Assurance Services
Question Bank
Course Introduction
Assurance Services is a course designed to introduce students to the concepts, principles, and practices surrounding independent professional services that improve the quality or context of financial and non-financial information for decision makers. The course covers the role and importance of assurance in the business environment, focusing primarily on financial statement audits, but also exploring other forms of assurance such as reviews, agreed-upon procedures, and compliance audits. Key topics include professional standards, engagement planning, evidence gathering, risk assessment, internal controls, ethical considerations, and reporting. Through case studies and practical examples, students will develop a comprehensive understanding of how assurance services contribute to stakeholder confidence, regulatory compliance, and overall organizational accountability.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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69 Verified Questions
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Sample Questions
Q1) A major type of assurance service performed by large public accounting firms is
A) auditing.
B) reviewing.
C) compilation.
D) management consulting.
Answer: A
Q2) Which of the following terms best describes the increased likelihood that unreliable information will be provided to decision makers?
A) audit risk
B) information risk
C) inherent risk
D) business risk
Answer: B
Q3) Which of the following is most difficult to evaluate objectively?
A) efficiency and effectiveness of operations
B) compliance with government regulations
C) presentation of financial statements in accordance with a generally accepted accounting framework
D) internal controls in use at a small company
Answer: A
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Canadian Auditing Standards (CASs) are best described as
A) the CPA Canada Handbook, plus published research and public accounting firm practices in auditing.
B) Canadian generally accepted auditing practices developed by public accounting firms.
C) material that is fully codified in the CPA Handbook developed in Canada.
D) the existing research that has been published about auditing that is used by firms.
Answer: A
Q2) A key difference between the PCAOB in the U.S. and the CPAB in Canada is that
A) the CPAB is involved in the development of auditing standards.
B) the PCAOB is involved in the development of auditing standards.
C) the PCAOB conducts practice inspections of public company auditors.
D) the CPAB conducts practice inspections of public company auditors.
Answer: B
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4
Chapter 3: Legal Liability
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Sample Questions
Q1) Fabio recently sold his restaurant for $650 000, the value of the net assets as reported on the balance sheet. After the sale, Fabio realized that he could've sold the restaurant for as much as $950 000 as the fair value of the assets was $300 000 higher than what was reported on the balance sheet. Fabio is suing the auditors for his loss. The auditor's best defence is
A) absence of a misstatement.
B) lack of duty.
C) no damages.
D) absence of causal connection.
Answer: A
Q2) Conflict between financial statement users and auditors often arises because of the A) high cost of performing an audit.
B) extremely technical vocabulary auditors use in their reports.
C) placement of the auditor's report in the back of the client's annual report, where it is hard to locate.
D) expectation gap.
Answer: D
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Which of the following situations best describes an advocacy threat? PA has been hired to
A) consult with the corporate controller and the bank manager about the conditions for financing a loan.
B) manage the accounting department for three weeks while the corporate controller is on vacation.
C) complete the personal tax returns of all executive management.
D) prepare the year end journal entries for a subsidiary company.
Q2) Which of the following is the best example of an intimidation threat? Management
A) has decided to sue you because the audit fee was twice as high as they expected.
B) has changed auditors of all of its subsidiary companies as they can get the audit done for a lower cost.
C) threatens to change auditors if you do not let them overstate accounts receivable by $100 000 (the bad debt allowance is too low).
D) threatens to resign from the company if the board of directors does not give them a 15% raise.
Q3) What are the common judgement traps and how can they be avoided?
Q4) List the components of the auditor's professional judgment framework.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Bratlett Company has purchased all of the shares of another company but does not want to consolidate its financial statements. Management has drafted a rather long and confusing note to the financial statements that describes the transaction and states that debt has been acquired in a foreign currency. In your view, the transaction and its effect on the company and the accounts have not been properly disclosed.
Required:
List the audit objectives about presentation and disclosure that have been affected and explain how they are affected.
Q2) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering either one.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.
Q3) A financial statement audit typically consists of three sections. Identify the three sections and discuss the major activities performed by the auditor in each section.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are
A) opportunities and a desire to meet debt repayment obligations.
B) opportunities and attitudes or rationalizations.
C) attitudes or rationalizations and the need to maintain stock prices.
D) the need to maintain stock prices and the need to meet debt repayment obligations.
Q2) If management and salespeople are compensated on the basis of achieving high sales targets, there is increased incentive to record sales before they have been earned. In such a situation, the auditor will increase the extent of testing for which of the following transaction-related audit objectives for sales?
A) cutoff and classification
B) classification and occurrence
C) occurrence and cutoff
D) completeness and cutoff
Q3) 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.
