduce audit risk down to an acceptably low level.

Question 2

An effective audit is one that
A) reduces the audit risk to the targeted level.
B) ensures that there are no errors contained in the financial statements.
C) does not contain errors of a dollar amount higher than 5% of the net income of the company.
D) is completed on time and within budget.

Accepted Answer

An effective audit is one that reduces the audit risk to the targeted level. The audit risk is the risk that the auditor may provide an inappropriate opinion on the financial statements. The goal of the audit is to reduce this risk to an acceptably low level. The other choices, such as ensuring no errors in the financial statements or keeping errors to a certain dollar amount, are not the primary goal of the audit. Completing the audit on time and within budget is important but not the most important factor in determining the effectiveness of the audit.

Question 3

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?
A) custom-designed operational or strategic information systems
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically controlled equipment used in the manufacturing process

Accepted Answer

Custom-designed operational or strategic information systems indicate the presence of an advanced automated information system. This is because these systems are specifically designed to meet the unique needs of the organization and are likely to be more complex and sophisticated than standard off-the-shelf software solutions. The other options (use of packaged software, customer relationship management systems, and numerically controlled equipment) are all common features of many businesses and do not necessarily indicate the presence of an advanced automated information system.

Question 4

An important reason for auditors to obtain good knowledge of a client's industry is that
A) payroll processing functions could differ from client to client.
B) control risks will vary from zero to 100% and can be better assessed in context.
C) detection risk must be set in accordance with the needs of the industry as well as of the individual client.
D) organizations like city governments have unique accounting requirements that could be complex.

Accepted Answer

The answer of An important reason for auditors to obtain...

Question 5

How is lack of understanding of a client's knowledge and industry linked to the auditor's business risk?
A) sales and collection processes need to be carefully documented so that the auditor can assess the value of accounts receivable
B) failure to fully understand the nature of the client's transactions could result in litigation should the client fail
C) the auditor may not be adequately trained to understand the nature of the client's business and thus may conduct a poor quality audit
D) there may not be sufficient expertise assigned to the audit engagement, resulting in a lack of understanding of complex issues

Accepted Answer

The answer of How is lack of understanding of a...

Question 6

The audit plan includes the nature, timing and extent of audit procedures for the purposes of risk assessment, including those that are linked to the individual audit assertions, as well as any other audit procedures that are considered necessary. At what point in the audit process is the audit plan finalized?
A) When the auditor has finished documenting internal controls.
B) When the client risk profile has been completed.
C) When risk assessments are complete.
D) When inherent risk information has been gathered.

Accepted Answer

The audit plan should be finalized after risk assessments are complete. This enables the auditor to tailor procedures to the specific risks identified and ensure appropriate coverage of all audit assertions. The finalization of the audit plan may still take into consideration information gathered during documenting internal controls or inherent risk assessment, but it should be built on the foundation of completed risk assessments.

Question 7

An important reason for adequately planning the audit engagement is to
A) help decide whether the engagement should be accepted.
B) enable the auditor to obtain sufficient appropriate audit evidence.
C) properly design the contents of the engagement letter.
D) keep audit risk as low as possible.

Accepted Answer

Adequate planning of the audit engagement helps the auditor to obtain sufficient appropriate audit evidence, which is necessary for the auditor to conduct an effective and efficient audit. While the other options may also be considerations in planning the engagement, obtaining appropriate audit evidence is the primary purpose of planning the audit.

Question 8

Jibbery Company has numerous transactions with related parties. For example, it has borrowed money from shareholders, purchases raw materials from a subsidiary company, and sells finished goods to its parent company. Which of the following describes one of the impacts of these transactions on risk assessment ?
A) inherent risk would be set as low
B) inherent risk would be set as high
C) control risk would be set as low
D) audit risk would be decreased

Accepted Answer

Transactions with related parties can increase inherent risk as there is a higher likelihood of errors or fraud occurring. Related parties may have a vested interest in the outcome of the transaction, which can create a risk of bias or manipulation. Therefore, the auditor may set inherent risk as high in order to account for this increased risk.

