Accounting Theory and Practice
Chapter Exam Questions
Course Introduction
This course explores the fundamental principles and underlying concepts of accounting, examining both theoretical frameworks and their practical applications. Students will analyze the evolution of accounting thought, the role of accounting standards, and how these influence financial reporting and decision-making. Topics include measurement of income and assets, the conceptual framework, regulatory environments, ethics in accounting, and current issues in international accounting. Through case studies and practical exercises, learners will develop critical thinking skills and apply theoretical knowledge to real-world accounting situations, preparing them for advanced studies and professional practice in the field.
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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Q1) Which of the following services results in assurance that the company's e-commerce activities on its website comply with Trust Services principles?
A) review engagement
B) internal controls assessment
C) SysTrust
D) WebTrust
Answer: D
Q2) Who is responsible for developing financial statement audit and assurance standards in Canada?
A) AASB (Auditing and Assurance Standards Board)
B) standards staff at the CICA (Canadian Institute of Chartered Accountants)
C) national accounting bodies such as CGA Canada
D) the accounting firms who conduct financial statement audits
Answer: A
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) The Canadian Auditing Standards can be divided into three categories. List these categories and provide an example of each.
Answer: Note: Two examples are provided.Others are possible.
1.General qualifications and conduct: the auditor complies with ethical and independence requirements implementation of ethical and independence requirements is monitored using control procedures
2.Examination, performance of the audit: the audit should be planned and performed using professional skepticism the audit shall be conducted using a risk-based approach
3.Reporting results: provide a report on the financial statements that matches the auditor's findings communicate findings in accordance with the CASs
Q2) What is the size of most public accounting firms in Canada?
A) fewer than 25 employees
B) between 25 and 49 employees
C) between 50 and 75 employees
D) more than 75 employees
Answer: A
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Chapter 3: Legal Liability
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Q1) A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n)
A) engagement letter.
B) letter of representation.
C) confirmation letter.
D) expert witness.
Answer: A
Q2) While performing services for their clients, professionals have always had a duty to provide a level of care that is
A) reasonable.
B) greater than average.
C) superior.
D) guaranteed to be free from error.
Answer: A
Q3) Laws that have been passed through federal or provincial governments are A) statutory law.
B) judicial law.
C) criminal law.
D) common law.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Q1) As a member of a professional accounting association, when considering the applicability of the rules of professional conduct, a PA would be responsible for compliance by
A) themselves only.
B) their partners in the practice and themselves.
C) their employees.
D) themselves, their employees, and partners.
Q2) 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.
Q3) Generally, all of the rules of professional conduct for CPAs apply to
A) students in public practice.
B) students and members.
C) all members.
D) members in public practice.
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Chapter 5: Audit Responsibilities and Objectives
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Q1) Big Bank had a program failure occur on Sunday night due to a maintenance program error. Transaction posting was interrupted, with several errors occurring in posting to the master files. Although sales had been posted to the general ledger, individual accounts were not recorded until subsequent days. The general transaction-related audit objective affected by this activity is
A) timing.
B) accuracy.
C) occurrence.
D) classification.
Q2) For the most part, auditors treat each transaction cycle
A) separately as the audit is being performed.
B) as an interrelated unit with the other cycles throughout the entire audit.
C) as a separate business unit with different audit teams.
D) as a joint venture with other clients in the same industry.
Q3) There is agreement within the auditing profession and the courts that the auditor is
A) not a guarantor or insurer of financial statements.
B) a guarantor but not an insurer of financial statements.
C) an insurer but not a guarantor of financial statements.
D) both a guarantor and an insurer of financial statements.
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Page 7
Chapter 6: Client Acceptance and Planning the Audit
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Q1) Black Rock Limited is a marble and tile outlet that has a large outdoor area as well as an indoor showroom for a variety of stone, tile, and marble. It is July and your firm has just been appointed as the auditor for the September year-end audit. The previous auditing firm had conducted review engagements. The company's bank has asked for audited financial statements for the current year end.
Required:
A) What is the purpose of obtaining knowledge of the client's industry and business environment? Identify at least three procedures that you could undertake in this area. B) What is the purpose of obtaining knowledge of the client's business? Identify at least three procedures that you could undertake in this area.
Q2) What are the three main factors that influence the organizational structure of all public accounting firms?
Q3) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
Q4) Knowledge of the client's industry and external environment can be obtained in different ways. Discuss some of the ways that this knowledge can be obtained.
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Page 8
Chapter 7: Materiality and Risk
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Q1) If detection risk is reduced, the amount of evidence the auditor accumulates will
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
Q2) CAS 320 (materiality in planning and performing an audit) defines materiality in terms of three key concepts. The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making; and that material is relative to circumstances surrounding the decision and nature of the information. The third concept is
A) that the auditor should consider users of financial statements as a group.
