Financial Statement Auditing
Test Questions
Course Introduction
Financial Statement Auditing introduces students to the principles, standards, and procedures employed by auditors to assess the accuracy and reliability of financial statements. The course covers the legal and ethical responsibilities of auditors, the audit process including planning, evidence gathering, risk assessment, and internal control evaluation and the formation of audit opinions. Emphasis is placed on the application of Generally Accepted Auditing Standards (GAAS), documentation requirements, and the use of analytical procedures and sampling techniques. Through practical case studies and real-world scenarios, students develop the skills necessary to identify material misstatements, ensure compliance with regulatory frameworks, and communicate audit findings effectively.
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Auditing The Art and Science of Assurance Engagements 14th Canadian Edition by
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Page 2
Alvin A Arens
Chapter 1: The Demand for Audit and Other Assurance Services
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Q1) The underlying conditions that create demand by users for reliable financial information include the fact that
A)more reliable information will allow investors to calculate the rate of return on their investment.
B)governments rely on such information to create tax policies.
C)there is a need for the expression of an opinion as to the fairness of financial statements.
D)users are separated from accounting records by distance and time.
Answer: D
Q2) Which of the following audits can be regarded as being solely "compliance" audits?
A)Canada Revenue Agency's examinations of the returns of taxpayers.
B)the Auditor General's evaluation of the computer operations of governmental units.
C)an internal auditor's review of his employer's payroll authorization procedures.
D)a public accounting firm's audit of the local school district.
Answer: A
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Chapter 2:The Public Accounting Profession and Audit Quality
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Q1) What are the staff levels and responsibilities at public accounting firms?
Answer: 1.Partner -Leads the engagement,reviews the overall audit work,and is involved in significant audit decisions.A partner has the ultimate responsibility for conducting the audit and maintaining client relations.Average experience of 10 years.
2.Senior manager -Leads the engagement and reviews the team's work.Works directly with the partner and assists in client relationships.Average experience of 7-10 years.
3.Manager -Helps the in-charge plan and manage the audit,reviews the in-charge's work,and manages relations with the client.A manager may be responsible for more than one engagement at the same time.Average experience of 5-7 years.
4.Senior or in-charge auditor -Coordinates and is responsible for the audit field work,including supervising and reviewing staff work.Average experience of 2-5 years.
5.Staff accountant -Performs most of the detailed audit work.Average experience of 0-2 years.
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Chapter 3: Professional Ethics and Legal Liability
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Q1) Xiao,PA,is the auditor of Minkle Credit Union,a medium-sized credit union.Xiao has prepared a management letter with several serious control weaknesses.Management agrees with the facts,but does not want to present the letter with the weaknesses to the audit committee or the board of directors.Management has implied that they will request a change of auditors if your firm presents the management letter to the board.
Required: Discuss the actions that Xiao should take.Justify your response.
Answer: Xiao is being faced with an intimidation threat.Xiao needs to consult GAAS (the CPA Canada Handbook),standards employees,and other resources to first determine what must be reported to the audit committee.Xiao should also consider that if management does not want to disclose these matters,that there could be other issues that management is hiding,making it difficult to complete the audit.If the weaknesses could lead to potential material misstatements,Xiao is required to report them to the audit committee.
Q2) Generally,all of the rules of professional conduct for CPAs apply to
A)students in public practice.
B)students and members in firms.
C)members in public practice.
D)all members and firms.
Answer: D
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Chapter 4: Audit Responsibilities and Objectives
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Q1) If the auditor were responsible for making certain that all the assertions of management in the statements were correct,
A)bankruptcies could no longer occur.
B)bankruptcies would be reduced to a very small number.
C)audits would be much easier to complete.
D)audits would not be economically practical.
Q2) CAS 330,the auditor's response to assessed risks,explains that the auditor needs to link completed audit work to the assessed risks at the assertion level and
A)document the conclusions and results of the audit procedures.
B)perform substantive procedures in areas where there is a high risk of fraud.
C)have the reviewing partner sign off on the assessed risk.
D)ensure that they test the entire population for areas that are considered to have a high risk of errors.
Q3) At what point during the audit should the auditor conduct an independence threat analysis?
