Assurance Services
Test Preparation
Course Introduction
Assurance Services explores the principles, practices, and significance of providing independent professional services that improve the quality of information for decision makers in organizations. The course examines the different types of assurance engagements, including audit, review, and agreed-upon procedures, and their roles in financial reporting and organizational governance. Students will learn about the regulatory environment, ethical considerations, risk assessment, evidence gathering, and reporting standards. Emphasis is placed on understanding how assurance services add value by enhancing the reliability and credibility of information, thereby supporting stakeholders in making informed business judgments.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 13th Canadian Edition by Alvin A. Arens
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Chapter 1: The Demand for Audit and Other Assurance Services
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Sample Questions
Q1) An accountant records information. When conducting an audit, the auditor must possess
A) an ability to interpret generally accepted accounting frameworks.
B) an education beyond the bachelor's degree.
C) an ability to classify transactions by type.
D) an ability to organize and summarize economic events.
Answer: A
Q2) It is important for the auditor to be independent because
A) otherwise the auditor would not charge a fair rate to the client.
B) otherwise the auditor might not be as knowledgeable of the subject matter and the criteria.
C) this will prevent bias in accumulating and evaluating evidence.
D) the Canadian tax authorities require that the auditor be independent.
Answer: C
Q3) Which of the following is an example of accounting rather than auditing?
A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
Answer: B
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) There are many elements of quality control at the firm level. Which element does the statement "quality control procedures should be developed, documented, implemented, and communicated" fall under?
A) leadership and responsibilities within the firm
B) general ethical requirements
C) general human resource policies
D) engagement quality control review
Answer: A
Q2) There are many elements of quality control at the firm level. Which element does "processes should exist for following up internal and external complaints" relate to?
A) engagement performance
B) engagement quality control review
C) documentation
D) general human resource policies
Answer: B
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Chapter 3: Legal Liability
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Sample Questions
Q1) The Ultramares doctrine is that ordinary negligence is insufficient for liability of auditors to third parties because of the lack of privity of contract between the third party and the auditor. What type of behaviour on the part of an auditor would result in liability to more general third parties according to this doctrine?
A) conducting an audit engagement when a review engagement had been contracted
B) completing work in accordance with a contract that was signed with the client
C) deliberate misstatement of the financial statements by management remaining undetected
D) fraud or constructive fraud with respect to the working papers
Answer: D
Q2) In the auditing environment, failure to meet generally accepted auditing standards is often
A) an accepted practice.
B) a suggestion of negligence.
C) strong evidence of negligence.
D) tantamount to criminal behaviour.
Answer: C
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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Which of the following situations would be an example a of self-review threat? Prior to commencing the audit engagement, PA has completed
A) personal and corporate tax returns.
B) audit of a company where the client owns a minority interest.
C) purchase price allocation calculation for a company that the client purchased during the year.
D) audit of the non-for profit organization of the client.
Q2) Why does a self-review threat pose a problem when conducting an audit engagement?
A) The audit can be conducted more efficiently.
B) You are auditing your own work, and may not detect inadequacies.
C) The audit is more expensive, as you have to provide clear documentation.
D) The auditor may not have the expertise to complete the special work.
Q3) Discuss the ways the accounting profession and society encourage public accountants to conduct themselves in a professional manner (i.e., the factors that influence the ethical conduct of audit practitioners).
Q4) List the components of the auditor's professional judgment framework.
Q5) What is the difference between auditors and lawyers with respect to privileged information?
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Heavy Manufacturing Company is in the business of making steel plates, forming heavy metal slabs, and drilling and scoring metals. The company recently upgraded many of its forming machines. Fortunately, it was able to sell its old equipment at a reasonable price. The effect was that sales for the quarter are substantially improved over the same period in the prior year. The general transaction-related audit objective affected by this activity is
A) timing.
B) accuracy.
C) occurrence.
D) classification.
Q2) The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to
A) be an insurer of the fairness in the statements.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial statements.
D) provide reasonable assurance that material misstatements will be detected.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) 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.
Q2) 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
A) the interest rates currently being paid for bonds that have been issued.
B) voting rights of each class of shares issued by the company.
C) which shares have been redeemed by the company in the current year.
D) the interest rates that are being received on long-term notes invested.
Q3) Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt covenant requirements
C) management's practice of making overly achievable forecasts
D) high turnover of accounting, internal audit, and information technology staff
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Chapter 7: Materiality and Risk
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Sample Questions
Q1) Using the audit risk model, audit risk describes targeted assurance, while control risk and inherent risk are assessed based upon a variety of factors. Of the components of the audit risk model, which is most likely to be set to 100%?