B) that the auditor should consider users of financial statements individually.
C) that the users should be informed and approve of the materiality used by the auditor.
D) that the auditor should be conservative in setting the materiality level.
Q3) Discuss three factors that affect client business risk and therefore audit risk.
Q4) A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.
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Chapter 8: Internal Controls and Control Risk
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Q1) It is important for the public accountant to consider the competence of the audit clients' employees because their competence bears directly and importantly upon the A) cost/benefit relationship of internal controls.
B) achievement of the objectives of the system of internal control.
C) comparison of recorded accountability with assets.
D) timing of the tests to be performed.
Q2) Ideally, tests of controls should be applied to controls
A) at the balance sheet date.
B) at each quarterly interim period.
C) for the entire period under audit.
D) at the beginning of the fiscal period.
Q3) A well-designed organizational structure at an entity
A) has operations and programming personnel tasks combined.
B) clearly defines authority and responsibility assignments.
C) requires that wage rates are recorded and tracked by the human resources department.
D) has the internal audit department report to the Chief Financial Officer.
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Chapter 9: Audit Evidence
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Q1) A) There are four important purposes of analytical procedures. Identify each of these four purposes and for each purpose give a specific example of an analytical procedure that an auditor might perform.
B) Identify each of the five major types of analytical procedures and give an example of each.
C) One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions concerning evidence accumulation in later phases of the audit.
Q2) For income statement accounts, evidence is more persuasive if there is a sample from
A) the entire period under audit.
B) the period closest to the end of the fiscal period.
C) at least three months of the fiscal year.
D) December, since this would include large holiday sales.
Q3) Identify and define the seven methods of audit evidence collection. Which two types of evidence are the most expensive? Which three types of evidence are the least expensive? Which type of evidence would be most persuasive when testing the existence objective for long-term assets?
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Q1) During a change to an entire IT system, if conversion controls are poor or are not documented, the auditor will need to
A) conduct an implementation audit.
B) conduct a legacy system audit.
C) conduct an audit of the new system.
D) conduct a conversion audit.
Q2) When the auditor has determined that there is a significant risk of misstatement for a particular assertion (for example, completeness of revenue), what type of audit testing does CAS 330 require?
A) tests of risk assessment
B) tests of understanding of internal control
C) control tests
D) substantive tests
Q3) Donna sees a large variation in the gross margin percentage as a result of analytical procedures she performed. This means that
A) Donna should perform more tests.
B) the financial statements contain an error.
C) Donna cannot rely on the company's internal controls.
D) Donna should document this difference.
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Page 12
Chapter 11: Audit Sampling Concepts
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Q1) If an auditor would like to estimate how many sales invoices have errors (such as no required order number showing or authorization for customers exceeding their credit limit), the auditor would likely use
A) random sampling with replacement.
B) sampling for attributes.
C) sampling for variables.
D) stratified random sampling.
Q2) A) Describe the differences between statistical and nonstatistical sampling in terms of 1) the sample selection methods used, and 2) measurement (quantification) of sampling risk.
B) Describe each of the three types of sample selection methods commonly associated with nonstatistical audit sampling.
C) Directed sample selection is the selection of each item in the sample based on some judgment criteria established by the auditor. Describe three commonly used criteria.
Q3) There are 14 steps to audit sampling, divided into four sections: plan the sample, select the sample, perform the audit procedures, and evaluate the results. Discuss each of the steps that comprise the "plan the sample" section for attribute sampling.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Q1) The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is
A) cutoff.
B) valuation.
C) accuracy.
D) completeness.
Q2) IFRS, ASPE, and ASNPO require that related party transactions be disclosed. Gregorio Limited has a materiality threshold of $50 000. Which of the following standards apply to the disclosure of related party transactions for Gregorio Limited?
A) Disclose all transactions that are greater than the current year's materiality.
B) Disclose all related party transactions, even those below materiality.
C) Disclose those related party transactions that relate to officers or directors of the corporation.
D) Disclose those related party transactions that could affect the decisions of a user.
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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Q1) The point at which most companies first recognize the acquisition and related liability on their records is when the
A) purchase requisition is completed.
B) purchase order is completed.
C) receiving report is completed.
D) vendor's invoice is paid.
Q2) Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).
Q3) When an acquisition is on an FOB (freight on board) origin basis, the inventory and related accounts payable must be recorded in the current period if the goods were
A) received prior to the balance sheet date.
B) shipped prior to the balance sheet date.
C) both shipped and received prior to the balance sheet date.
D) paid for.
Q4) State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) Receipt of ordered materials by the receiving department will generate the completion of a form called the A) receiving report.
B) materials requisition.
C) bill of lading.
D) inventory acquisition summary.
