Advanced Auditing
Chapter Exam Questions
Course Introduction
Advanced Auditing builds upon foundational auditing concepts and techniques, focusing on complex audit processes and contemporary issues in assurance services. This course delves into advanced topics such as audit planning and risk assessment, internal control evaluation, forensic and IT auditing, audit sampling, and auditing in a computerized environment. Students will explore regulatory frameworks, professional ethics, current auditing standards, and the application of data analytics in the audit process. Through real-world case studies and practical exercises, learners will enhance their ability to exercise professional judgment, address fraud risks, and communicate findings effectively, preparing them for senior roles in the auditing profession.
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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Q1) The need to implement philosophies and practices commonly referred to as "improved business practices" comes from
A) increased competition resulting in public accounting firms being concerned about keeping clients and maintaining a reasonable profit.
B) a CAS pronouncement.
C) a GAAP pronouncement.
D) a need to increase profitability on assurance type mandates.
Answer: A
Q2) In Canada, publicly traded companies are
A) required to have audits.
B) strongly encouraged to have audits.
C) not required to have an audit if they have a review.
D) not required to have an audit.
Answer: A
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) Which of the following is a typical consequence to a PA or PA firm if practice inspectors find any files or quality control procedures to be unsatisfactory? The PA A) will lose the right immediately to conduct audit engagements.
B) will no longer be allowed to sign audit reports for a period of time (such as a year). C) may be required to revise processes or attend training courses.
D) will be required to rewrite the professional qualification examinations.
Answer: C
Q2) Farah is currently auditing Software Synx, a public company. After a long day of work, Farah goes for a drink with her friend John who mentions that he owns shares of Software Synx. Farah indicates that John should hold on to his shares as they will go up next week when the financial statements are released and show an increase of 12% for revenues. Which element of quality control is compromised by Farah?
A) general ethical requirements
B) independence
C) general human resource policies
D) engagement performance
Answer: A
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Page 4
Chapter 3: Legal Liability
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Q1) Winston Chang, a PA, conducted the audit of Manra Manufacturing Ltd., a small company that produces a variety of machined parts for the automotive and computer industries. The audit showed that the company produced a small profit after paying the owners of the company a high salary. Manra was purchased by a competitor, Cheblay. Cheblay had hoped to produce efficiencies by combining the two companies but was unable to do so. Cheblay sued Chang because it relied upon the financial statements when purchasing the company's shares, claiming that the machines, which were about fifteen years old, had been overvalued. The machines were recorded at cost, which was below net realizable value. What is the auditor's best defence?
A) contributory negligence
B) absence of negligence
C) duty of care
D) absence of liability
Answer: B
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Chapter 4: Professional Judgment and Ethics
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Q1) Which one of the following situations is a violation of the professional rules of conduct? PA
A) looked the other way when he noticed that one of his firm's accounting staff accepted money from client management.
B) resigned so that he could accept a position on the Board of Directors at a major client. C) prepared personal and corporate tax returns for a client and all of its executive officers.
D) placed an advertisement in the local paper indicating that she conducted audit engagements for five major insurance companies.
Q2) 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.
Q3) What are the qualities of professional skepticism?
Q4) List the components of the auditor's professional judgment framework.
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Chapter 5: Audit Responsibilities and Objectives
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Q1) Your PA firm has just obtained a new client and you have been assigned the task of preparing the knowledge of business section of the file. Which of the following best describes the process of gathering the knowledge of business for a client?
A) discussing processes and business objectives with company employees
B) gathering information about the industry and regulatory environment
C) understanding the client's business, industry, and regulatory environment
D) examining the legal expenses file for possible regulatory infractions
Q2) Georgina was working as the part-time accountant for three small businesses. Whenever she could, she pocketed cash and neglected to record the sale in the sales system. The general transaction-related audit objective affected by her actions is A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
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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Q1) Risks associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk, and even influence client acceptance decisions. Which of the following businesses would be the most risky for the auditor to accept as a new client?
A) a small manufacturer of metal and plastic parts that has steady profits and has been in business for 15 years
B) a client who is developing a computer game that is expected to be ready in three years and has no other products
C) a retail company in the clothing industry that has mid-range pricing and appeals to a large population sector
D) a firm consisting of a partnership of ten lawyers that operates out of three different cities in one province
Q2) If the client has set unreasonable objectives or if the performance measurement system encourages aggressive accounting, the auditor will
A) increase inherent risk of financial statement misstatements.
B) lower inherent risk of financial statement misstatements.
C) increase control risk of financial statement misstatements.
D) lower control risk of financial statement misstatements.
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Chapter 7: Materiality and Risk
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Q1) The audit risk model is
A) a planning, testing, and evaluation model.
B) useful in planning but of limited value in evaluating results.
C) useful in evaluating results but of limited use in planning.
D) useful when performing the tests of balances, but of little value in either the planning or evaluation stages.
Q2) When inherent risk is assessed as higher (i.e. more material errors are likely to exist) and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?
A) Detection risk will increase.
B) Detection risk will decrease.
C) Detection risk will stay the same.
D) Detection risk will need less documentation.
Q3) When a different extent of evidence is needed for the various cycles, the difference is caused by
A) errors in the client's accounting system.
B) the client's need to achieve an unqualified opinion.
C) the auditor's need to follow GAAS.