A) audit risk
B) control risk
C) detection risk
D) inherent risk
Q2) Because control risk and inherent risk vary from cycle to cycle, account to account, or objective to objective,
A) audit risk must also change.
B) planned detection risk and required audit evidence will also vary.
C) planned detection risk will vary but audit evidence will remain constant.
D) planned detection risk will remain constant but audit evidence will vary.
Q3) Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for
A) identified misstatements.
B) likely misstatements.
C) unanticipated misstatements.
D) further possible misstatements.
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Page 9
Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) Which one of the following is an example of a specific authorization?
A) The computer systems automatically reorder inventory when quantities fall below the economic order quantity.
B) The highest credit limit allowed for accounts receivable customers is $100 000.
C) Each sales transaction that exceeds the credit limit of a customer must be approved by the controller.
D) Grocery sales clerks may approve returns of goods less than ten dollars in value.
Q2) Each key control that the auditor intends to rely on must be supported by sufficient A) tests of details of balances.
B) tests of controls.
C) analytical review procedures.
D) reperformance procedures.
Q3) An act of two or more employees to work together to misstate records is called A) malfeasance.
B) collusion.
C) defalcation.
D) felony.
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10
Chapter 9: Audit Evidence
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Sample Questions
Q1) The working papers prepared during the engagement are the property of the A) auditor, but do not include the working papers prepared by the client for the auditor.
B) auditor, even including those prepared by the client for the auditor.
C) client, who will provide copies to the auditor.
D) auditor and client jointly.
Q2) Which of the following is an example of subjective evidence?
A) a positive confirmation of an account receivable
B) a bank confirmation
C) inquiries of the credit manager about the collectability of noncurrent accounts receivable
D) the physical count of securities and cash
Q3) A major benefit of computerized analytical procedures is the
A) ease of doing the calculations.
B) ease of updating the calculations.
C) ease of correcting math calculations.
D) ability to push the work down to lower levels of the audit staff to do the analysis.
Q4) Identify the characteristics that working papers should have. For each characteristic, briefly explain why it is important.
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) An example of an audit procedure that relates to the auditor's understanding of internal control is to
A) reperform the counting of physical inventory.
B) inspect documents and records.
C) recalculate the depreciation expenses.
D) trace all legal expenses to supporting invoices.
Q2) Eleonora is inspecting a sample of "Code of Conduct Acknowledgement" forms that must be signed by all employees to indicate that they have read and understood the company's code of conduct. Eleonora is ensuring that they have been signed by the employees. Eleonora is performing
A) a test of controls.
B) an analytical procedure.
C) a substantive procedure.
D) a procedure to obtain an understanding of internal controls.
Q3) Risks of fraud are assessed at which level(s) of the audit?
A) overall audit, transaction-related audit objectives
B) balance-related audit objectives only
C) overall audit, cycle, and account
D) cycle, account, and transaction-related audit objectives
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Page 12
Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) The process that requires the calculation of an interval and then selects the items based on the size of the interval is
A) statistical sampling.
B) random selection.
C) systematic selection.
D) computerized selection.
Q2) The exception rate the auditor will permit in the population and still be willing to use the assessed level of control risk is called the
A) tolerable exception rate.
B) estimated population exception rate.
C) acceptable risk of overreliance.
D) sample exception rate.
Q3) A) Discuss what is meant by "sampling risk."
B) Discuss what is meant by "nonsampling risk."
C) Discuss two causes of nonsampling risk. Also discuss ways the auditor can control nonsampling risk.
D) Discuss two ways the auditor can control sampling risk.
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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) The two primary classes of transactions in the sales and collection cycle are
A) sales and sales returns.
B) sales and sales discounts.
C) sales and accounts receivable.
D) sales and cash receipts.
Q2) Whenever a statistical method is used, a decision rule determines whether the population is acceptable. The decision rule for dollar-unit sampling is "Accept the conclusion that the book value is not misstated by a material amount if A) the upper error bound falls between the understatement and overstatement tolerable misstatement amounts."
B) both the lower and upper error bound fall between the understatement and overstatement tolerable misstatement amounts."
C) both the understatement and overstatement tolerable misstatement amounts fall between the upper and lower error bound."
D) the overstatement tolerable misstatement amount falls between the lower and upper error bound."
Q3) State the five specific balance-related audit objectives as applied to accounts receivable.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use
A) attributes sampling.
B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.
Q2) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
Q3) The main focus taken by the auditor in verifying liability balances is on the discovery of
A) liabilities posted to the wrong account.
B) overstated liabilities.
C) understated or omitted liabilities.
D) overstated or extraneous liabilities.