A)after the audit evidence assessment and collection process
B)prior to the acceptance of the engagement
C)after gathering sufficient knowledge of the client's business
D)prior to signing the audit report
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Chapter 5: Audit Evidence
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Q1) 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
Q2) How frequently does the auditor make a decision with respect to the sample size to be selected?
A)once for the entire audit
B)for each transaction cycle
C)once for each type of audit procedure
D)for each audit procedure
Q3) An example of an internal document is
A)a cancelled cheque.
B)a bank statement.
C)a bill of lading for purchases.
D)employees' time reports.
Q4) Identify the factors that would potentially lead the auditors to obtain less audit evidence after the initial appropriate risk assessment procedures?
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Chapter 6: Client Acceptance,Planning,and Materiality
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Q1) Which of the following is an important purpose of an organizational code of ethics and the associated processes to ensure adherence?
A)to ensure that there are no fraudulent or illegal transactions at the company
B)to train employees in acceptable conduct at the organization
C)to prevent unethical employees from acting in unacceptable ways
D)to provide a powerful signal of acceptable organizational conduct
Q2) If the auditor sets a low dollar amount as materiality,
A)more evidence is required than for a high amount.
B)less evidence is required than for a high amount.
C)the same amount of evidence is required as for a high dollar amount.
D)it has no effect on the amount of evidence required.
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.
Q4) What is specific materiality?
Q5) 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.
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Chapter 7: Assessing the Risk of Material Misstatement
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Q1) A)Explain how auditors use the audit risk model when planning an audit.B)Describe the audit risk model and each of its components.
Q2) Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function.An effective auditor will
A)take any means available to reduce the risk to the lowest possible level.
B)set the risk level between 5% and 10%.
C)perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report.
D)recognize that risks exist and deal with those risks by performing high quality audits.
Q3) Which of the following best describes risk assessment,from an auditor's perspective?
A)Financial statements cannot be audited,for example,because the auditor was appointed after the year end.
B)Financial statements distributed by the auditee are not materially false and misleading.
C)The auditor will not overlook significant errors in the financial statements.
D)Identify and assess the risk of material misstatements.
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Chapter 8: Internal Control and COSO Framework
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Q1) To help with corporate governance and a positive "tone at the top," the board of directors and its committees,such as the audit committee,should
A)rubber-stamp the financial statements once per year.
B)consist of all members of executive management.
C)follow the policies and procedures approved by management.
D)take an active role in overseeing the company.
Q2) Dimple Leather is a chain of retail stores that sells leather clothing and accessories across Canada.Each store has point-of-sale equipment that is linked to a local server.At night,local accounting information is transmitted to the head office computer and any updates to prices or other adjustments are transferred to the local office. Required:
Define the control environment.List the components of the control environment.For each component,provide an example of a control that might exist at Dimple Leather.
Q3) A)Describe the four broad objectives of management when designing an effective system of internal control.B)Describe the aspect of internal control that auditors are primarily concerned with for a financial statement audit.
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Chapter 9: Assessing Control Risk and Designing Test of Controls
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Q1) List and explain the methods of documenting the auditor's understanding of internal controls.
Q2) Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls.As part of this process,Paul received from the client completed narratives,flowcharts,and internal control questionnaires.Paul can use this information from the client
A)if the entity-level controls and tone at the top were found to be effective.
B)if there has not been any significant change in the internal controls since the prior year.
C)as long as any subsequent reliance on controls is adequately substantiated with testing.
D)since it was prepared by management,which is unbiased.
Q3) Control tests are required for
A)obtaining evidence about the operating effectiveness of company control procedures.
B)analytical review of financial statement balances.
C)accomplishing control over the validity of recorded transactions.
D)obtaining evidence about the financial statement assertions.
Q4) What are the two types of reports service auditors issue?
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Chapter 10: Develop Risk Response: Audit Strategy and Audit Program
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Q1) After completing tests of key controls,the auditor should review the results and consider whether
A)the planned degree of reliance on internal controls is justified.
B)the audit evidence obtained from the study of internal controls can provide a reasonable basis for an opinion.
C)further study of internal controls is likely to justify any restriction of tests of details of balances.
D)sufficient knowledge has been obtained about the entity's entire internal control structure.
Q2) When does the auditor normally conduct tests of controls?
