Auditing : A Practical Approach, Canadian Edition Test Bank

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CHAPTER 1INTRODUCTION AND OVERVIEW OF AUDITINGSUMMARY OF QUESTIONS BY LEARNING OBJECTIVESItemLOItemLOItemLOItemLOItemLOItemLOItemLOTrue-False Statements1.34.27.210.213.82.45.48.311.63.26.29.312.6Multiple Choice Questions14.119.324.629.334.539.615.220.325.130.335.540.616.221.426.231.436.541.617.222.527.232.437.542.818.323.528.333.438.643.8Short Answer Questions44.1,2,3,4,545.246.347.448.649.8Essay Questions50.2,5

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1 – 2Test Bank for Auditing: a practical approach, Canadian EditionSUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPEItemTypeItemTypeItemTypeItemTypeItemTypeItemTypeItemTypeLearning Objective 125.MC44.SALearning Objective 23.TF6.TF10.TF16.MC26.MC44.SA50.Ca4.TF7.TF15.MC17.MC27.MC45.SALearning Objective 31.TF9.TF19.MC28.MC30.MC46.SA8.TF18.MC20.MC29.MC44.SALearning Objective 42.TF21.MC32.MC44.SA5.TF31.MC33.MC47.SALearning Objective 522.MC34.MC36.MC44.SA23.MC35.MC37.MC50.CaLearning Objective 611.TF24.MC39.MC41.MC12.TF38.MC40.MC48.SALearning Objective 7Learning Objective 813.TF42.MC43.MC49.SANote:TF =True-FalseSA = Short AnswerEs = EssayMC =Multiple ChoiceCa = Case

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CHAPTER STUDY OBJECTIVES1.Define an assurance engagement.An assurance engagement involves an assurance provider arriving at an opinionabout some information being provided by their client to a third party. A financialstatement audit is one type of assurance engagement. This engagement involves anauditor arriving at an opinion about the fair presentation of the financial statements.The audit report is addressed to the shareholders of the company being audited, butother users may read the financial statements. Learning about auditing andassurance requires an understanding of auditing and assurance terminology,including terms such as audit risk, materiality, internal controls, listed entity, andassertions.2.Differentiate between types of assurance services.Assurance services include financial statements audits, compliance audits,performance audits, comprehensive audits, internal audits, and assurance oncorporate social responsibility (CSR) disclosures.3.Explain the different levels of assurance.The different levels of assurance include reasonable assurance, which is the highestlevel of assurance, moderate assurance, and no assurance. Reasonable assuranceis provided on an audit of a company’s financial statements. Moderate assurance isprovided on a review of a company’s financial statements that provides negativeassurance. No assurance is provided in a compilation engagement.4.Outline different audit opinions.An auditor can issue an unmodified and unqualified opinion, also known as a cleanreport, an unqualified opinion with an emphasis of matter opinion, or a modified andqualified opinion, which is issued when the financial statements contain a material(significant) misstatement (error or fraud).5.Differentiate between the roles of the preparer and the auditor, and discuss thedifferent firms that provide assurance services.It is the responsibility of a company’s governing body to ensure that their financialstatements are relevant, reliable, comparable, understandable, and true and fair. It isthe responsibility of the auditor to form an opinion on the fair presentation of thefinancial statements. In doing so the auditor must maintain professional scepticismand utilize professional judgement and due care. The firms that provide assuranceservices include the Big-4 international firms, the national firms (with internationallinks), local and regional firms, and consulting firms that tend to specialize inassurance of CSR and environmental disclosures.