Q4) State each of the six specific balance-related audit objectives for manufacturing equipment additions and describe one common test of details of balances for each objective.
Q5) Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to
A) fraud.
B) audit risk.
C) illegal acts.
D) business risks.
Q2) The audit of the inventory and distribution cycle consists of five parts. State the five parts and, for each part, identify the cycle in which that part is tested by the auditor.
Q3) Controls that provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totalled, and included in the general ledger at the proper amount are known as
A) standard cost records.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
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) Which of the following internal control tests would help to assess whether payroll transactions were properly classified?
A) Test clerical accuracy by footing the payroll journal.
B) Recompute net pay and gross pay.
C) Reconcile the disbursements in the payroll journal with the payroll bank statement.
D) Review time records and job records, tracing to labour distribution.
Q2) Which of the following type of test is most important for the audit of payroll?
A) internal control
B) test of detail
C) analytical review
D) substantive test
Q3) Which of the following tests of controls would pertain to whether existing payroll transactions are recorded?
A) Compare cancelled cheques with payroll journal details.
B) Compare cancelled cheques with payroll records.
C) Foot the payroll journal and trace details to the general ledger.
D) Conduct gap testing for a sequence of payroll cheques.
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Page 17
Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The transfer agent confirmed to the auditor that the company had 2 500 000 shares outstanding at December 31, 2010. To have assurance over the accuracy of the dividend payable, the auditor would multiply 2 500 000 by the
A) dividend per share declared.
B) dividend per share paid during the year.
C) dividend per share as per the articles of incorporation, even if it was not declared during the year.
D) average dividend for the industry.
Q2) Caroline is performing the audit of the capital acquisition and repayment cycle. She is currently auditing the payments of interest made during the year. The proper documentation that Caroline should use as supporting evidence of the payment is
A) a copy of the note.
B) a bank reconciliation.
C) documentation of her inquiries with management.
D) the notes payable sub-ledger.
Q3) State the specific balance-related audit objectives applicable to notes payable and interest and, for each objective, identify one common test of details of balances.
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Page 18
Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Because cash is the most desirable asset for people to steal, it has a higher A) inherent risk.
B) control risk.
C) detection risk.
D) materiality.
Q2) A) Discuss the methodology for designing tests of details of balances for cash in the bank.
B) An effective monthly bank reconciliation by client personnel includes nine procedures. List these nine bank reconciliation procedures.
C) Discuss two analytical procedures commonly performed during the audit of the cash account.
Q3) In an effort to satisfy the completeness objective, the auditor could perform which of the following test of details of balance procedures?
A) Trace the book balance on the reconciliation to the general ledger.
B) Trace outstanding cheques to subsequent period bank statements.
C) Obtain and test a cutoff bank statement.
D) Review financial statements to make sure that material savings accounts and certificates of deposit are disclosed separately.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) Management furnishes the auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor's primary means of initiating action to corroborate such information?
A) Request that the client's lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
B) Request that the client's management send a letter of inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.
C) Request that the client's lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
D) Request that the client's management engage outside lawyers to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
Q2) Discuss three audit procedures commonly used to search for contingent liabilities.
Q3) Discuss the purpose of a management letter.
Q4) Describe the items the auditor is required to report to the audit committee.
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Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) Your client has two sets of financial statements. One set is in compliance with IFRS, while the other set is in compliance with local tax legislation and will be used only with the tax returns. How do these events affect the independent auditor's report?
A) The auditor would use an unqualified audit report for both financial statements, with an emphasis of matter paragraph that describes to readers the nature of the other set of financial statements.
B) The auditor would use a standard unqualified auditor's report for both financial statements, labeling the auditor's report "for IFRS only" and "for tax purposes only."
C) The auditor would use an unqualified audit report for both financial statements, with an other matter paragraph that describes to readers the nature of the other set of financial statements.
D) The auditor would use a qualified audit report, as the client may not have two different sets of financial statements.
Q2) There are five conditions that must be met before an auditor can issue a standard unqualified report. Discuss each of these five conditions.
Q3) Discuss how materiality affects audit reporting decisions.
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Page 21
Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) What is an auditor's responsibility for supplementary information that is outside the basic financial statements but required by accounting guidelines?
A) The auditor should apply certain limited procedures to the required supplementary information and add an explanatory paragraph to the financial statement audit report.
B) The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
C) The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted.
D) The auditor should apply tests of details of transactions and balances to the required supplementary information and report any material misstatements in such information.
Q2) What is the title of a compilation report?
A) Opinion
B) Criteria Schedule
C) Engagement Report
D) Notice to Reader
Q3) Define "direct reporting engagements."
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