A)prior to the completion of the tests of details
B)after the completion of all analytical review
C)prior to the preparation of the client risk analysis
D)prior to the finalization of the audit risk model
Q3) Analytical procedures are mandatory during which phases of the audit?
A)tests of controls and tests of details
B)planning and risk response
C)planning and tests of details
D)tests of details and final evaluation
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Chapter 11: Audit Sampling Concepts
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Q1) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
A)afford greater assurance and clarity than a nonstatistical sample of equal size.
B)provide an objective basis for quantitatively evaluating sample risks.
C)can more easily convert the sample into a dual-purpose test useful for substantive testing.
D)eliminate the need to use judgment in determining appropriate sample sizes.
Q2) The most common method used for performing statistical tests of controls is A)variables sampling.
B)attribute sampling.
C)judgment sampling.
D)random selection of samples.
Q3) The acceptable risk of incorrect acceptance (ARIA)has a significant effect on sample size.The relationship of ARIA to sample size is
A)direct (larger ARIA = larger sample).
B)inverse (larger ARIA = smaller sample).
C)variable (sometimes larger,sometimes smaller).
D)not determinable.
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Chapter 12: Audit of the Revenue Cycle
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Q1) Which of the following control weaknesses could result in problems with collectability of accounts receivable?
A)Unauthorized individuals can establish or change credit limits.
B)Matching shipping documents to sales records is done weekly.
C)When there is one error in a batch of transactions,the whole batch is rejected.
D)Cash receipts are matched to the customer accounts rather than against specific invoices.
Q2) An effective procedure to test for unbilled shipments is to trace from the
A)sales history file to the shipping documents.
B)shipping documents to the sales history file.
C)sales history file to the accounts receivable ledger.
D)sales history file to the general ledger sales account.
Q3) Trade accounts receivable should exclude
A)accounts receivable denominated in foreign currencies.
B)past-due accounts receivable.
C)related party accounts receivable.
D)accounts receivable of clients entitled to receive discounts.
Q4) What are the six classes of transactions in the revenue cycle and what entries relate to each class of transactions?
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Which business functions are part of the acquisition and payment cycle?
Q2) The control objective associated with selecting a sample of receiving reports and tracing them to the perpetual inventory records is
A)accuracy.
B)validity.
C)completeness.
D)classification.
Q3) To ensure that goods and services acquired are for authorized company purposes,and to help acquire only needed items
A)receiving reports should be independently signed and reconciled to the purchase order.
B)proper authorization for acquisitions and changes to the master file should take place.
C)purchase requisitions should be approved and matched to purchase orders.
D)account allocations of vendor invoices should be carefully checked.
Q4) What are the important controls relating to cash disbursements?
Q5) What are the common key controls relating to acquisitions?
Q6) Describe the two objectives that are most important in auditing accumulated amortization.Explain why these objectives are important.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) Outline the key controls relating to compilation and pricing in the inventory cycle.
Q2) The auditor's tests of the adequacy of the physical controls over raw materials,work-in-process,and finished goods are usually limited to
A)observation and inquiry.
B)inspection and observation.
C)inspection and confirmation.
D)inspection and inquiry.
Q3) 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.
Q4) What are the five distinct activities used during the audit of the inventory cycle?
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) Which of the following internal control tests would help to assess whether payroll transactions were recorded on the correct dates?
A)Compare cancelled cheques with payroll journal for name,amount,and date.
B)Compare date on cheque with date the cheque cleared the bank.
C)Compare cancelled cheques with personnel records.
D)Recompute hours worked from pay records.
Q2) Master file data is the semi-permanent data in an employee's file.Changes to the master file
A)should be adequately supported.
B)should be checked by the originator.
C)would be entered only once per month.
D)would be implemented on an annual basis.
Q3) The careful and timely preparation of all payroll withholdings and employer's portion of withholdings is necessary to avoid heavy fines.The most important control in the timely preparation of these returns is
A)computerized preparation of income tax returns.
B)a well-defined set of policies that indicate when each form must be filed.
C)independent verification of computer output by a competent individual.
D)a Gantt chart.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Notes payable that have been repaid in full should be A)destroyed so that they will not be paid again inadvertently.
B)cancelled and destroyed.