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1 – 4Test Bank for Auditing: a practical approach, Canadian Edition6.Explain why there is a demand for audit and assurance services.Financial statement users include investors (shareholders), suppliers, customers,lenders, employees, governments, and the general public. These groups of usersdemand audited financial statements because of their remoteness from the entity,accounting complexity, their incentives competing with those of the entity’smanagers, and their need for reliable information on which to base decisions. Thetheories used to describe the demand for audit and assurance services are agencytheory, the information hypothesis, and the insurance hypothesis.7.Identify the different regulators, legislation, and regulations surrounding theassurance process.Regulators of the assurance process include the Auditing and Assurance StandardsOversight Council (AASOC), the Auditing and Assurance Standards Board (AASB),the Canadian Business Corporations Act (CBCA), Canadian SecuritiesAdministrators (CSA) and the various provincial securities commissions, and theCanadian Public Accountability Board (CPAB). Relevant legislation includes theCanadian Business Corporations Act (CBCA). The three organizations responsiblefor accounting designations in Canada are the Canadian Institute of CharteredAccountants (CICA), the Certified General Accountants of Canada (CGA-Canada),and the Society of Management Accountants of Canada (CMA Canada).8.Describe the audit expectation gap.The audit expectation gap occurs when there is a difference between theexpectations of assurance providers and financial statement or other users. The gapoccurs when user beliefs do not align with what an auditor has actually done.

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TRUE-FALSE STATEMENTS1. An auditor can provide a reasonable level of assurance on information other thanhistorical financial information.2. A negative expression of opinion is only given when there is a disagreement withmanagement and the auditor.3. A compliance audit involves gathering evidence to ascertain whether the person or entityunder review has followed the rules, policies, procedures, laws and regulations with whichthey must conform4. An operational audit is an example of a compliance audit.5. All modified audit reports are qualified audit opinions.6. The most common types of assurance engagements are financial statement audits,confirmation audits, performance audits, comprehensive audits and assurance on corporatesocial responsibility (CSR) disclosures.7.The nature of audit procedures refers to the reliance on evidence provided by the clientand its management.8. A reasonable level of assurance is the highest level of assurance that an auditor canprovide.9. A no assurance engagement is of little use as no assurance is given to the client.10. It is the auditor’s responsibility to prepare the financial statements.11. Only current investors (not potential investors) are considered to be users of the financialstatements.12. Insurance hypothesis is a means whereby the investor can guarantee the success oftheir investment.

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1 – 6Test Bank for Auditing: a practical approach, Canadian Edition13. The expectation gap is caused by unrealistic user expectations such as the auditorproviding a moderate level of assurance.

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ANSWERS TO TRUE-FALSE STATEMENTSItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.1.T3.T5.F7.T9.F11.F13.F2.F4.F6.F8.T10.F12.F

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1 – 8Test Bank for Auditing: a practical approach, Canadian EditionMULTIPLE CHOICE QUESTIONS14.Mary Moras was reviewing the previous year’s audited financial statements of aclothing manufacturer.Her manager explained to her that for a financial statementaudit, the clothing company was the accountable party, its shareholders were theusers, and the subject matter was the financial statements.What kind of auditengagement was her manager describing?a.consulting engagementb.assurance engagementc.review engagementd.compliance engagement15.Vera Sobczyk spent a week at a client’s wholesale operation determining whetherthe client’s remittances to the tax authorities were in accordance with tax regulations.This is an example of a(n)a.taxes payable mandateb.financial auditc.operational auditd.none of these16.Ming Yao reviewed the operations of a basketball academy.His objectives were todetermine how effectively the academy delivered its many programs.What kind ofan audit did he perform?a.operationalb.compliancec.financiald.comprehensive17.Matt Fuller reports to the board and evaluates how the company can improve riskmanagement practices, internal control procedures, and certain governance issues.Who is he?a.Presidentb.Controllerc.Treasurerd.Internal Auditor18.Matt Stairs performed work for a client in the real estate business and issued aNotice to Reader. What degree of assurance does a Notice to Reader provide to theuser of the statements?a.reasonable assuranceb.moderate assurancec.no assurance