Q2) The auditor is determining which specific inventory items should be selected for pricing tests. The auditor has selected a representative sample, and those items that have a large dollar amount. In addition, the auditor should select those items that A) are prone to breakage or theft.
B) have wide fluctuations in price.
C) are stored in multiple locations.
D) are likely to have been miscounted during the inventory count.
Q3) What are inventory price tests and inventory compilation tests? Provide an example of each.
Q4) Discuss the methodology for designing tests of details of balances for inventory.
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Page 16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file and the whole year's payroll transaction files. What is the purpose of these tests?
A) to determine whether any employees were not paid in the most recent pay
B) to check for wage rates that are under the amount specified by the union contract
C) to help with the reconciliation of wage rates to the T4 summary
D) to determine whether terminated employees are still being paid
Q2) Even though the tests of controls are the most important part of testing payroll, many auditors spend little time in this area. In many audits, there is a minimal risk of material misstatements, even though payroll is frequently a significant part of total expenses. Explain the reasons the auditors have for justifying this position.
Q3) When examining payroll transactions, an auditor is primarily concerned with the possibility of
A) overpayments and unauthorized payments.
B) posting of gross payroll amounts to incorrect salary expense accounts.
C) misfootings of employee time records.
D) excess withholding of amounts required to be withheld.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) A primary concern in determining whether retained earnings is correctly disclosed on the balance sheet is
A) correct calculation of the net income or loss for the year.
B) correct calculation of dividend payments for the year.
C) whether adjustments to retained earnings have been made correctly.
D) whether there are any restrictions on the payment of dividends.
Q2) Discuss the four key controls over notes payable.
Q3) During the course of an audit, a public accountant observes that the recorded interest expense seems to be excessive in relation to the balance in the long-term debt account. This observation could lead the auditor to suspect that
A) long-term debt is understated.
B) discount on bonds payable is overstated.
C) long-term debt is overstated.
D) premium on bonds payable is understated.
Q4) The normal audit approach for the audit of bonds issued is to
A) examine transactions that occurred near the year-end date only.
B) verify each transaction taking place in the cycle for the entire year.
C) select a statistical sample of transactions throughout the year.
D) rely on controls rather than conducting substantive tests.
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Chapter 17: Audit of Cash Balances
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Q1) When examining the bank reconciliation for the imprest payroll account, it is normal for the only reconciling item to be
A) outstanding cheques.
B) direct deposits from customers.
C) outstanding deposits.
D) corrections to payroll amounts.
Q2) 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
Q3) A branch bank account is helpful for
A) limiting the impact of a fraud.
B) improving internal controls.
C) empowering the different branches of the company.
D) building public relations in local communities.
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Chapter 18: Completing the Audit
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Q1) The audit procedures for the subsequent events review can be divided into two categories: 1) procedures normally integrated as a part of the verification of year-end account balances, and 2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures would be in the first category?
A) Make inquiries of client regarding contingent liabilities.
B) Obtain a letter of representation written by client.
C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.
D) Review the minute book to determine the existence of any transaction related to year 1.
Q2) If the amount of a probable loss on a contingent liability cannot be estimated but the event is likely, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
Q3) State the three conditions required for a contingent liability to exist.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Q1) Discuss how materiality affects audit reporting decisions.
Q2) A company has changed its method of inventory valuation from an unacceptable one to one that complies with ASPE (Accounting Standards for Private Enterprises). The auditor's report on the financial statements of the year of the change should include
A) no reference to the item assuming that the change has been properly disclosed.
B) a reference to a change in accounting principles in the opinion paragraph.
C) an explanatory paragraph explaining the change.
D) a justification for making the change and the impact of the change on reported net income.
Q3) According to CAS 700, the standard unqualified report's title should be
A) "Unqualified Report of the Auditor."
B) "Audited Financial Statements."
C) "Auditor's Report."
D) "Independent Auditor's Report."
Q4) There are five conditions that must be met before an auditor can issue a standard unqualified report. Discuss each of these five conditions.
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) For the conduct of an assurance engagement, the practitioner is required to identify or develop criteria to evaluate the subject matter. Identify some characteristics of suitable criteria.
A) relevance, reliability, neutrality, understandability, completeness
B) reliability, accuracy, neutrality, timeliness
C) understandability, completeness, timeliness, free from bias
D) completeness, timeliness, free from bias, competent
Q2) When would the public accountant conduct audit procedures during a review engagement?
A) When junior staff are assigned to the engagement.
B) When required to assess plausibility.
C) When it is a first-time review engagement.
D) When a higher level of assurance is required for the bank.
Q3) When assessing the plausibility of the financial statements for a review engagement, the auditor will use which of the following criteria for auditing a small, privately held company?
A) standards of efficiency and effectiveness
B) the audit objectives associated with the audit of financial statements
C) an acceptable reporting framework such as ASPE
D) an enterprise risk-management framework to help detect fraud
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