Question 1

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

Accepted Answer

1. The need for independence from clients. Independence permits auditors to remain unbiased in drawing conclusions about their clients' financial statements.
2. The importance of a structure to encourage competence. The ability of the structure to encourage competence permits auditors to conduct audits and perform other services efficiently and effectively.
3. The increased litigation risk faced by auditors. Firms continue to experience increases in litigation-related costs from lawsuits. Some organizational structures afford a degree of protection to individual firm members.

Question 2

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 primarily concerned with the needs of external users of the financial statements, while internal auditors focus on the needs of management. As a result, the decisions about materiality and risks may be different, as external auditors may need to consider risks and materiality that are more significant to external users, while internal auditors may be more concerned with risks and materiality that are more specific to the organization's operations.

Question 3

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 is finalized when risk assessments are complete, as this is when the auditor has identified the specific risks associated with the client's financial statements and determined the appropriate audit procedures to address those risks. The other options may inform the development of the audit plan, but they do not represent the final step in the process.

Question 4

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 are an indicator of an advanced automated information system because they are specifically tailored to the organization's needs and processes. This level of customization requires a high level of technological sophistication and investment. The other options listed are examples of automated systems but do not necessarily indicate an advanced level of automation.

Question 5

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 6

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 identify the areas that require more attention during the audit, determine the nature, timing, and extent of audit procedures to be performed, and ensure that sufficient appropriate audit evidence is obtained to support the audit opinion. It also helps to reduce audit risk by ensuring that all significant areas are covered, minimizing the possibility of errors or fraud going undetected. The decision to accept the engagement and contents of the engagement letter are important, but they are not the primary reasons for the planning process. Therefore, options A and C are less appropriate choices.

Question 7

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 8

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. Audit risk is the risk of issuing an incorrect opinion on the financial statements. An effective audit will minimize this risk to the degree necessary for the auditor to feel comfortable issuing an opinion on the financial statements. The other choices are incorrect because an audit cannot guarantee that there are no errors in the financial statements, and a specific threshold of materiality is determined by the auditor based on professional judgment, not a fixed percentage. Additionally, although completing the audit on time and within budget is important, it does not necessarily indicate that the audit was effective in reducing audit risk.

Question 9

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 audit risk, which is the risk that the auditor may issue an incorrect unqualified opinion. Inherent risk relates to the nature of the entity being audited, statistical risk is not a recognized term, and financial risk relates to the financial health of the entity being audited rather than the auditor's willingness to accept materially misstated financial statements.

Question 10

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

Electronic data interchange systems for purchase orders, sales invoices, and payments indicate the presence of an advanced automated information system. This system automates the exchange of business documents between trading partners in a standardized, electronic format, reducing paper-based transactions and manual data entry. The use of packaged software, customer relationship management systems, and numerically controlled equipment are also indicators of automation but are not as strong as the presence of electronic data interchange systems.

Question 11

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 increase the risk of fraudulent financial reporting or misstatement. As a result, the inherent risk is set as high, which means that there is a higher possibility of material misstatement in the financial statements. This is because related parties may collude to manipulate the financial statements to serve their interests. The auditor would need to perform additional audit procedures to assess the risk of material misstatement adequately.

Question 12

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 13

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

The development of a new product involves significant risks, and the client has no other products to fall back on. The unpredictability and uncertainty of the product's success make it a high-risk proposition for the auditor. The other options have established businesses and relatively stable markets, making them less risky for the auditor to accept as clients.

Question 14

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 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, there is a high risk of inventory obsolescence due to constantly changing fashion trends. This risk can lead to potential inventory write-offs and decreased profitability for the client. Options A and B do not necessarily apply to the fashion clothing industry specifically, and option D is more related to the client's financial investments rather than their industry.

Question 16

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 17

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 18

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

The objective of an audit is to detect material misstatements to the targeted level of assurance. When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level, they have conducted enough work to provide reasonable assurance that material misstatements have been detected.

Question 19

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 20

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 sufficient quality control work is conducted with respect to any secondary auditors. This includes making sure that the secondary auditors are properly supervised, and that their work is reviewed in accordance with the primary auditor's quality control procedures. The other choices are not directly related to the primary auditor's ability to defend against negligence.

Quiz 6: Client Acceptance and Planning the Audit

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

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?

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?

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

An important reason for adequately planning the audit engagement is to

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

An effective audit is one that

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

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?

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

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 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?

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

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.

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?

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

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

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