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d.none of the above19.Theodore Heinrich prepared a set of financial statements based on informationprovided to him.He checked mathematical accuracy of the data, and the clientcomplimented him on the reasonable cost of the work he performed.Theodoreperformeda.a compilationb.a reviewc.an auditd.none of the above20.James Brown, the senior auditor atYanzhou Coal Mining and Minerals,performedthe following tasks:he used analytical procedures and he had discussions withmanagement. These activities were a basis for a negative form of opinion. What didJames Brown perform?a.a qualified reportb.an unmodified opinionc.a compilationd.a review engagement21.MaggieOhperformedanauditofaclientthathadundergonefloodingtoitsoperations inSt-Jean Sur Richelieu.The client was insured and was able to keepoperating.However, there was material damage to the client’s warehouse andMaggie felt it would be appropriate to inform the users of the financial statements ofthis fact in the audit report. This form of audit report is called:a.an adverse opinionb.unmodified opinion – emphasis of matterc.modified opiniond.disclaimer of opinion22.Mary Logan was careful to undertake her audits in a most responsible manner.Heraudit manager complimented her on her diligence and how well she documented herwork at the different stages of the audit process.Which element of responsibility didshe display?a.due careb.professional judgmentc.professional scepticismd.none of these23.Larry Dibitonto is a partner in his firm and runs management consulting, mergers andacquisitions,insolvency,tax,andaccountingservices.Howaretheseservicesreferred to collectively?a.audit

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1 – 10Test Bank for Auditing: a practical approach, Canadian Editionb.non-assurance servicesc.reviewsd.none of the above24.Whileawaitingameetinginhisfirm’sboardroom,theseniorpartner,BillGoldsworthy, read the following statement in an article in the Globe & Mail:“Thegreater the perceived quality of the information contained in the financial statements,the more likely it will be relied upon by the users of that information.”This statementbest describesa.the expectations gapb.agency theoryc.information hypothesisd.insurance hypothesis25.An example of the three parties in an assurance engagement would be:a.audit client, employee, customerb.audit client, supplier, auditorc.auditor, shareholder, general publicd.auditor, general public, employees.26.A limitation of an audit is caused by:a.the nature of financial reportingb.the nature of audit proceduresc.the need for the audit to be conducted within a reasonable period of timeand at a reasonable costd.all of the above.27.Which of the following is NOT true about Corporate Social Responsibility assurance?a.reporting is voluntary and is becoming more widespread.b.includes both financial and non-financial information.c.is required to be performed by an auditor.d.disclosures include environmental, employee and social reporting.28.Which of the following would be an example of a reasonable assuranceengagement?a.the review of annual financial statements.b.the audit of annual financial statements.c.the reporting of procedures performed by the auditor as agreed by the client.d.all of the above.29.The wording of a negative expression of opinion generally states that:

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a.there is nothing wrong with the subject matter.b.there is something wrong with the subject matter.c.there is nothing that has come to the attention of the auditors that would leadthem to believe that the information being assured is not true and fair.d.there is something that has come to the attention of the auditors that wouldlead them to believe that the information being assured is not true and fair.30.In a review engagement, which of the following is least likely to occur during theengagement?a.analytical proceduresb.enquiries with management and other personnelc.substantive audit proceduresd.review of the internal controls of the entity.31.An example of an unmodified audit opinion is:a.qualified audit opinionb.adverse audit opinionc.unqualified audit opinion with an emphasis of matter.d.none of the above.32.Which of the following is not a type of opinion?a.qualified opinionb.modified opinionc.adverse opiniond.disclaimer of opinion33.The following can be said about an emphasis of matter:a.it is included when the auditor’s opinion has changed and the auditor wantsto bring the users’ attention to a particular matter.b.it is only used in unqualified audit opinions.c.it is included when the auditor’s opinion has not changed and the auditorwants to bring the users’ attention to a particular matter.d.it can not be used when expressing audit opinion that has pervasivemisstatements.34.In addition to the preparation of financial statements, it is also the responsibility ofthose charged with governance to:a.identify the financial reporting framework to be used in the preparation andpresentation of their financial statements.b.establish and maintain internal controls that are effective in preventing anddetecting material misstatementsc.selecting and applying appropriate accounting policies and makingreasonable accounting estimates