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Chapter 7: Materiality and Risk
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Sample Questions
Q1) Discuss three factors that affect client business risk and therefore audit risk.
Q2) The audit risk model is used primarily
A) for planning purposes in determining how much evidence to accumulate.
B) while doing tests of controls.
C) to determine the type of opinion to express.
D) to evaluate the evidence that has been gathered.
Q3) When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will
A) potentially differ from each other.
B) require the same level of unanticipated misstatements.
C) require the same amount of audit work.
D) be the same for each account audited.
Q4) An inherent risk (IR) of 40% and a control risk (CR) of 60% affect detection risk and planned evidence differently than an
A) IR of 60% and CR of 40%.
B) IR of 100% and CR of 24%.
C) IR of 80% and CR of 30%.
D) IR of 70% and CR of 30%.
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Page 9
Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is
A) inspection.
B) observation.
C) reperformance.
D) reconciliation.
Q2) A) The first step in the auditor's study and evaluation of internal control is obtain understanding of internal control for audit planning purposes. List the remaining steps.
B) Once the auditor has an understanding of internal control, what two assessments must be made prior to testing controls?
C) Describe five common procedures an auditor can use to obtain an understanding of internal control design.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) The audit of Simcoe Transports Inc. was completed three months ago, so the PA firm proceeded to the file archive stage in accordance with Canadian Audit Standards. If the audit firm receives additional information related to the audit but the information does not affect the audit conclusions, the information should be
A) disregarded, as the file archive was already done.
B) added to the audit file in the section to which it pertains.
C) separately identified and added at the front of the audit file.
D) added to the audit file with a request that the reviewing partner review the new information.
Q2) When the current year's unaudited trial balance amounts are compared to the prior year's audited trial balance amounts,
A) errors are identified.
B) discrepancies are discovered.
C) irregularities become apparent.
D) significant changes in balances are highlighted.
Q3) Identify the characteristics that working papers should have. For each characteristic, briefly explain why it is important.
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) A) There are seven types of audit evidence: inspection, observation, inquiries of the client, external confirmation, recalculation, reperformance, and analytical procedures. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) analytical procedures, and (3) tests of details of balances.
B) Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls.
C) Types of audit tests include tests of controls, analytical procedures, and tests of details of balances. Rank these types of tests from least costly to most costly.
Q2) The auditor would like to design a test of control to test that statements are mailed to all customers each month. Which of the following typical tests of controls would be suitable?
A) Inquire about who is responsible for mailing the statements.
B) Find out whether customers pay by statement or by invoice.
C) Reconcile subsequent payments to particular invoices.
D) Match remittance advices from customers to customer statements.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) A) Describe three types of sample selection methods commonly associated with statistical audit sampling.
B) Explain the difference between sampling with replacement and without replacement. Which method is more common in audit practice?
C) Describe the steps involved in systematic sampling.
Q2) One of the causes of nonsampling error is
A) the use of inappropriate or ineffective audit procedures.
B) failure to draw a random sample.
C) failure to draw a representative sample.
D) the use of attribute sampling instead of variables sampling.
Q3) CAS 530 has a very specific definition of sampling. Assuming that each item (described as a sampling unit) in the populations below could be selected as part of the sample, which of the following illustrates the other part of the CAS 530 definition of sampling?
A) looking at 50 sales invoices from the current population of 100 000
B) recalculating interest calculations for notes payable
C) estimating the gross profit by product for all company products
D) inspecting all legal invoices for potential contingent liabilities
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13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) What is one of the advantages of converting procedures from a design to a performance format?
A) obtain audit evidence of better quality
B) help the auditor select the procedures to be performed
C) eliminate duplicate procedures
D) ensure compliance with Canadian Auditing Standards
Q2) For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective of accounts receivable. Which accounts receivable balance-related audit objective does the cash receipts transaction-related audit objective of completeness affect?
A) allocation
B) completeness
C) rights and obligations
D) existence
Q3) Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) that may be revealed by each analytical procedure.
Note: students could also be asked to separately discuss ratios for planning and ratios as substantive tests.
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The test of transactions that requires the recomputing of cash discounts satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q2) An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is
A) attachment of the receiving report to the invoice only.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Q3) The starting point for the verification of current-year acquisitions of manufacturing equipment is normally
A) the manufacturing equipment account in the general ledger.
B) the acquisitions journal.
C) the purchase requisitions file.
D) a client schedule of all acquisitions recorded during the year.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) A public accountant observes his client's physical inventory count on December 31. There are eight inventory-taking teams and a tag system is used. The public accountant's observation normally may be expected to result in detection of which of the following inventory errors?