C)cancelled and returned to the creditor.
D)cancelled and retained by an authorized company official.
Q2) State the common test of details of balances for notes payables relating to the completeness assertion.
Q3) Responsibility for the issuance of new notes should be vested in the A)board of directors.
B)accounting department.
C)accounts payable department.
D)purchasing department.
Q4) Explain why the auditor's verification of owners' equity is more complex for publicly-held corporations than closely-held corporations.
Q5) The normal starting point for the audit of notes payable is
A)a discussion with management of any new notes payable for the year.
B)a schedule of notes payable and accrued interest obtained from the client.
C)the assessment of materiality.
D)the minutes of the board of directors.
Page 18
Q6) Which accounts are relevant during the audit of notes payable?
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Chapter 17: Audit of Cash Balances
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Q1) What is the best way to prevent potential alteration,deletion,or addition of cancelled cheques,duplicate deposit slips,or other documents provided with the bank statement?
A)Have the bank statements be provided unopened to an independent reconciler.
B)Have the person responsible for recording cash receipts do the bank reconciliation.
C)Have the signing officer(s)review the bank reconciliation.
D)Have the bank statements provided to the accounts payable supervisor.
Q2) Under what circumstances would an auditor prepare a proof of cash?
A)When the client has material internal control weaknesses in cash.
B)When control risk is set at minimum.
C)When inherent risk in cash is considered to be low.
D)When an enterprise resource system is in use for processing of cash transactions.
Q3) You are the auditor of Brody Grass Inc.The CEO expressed a concern that the audit fees for the year were very high.You explained that this is largely due to poor internal controls in the cash and transaction cycle and that the audit fees could decrease if better controls were in place.
Provide 5 examples of general cash account controls that Brody Grass Inc.could implement.
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Chapter 18: Completing the Audit
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Q1) When several staff are working together on an audit engagement,what type of quality control review is conducted on a daily basis?
A)the partner reviews the electronic files
B)team review by interview
C)second partner review
D)manager review of sections
Q2) The standard letter of confirmation from a client's legal counsel should ask for information about the period of time
A)covered by the client's financial statements.
B)covered by the client's financial statements plus the preceding year.
C)covered by the client's financial statements plus the succeeding year.
D)approximately up to the date of the auditor's report.
Q3) IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event.Which of the following would require note disclosure only?
A)likely to occur and the amount can be estimated
B)possible that an outflow of resources is not required
C)likelihood is remote
D)amount is yet to be confirmed
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Chapter 19: Audit Reports on Financial Statements
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Q1) A PA finds that the client has not capitalized a material amount of leases in the financial statements.When considering the materiality of this departure from IFRS,the PA's reporting options are
A)qualified or adverse opinion.
B)unmodified or disclaimer of opinion.
C)unmodified or qualified opinion.
D)unmodified opinion with an Emphasis of Matter paragraph.
Q2) Whenever the client imposes restrictions on the scope of the audit,the auditor should be concerned about the possibility that management is trying to prevent discovery of misstated information.In such cases,which type of report should be issued?
A)a disclaimer of opinion in all cases
B)a qualification of both scope and opinion in all cases
C)a disclaimer of opinion whenever materiality is in question
D)a qualification of both scope and opinion whenever materiality is in question
Q3) What does a "clean" audit opinion mean?
A)an adverse opinion
B)a disclaimer of opinion
C)a modified opinion
D)an unmodified opinion
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) What is the title of a compilation report?
A)Opinion
B)Criteria Schedule
C)Engagement Report
D)Notice to Reader
Q2) As part of the review engagement for a small manufacturing company,which of the following would be a typical review procedure for the sales cycle?
A)review of internal controls over the granting of credit
B)examination of sales documents to ensure credit approval is documented
C)recalculation of the taxes and extensions on a sample of invoices
D)comparison of sales and gross profit to the prior year
Q3) A financial statement review emphasizes four broad areas,one of which is to "perform analytical procedures." State the other three areas emphasized.
Q4) Outline the three performance standards of "Standards for Assurance Engagements."
Q5) Describe the professional standards that must be followed when undertaking a compilation engagement as specified by the CPA Canada Handbook.
Q6) Identify the reporting standards for compilation engagements.
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