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1 – 12Test Bank for Auditing: a practical approach, Canadian Editiond.all of the above.35.Which of the following is not true in relation to comparability:a.able to identify trends, that may influence their perception of how well theentity is doing.b.able to assess performance of the entity over time and with other entitiesc.able to evaluated.all of the above are correct.36.Professional scepticism does not involve:a.the professional requirement that all management representations besubstantiated with supporting documentation.b.seeking independent evidence to corroborate information provided by theirclientc.being suspicious when evidence contradicts documents held by their clientor enquiries made of client personneld.none of the above.37.The largest accounting firms in Canada are known collectively as thea.‘Big-3’b.‘Big-4’c.‘Big-5’d.‘Big-6’38.As users of the financial statements, suppliers would least consider which of thefollowing aspects of the financial statements:a.solvency of the entityb.profitability of the entityc.return on investment of the entityd.corporate social responsibility of the entity39.Which of the following is incorrect? A government can be considered to be a user ofthe general purpose financial statements because:a.it is the basis for the calculation of taxes owed to the governmentb.it can determine whether certain regulations have been complied withc.to gain a better understanding of the entity’s activitiesd.governments need to assess the entity so that they can provide the entitywith grants that will benefit society.40.Agency theory can be described as the theory of:

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a.hiring an agency to review the work of the management, in this case it is theauditor.b.when the finance function is outsourced to an outside party, and the auditoris required to audit the outside party’s work.c.the relationship between the owner and the management of the businesswhen the owner is not the manager of the business.d.none of the above.41.Insurance hypothesis tells us that:a.investors will demand that financial statements be audited as a way ofinsuring against some of their loss should their investment fail.b.investors can insure themselves against loss by investing in a diverseinvestment portfolio should an individual investment fail.c.investors cannot insure themselves against loss when investing in an entity.d.the entity can take out insurance to protect itself from such risks asemployee or management fraud which can lead to material misstatements inthe financial statements.42.The expectation gap is caused by:a.realistic auditor expectationsb.unrealistic user expectationsc.realistic user expectationsd.unrealistic auditor expectations43.The expectation gap can be reduced by:a.auditors performing their duties properlyb.enhanced reporting to explain what processes have been followed in arrivingat an audit or a review opinionc.assurance providers reporting accurately the level of assurance beingprovidedd.all of the above.

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1 – 14Test Bank for Auditing: a practical approach, Canadian EditionANSWERS TO MULTIPLE CHOICE QUESTIONSItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.14.b19.a24.c29.c34.d39.a15.d20.d25.b30.c35.d40.c16.a21.b26.d31.c36.a41.a17.d22.a27.c32.b37.b42.b18.c23.b28.b33.c38.c43.d

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SHORT ANSWER QUESTIONSS-A 44Indicate whether you agree or disagree with the following statements and explain yourreasoning.a) Rejean Tremblay feels that an internal auditor that reports to the chief financial officer ofthe company can be as independent as an auditor that reports to the audit committee.b) Angela Pelletier discovered a very material overstatement in the financial statements ofMcKenzie Growth.She felt that the misstatement would have an impact on the decisions ofusers of the financial statements, and indicated to her audit senior that she would beincluding it as an “emphasis of matter” paragraph in the audit report.c)Anauditorisresponsibleforthepreparationandfairpresentationofthe financialstatements in accordance with International Financial Reporting Standards, and for suchinternal control as is necessary to enable the preparation of financial statements that are freefrom material misstatement, whether due to fraud or error.d) An assurance engagement involves evaluation or measurement of subject matter againstcriteria.Solution:a) Disagree. The internal auditor’s independence is protected best when they report to thehighest level of governance, usually the Audit Committee of the Board or to the President ofthe company.b) Disagree. The pervasiveness of the material misstatement will require an adverse opinion.In this case, the misstatements affect the financial statements materially and will requiredisclosures that are vital to a user’s understanding of the financial statements. Whenstatements are pervasively and materially misstated, an adverse opinion is appropriate.c) Disagree. The above statement describes management’s responsibilities. An auditor hasthe responsibility to express an opinion on financial statements based on an audit.d) Agree. An assurance engagement is an engagement where a practitioner issues a writtenreport and concludes on a subject matter for which the accountable party is responsible.Therefore, a prerequisite for an assurance engagement is the existence of an accountabilityrelationship, where one party is answerable to another for the subject matter.S-A 45The main assurance service the general public are familiar with are financial statementaudits. Briefly describe the other services that an auditor can provide.Solution:A compliance audit involves gathering evidence to ascertain whether the person or entityunder review has followed the rules, policies, procedures, laws and regulations with whichthey must conform.Performance audits are concerned with the economy, efficiency and effectiveness of anorganization’s activities.

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