A) The inventory takers forgot to count all the items in one room of the warehouse.
B) An error is made in the count of one inventory item.
C) Some of the items included in the inventory had been received on consignment.
D) The inventory omits items on consignment to wholesalers.
Q2) Discuss the methodology for designing tests of details of balances for inventory.
Q3) It is frequently possible to test the physical inventory prior to the balance sheet date when
A) there are accurate perpetual inventory master files.
B) year-end sales are small.
C) the internal control system is no better at year-end than at an earlier point in time.
D) client counts inventory at interim dates.
Q4) What are inventory price tests and inventory compilation tests? Provide an example of each.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) Otto decided to outsource the payroll function to Magna Plus. For the purpose of an assurance engagement, Magna is considered a
A) service organization.
B) user entity.
C) payroll administrator.
D) human resource company.
Q2) Which of the following internal controls would assist in ensuring that recorded payroll transactions are for the amount of time actually worked and at the proper pay rate, and that withholdings are properly calculated?
A) comparison of batch totals with computer summary reports
B) comparison of payroll master file with payroll general ledger totals
C) adequate personnel files
D) separation of duties between personnel, timekeeping, and payroll disbursements
Q3) Discuss the two most common ways in which employees can defraud a company in the payroll area.
Q4) State the six specific transactions-related audit objectives as related to payroll and for each objective state one common test of controls that can be used to test the objective.
Page 17
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The audit objective requiring that existing notes payable are included in the notes payable schedule (completeness) is satisfied by performing the following audit procedure.
A) Recalculate accrued interest.
B) Examine duplicate copies of notes for details.
C) Review the notes payable schedule to determine whether any are related parties.
D) Obtain confirmations from creditors who have held notes from the client in the past and are not currently included in the notes payable schedule.
Q2) Presentation and disclosure are important because acceptable financial reporting frameworks require that footnotes adequately describe the terms of notes payable outstanding and the assets pledged as collateral for the loans. Which assertion does this relate to?
A) valuation
B) existence
C) completeness
D) understandability
Q3) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Which of the following situations would indicate a susceptibility to fraud that pertains to theft of cash?
A) lack of segregation of duties between the handling of cash and the recording of cash
B) cash disbursement cheques requiring only one authorizing signature
C) payroll rates being approved by the corporate controller
D) customer master file changes being handled by the controller's executive assistant
Q2) Outline the audit procedures that would be performed when testing electronic receipts and payments.
Q3) In addition to the possibility of kiting, inaccurate handling of bank transfers could result in
A) a misclassification between cash and accounts receivable.
B) an incorrect balance in the accounts receivable account.
C) a misclassification between cash and accounts payable.
D) an incorrect balance in the bank loan account.
Q4) A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) Which level of risk does the auditor normally assign to the presentation and disclosure-related assertion of completeness for contingent liabilities and subsequent events?
A) low risk for inherent risks that required information may not be disclosed in the notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high risk that all required information may not be disclosed in the notes
Q2) Which of the following is a required condition for a contingent liability to exist?
A) There is a potential liability to an employee of the client.
B) The amount of the future payment is known.
C) The liability resulted from known events.
D) The outcome has been resolved by a current event.
Q3) Discuss three audit procedures commonly used to search for contingent liabilities.
Q4) State three types of information that should be included in a standard letter of inquiry of a client's law firms.
Q5) Discuss the purpose of a management letter.
Q6) Describe the items the auditor is required to report to the audit committee.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) A misstatement in the financial statements can be considered material if A) it overshadows the financial statements as a whole.
B) knowledge of the misstatement would affect the decision of a reasonable user of the statements.
C) it affects more than one account on the statements.
D) it affects only one account on the statements.
Q2) Your client has experienced a major data breach with lawsuits and fines pending of significant and uncertain amounts. These events are disclosed in the client's financial statements and are clearly explained in the notes. How do these events affect the independent auditor's report?
A) The auditor would use a standard unqualified auditor's report.
B) The auditor would use an emphasis of matter paragraph titled "Data Breach" to highlight the events.
C) The auditor would use an "other matters" paragraph titled "Data Breach" to highlight the amounts.
D) The auditor would use a qualified audit opinion due to the size of the uncertainty.
Q3) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Before performing a review of an entity's financial statements, an accountant should A) complete a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.
Q2) An engagement for applying specified auditing procedures to financial information other than financial statements provides no assurance. This results in
A) a report that can be readily tailored to any type of engagement.
B) a broad set of audit procedures being conducted for specific information.
C) frequent disagreement between auditor and client with respect to results.
D) distribution of the report normally being restricted.
Q3) Define "direct reporting engagements."
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