Question 9

A thorough understanding of the client's business and industry and knowledge about the company's operations are essential for doing an adequate audit. Why do auditors need greater knowledge about major customers and suppliers and related risks?
A) Information technology connects these organizations, so they affect each other.
B) Information technology provides rapid information about organizations.
C) There is increased importance of human capital and other intangible assets.
D) Joint ventures and strategic alliances affect client business risks.

Accepted Answer

Auditors need to understand major customers and suppliers and related risks because they are connected through information technology, which can impact each other's operations. For example, a major supplier experiencing financial difficulties could affect the client's ability to continue its operations. Similarly, a major customer's change in demand patterns could impact the client's sales and profitability. Therefore, understanding these risks is essential for a thorough audit.

Question 10

Risks associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk, and even influence client acceptance decisions. Which of the following businesses would be the most risky for the auditor to accept as a new client?
A) a small manufacturer of metal and plastic parts that has steady profits and has been in business for 15 years
B) a client who is developing a computer game that is expected to be ready in three years and has no other products
C) a retail company in the clothing industry that has mid-range pricing and appeals to a large population sector
D) a firm consisting of a partnership of ten lawyers that operates out of three different cities in one province

Accepted Answer

Developing a computer game that is expected to be ready in three years and has no other products is the most risky option as it is a new and unproven business with a long development timeline, which increases the risk of failure or significant changes in the business model. This would make it difficult for the auditor to assess the client's business risk and acceptable audit risk. The other options are more established and have a history of steady profits or operations, making them less risky.

Question 11

What are the three main factors that influence the organizational structure of all public accounting firms?

Accepted Answer

The answer of What are the three main factors that...

Question 12

Simon owns a clothing store, Simonello. Simonello recently purchased a material amount of fabric from Simonique Inc., a textile company also owned by Simon. With regards to this transaction, the auditors should
A) request a confirmation from Simonique that the transaction took place.
B) inspect the textile received in the warehouse to ensure that the amount sent equals the amount ordered.
C) qualify the audit report, as this puts management's integrity into question.
D) verify that the business relationship is disclosed in the financial statements.

Accepted Answer

The answer of Simon owns a clothing store, Simonello. Simonello...

Question 13

One of the purposes of developing a client risk profile is to assist the auditor in
A) developing the pertinent audit procedures for tests of internal controls.
B) assessing the client's business risk.
C) locating related parties that need to be disclosed.
D) deciding whether fraud or illegal acts have taken place.

Accepted Answer

Assessing the client's business risk is a primary purpose of developing a client risk profile. This helps the auditor understand the client's environment and potential areas of risk that could affect the financial statements.

Question 14

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?
A) electronic data interchange systems for purchase orders, sales invoices, and payments
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically controlled equipment used in the manufacturing process

Accepted Answer

The use of electronic data interchange systems for purchase orders, sales invoices, and payments is an indicator of the presence of an advanced automated information system. This suggests that the company is openly sharing electronic data with its customers and suppliers, and is likely using sophisticated IT systems to manage this process.

Question 15

It is important for the auditor to obtain a good understanding of the client's industry to develop a client risk profile. If the auditor is looking at a client in the fashion clothing industry, a risk specific to the industry would be
A) the high risk of poor governance and management oversight.
B) the high risk of defective products.
C) the high risk of obsolescence of their inventory.
D) the volatility in the stock market with regards to common stock.

Accepted Answer

In the fashion clothing industry, trends and styles can quickly become outdated, resulting in a high risk of inventory becoming obsolete. This poses a risk to the client's financial performance and the auditor's assessment of their inventory valuation. Poor governance and management oversight may be a risk in any industry and defective products may be a risk, but they are not specific or unique to the fashion clothing industry. Volatility in the stock market with regards to common stock is not a risk specific to the client's industry but rather a general economic risk.

Question 16

Why might the decisions about materiality and risks be different for the internal auditor than for the external auditor when conducting an audit of a system?
A) The auditors are applying different skills during the conduct of the audit.
B) External auditors have different expectations with respect to quality control.
C) Internal auditors focus only on the potential for dollar errors internally.
D) External users may have different needs than management.

Accepted Answer

External auditors are focused on providing assurance to external parties such as investors and regulators, who may have different needs and expectations than internal management. As such, external auditors may prioritize certain risks and materiality considerations differently than internal auditors who are primarily focused on helping management improve internal controls and processes.

Question 17

During the audit engagement, the primary auditor may rely on other individuals, such as specialists, other auditors, and internal auditors (secondary auditors). The primary way to defend the auditor against negligence should such other individuals conduct poor quality work is whether the
A) other individuals were professionals with recognized credentials.
B) primary auditor conducted sufficient quality control work with respect to the secondary auditor(s).
C) secondary auditor had ever been sued before.
D) appropriate level of materiality had been used during the conduct of the engagement.

Accepted Answer

The primary auditor can defend against negligence by ensuring that they have conducted sufficient quality control work with respect to any secondary auditors. This means that the primary auditor should have reviewed the work of the secondary auditor, assessed their competence and expertise, and made sure that they have followed appropriate audit procedures. This will help to ensure that any potential errors or omissions by the secondary auditor are identified and corrected before the audit report is issued. The other choices are not relevant to the issue of defending against negligence.

Question 18

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?
A) use of data communications (such as the Internet) to transfer transaction data
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically-controlled equipment used in the manufacturing process

Accepted Answer

The answer of The existence of advanced automated systems affects...

Question 19

The Canadian Auditing Standards state that the auditor must develop an audit plan. List and explain the components that must be included in the auditor's plan.

Accepted Answer

The answer of The Canadian Auditing Standards state that the...

Question 20

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the
A) inherent risk.
B) audit risk.
C) statistical risk.
D) financial risk.

Accepted Answer

The measure described in the question is the audit risk. Audit risk is the risk the auditor is willing to take that the financial statements contain material misstatements after issuing an unqualified opinion. Inherent risk refers to the risk that exists in the absence of any controls, while statistical risk is not a commonly used term in auditing. Financial risk relates to the creditworthiness of a company and is not relevant to this question.

Quiz 6: Client Acceptance and Planning the Audit

When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level that is consistent with the objective of the audit, this means that the auditor has conducted enough work to

An effective audit is one that

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?

An important reason for auditors to obtain good knowledge of a client's industry is that

How is lack of understanding of a client's knowledge and industry linked to the auditor's business risk?

An important reason for adequately planning the audit engagement is to

A thorough understanding of the client's business and industry and knowledge about the company's operations are essential for doing an adequate audit. Why do auditors need greater knowledge about major customers and suppliers and related risks?

Risks associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk, and even influence client acceptance decisions. Which of the following businesses would be the most risky for the auditor to accept as a new client?

What are the three main factors that influence the organizational structure of all public accounting firms?

Simon owns a clothing store, Simonello. Simonello recently purchased a material amount of fabric from Simonique Inc., a textile company also owned by Simon. With regards to this transaction, the auditors should

One of the purposes of developing a client risk profile is to assist the auditor in

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?

It is important for the auditor to obtain a good understanding of the client's industry to develop a client risk profile. If the auditor is looking at a client in the fashion clothing industry, a risk specific to the industry would be

Why might the decisions about materiality and risks be different for the internal auditor than for the external auditor when conducting an audit of a system?

During the audit engagement, the primary auditor may rely on other individuals, such as specialists, other auditors, and internal auditors (secondary auditors) . The primary way to defend the auditor against negligence should such other individuals conduct poor quality work is whether the

The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?

The Canadian Auditing Standards state that the auditor must develop an audit plan. List and explain the components that must be included in the auditor's plan.

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the