D) the auditor's expectations of errors and assessment of internal control.
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Page 9
Chapter 8: Internal Controls and Control Risk
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Q1) Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
A) employment of temporary personnel to aid in the segregation of duties.
B) direct participation by the owner of the business in the record-keeping activities of the business.
C) engaging a public accountant to perform monthly "write-up" work.
D) delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
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.
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Chapter 9: Audit Evidence
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Q1) Observation is an important audit technique where the auditor can use sight, hearing, touch, and smell. Observation needs to be used together with other audit techniques because
A) employees will often perform their procedures consistently over time.
B) it is a high-cost technique that is rarely used by auditors.
C) it is a point-in-time technique limited to the time of the observation.
D) auditors may not accurately observe and interpret what is happening.
Q2) To improve the appropriateness of audit evidence, the auditor should
A) be sure to select a larger sample size for the items being tested.
B) add additional population items into the sample to improve sample variety.
C) select audit procedures that improve the reliability of the evidence.
D) select a smaller sample size that is statistically valid.
Q3) Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
A) bank statement obtained from the client
B) computations made by the auditor
C) prenumbered client sales invoices
D) a vendor's invoice
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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Chapter 10: Audit Strategy and Audit Program
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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 has conducted tests of controls of the write-off of accounts receivable and found two exceptions. These exceptions are
A) an indication of the likelihood of errors or fraud and other irregularities.
B) confirmation that controls are not functioning as designed throughout the year.
C) information about the quantity of the dollar error in accounts receivable.
D) indications that employee training is required in the accounting area.
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Page 12
Chapter 11: Audit Sampling Concepts
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Q1) 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.
Q2) One of the purposes of using statistical sampling is to quantify sampling risk. For which of the following audit tests would sampling risk be zero?
A) The auditor used monetary unit sampling to select a sample of payroll payments.
B) The auditor used attribute sampling to select a sample of shipping documents.
C) The auditor sent empty (zero balance) external confirmations to suppliers with large dollar balances.
D) The auditor sent external confirmations to all financial institutions used by the client.
Q3) Kyle is performing a test of detail using a non-statistical sample.
A) Can Kyle formally measure sampling error?
B) What should Kyle consider in determining the sampling error?
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Chapter 12: Audit of the Revenue Cycle
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Q1) Following are three different situations with respect to the audit of accounts receivable and sales. For each, specify the evidence mix that you would use (tests of control, substantive tests, type of confirmation/timing), and explain why.
A) The client is in a volatile industry, selling products that can quickly become obsolete. Total accounts receivable is $65 million with a bad debt allowance of $7 million. The company has recently laid off three accounting staff to save money.
B) A small company has 45 different customers with balances ranging from $500 to $25 000 per customer. There is one accountant on staff and a professional accountant comes in once per week for three hours to review the staff accountant's work and prepare journal entries. Bad debts are rare, as the owner is actively involved in accounts receivable collection.
C) Big Department Store Finance Corporation has fifty staff in the accounting department, a sophisticated software package, and about $250 million in accounts receivable. The corporation manages the department store's credit cards. About 100 000 credit card customers have balances less than $300 on their accounts, while the balances for the remaining customers range up to a maximum of $5000.
Q2) Outline the key areas that the auditor would review as part of general controls.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) After the supplier master file data has been entered, to best improve internal controls the
A) supplier master file data should be matched to the accounts payable files.
B) transaction file detail should be matched to the supplier master file.
C) data entry should be independently verified.
D) accounting department should file the new supplier authorization form sequentially.
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) Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).
Q4) Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) The bias in recording inventory would be toward A) overstatement.
B) understatement.
C) increasing share price.
D) income smoothing.
Q2) The most important part of the observation of inventory is determining whether A) the inventory-takers are qualified.
B) the physical count is being taken in accordance with the client's instructions.
C) the counts are accurate.
D) obsolete inventory has been identified.
Q3) 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.
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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Q1) 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.
Q2) The correct cutoff and valuation of accrued salaries and wages
A) is to calculate the exact hours of pay that were earned in the current period and paid in a subsequent period.
B) is to compute an approximate proportion of the wages that were earned in the current period and use that amount as the accrual.
C) allows the client to choose between A and B (above) each year.
D) depends on company policy and whether it is consistently followed.
Q3) Which of the following is a substantive test of transactions?
A) Review personnel policies.
B) Account for a sequence of payroll cheques.
C) Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
D) Examine printouts of transactions rejected by the computer as having invalid employee numbers.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Discuss the four key controls over notes payable.
Q2) As part of the audit of dividends, the auditor would verify whether the payment was made to the shareholders who owned the stock at the dividend record date. Which of the following audit tests assists with this objective?
A) examining the minutes of board of directors' meetings for the amount of the dividend per share and the dividend date
B) reviewing the permanent audit working paper file to determine if there are restrictions on the payment of dividends
C) recomputing the amount of dividends declared by multiplying the dividend amount per share by the number of shares outstanding
D) selecting a sample of recorded dividend payments and tracing the payee's name on the cancelled cheque to the dividend records
Q3) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
Q4) Explain why the auditor's verification of owners' equity is more complex for publicly-held corporations than closely-held corporations.
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Page 18
Chapter 17: Audit of Cash Balances
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Q1) A) Distinguish between i) risks of error, ii) risks of fraud, and iii) risks of inadequate presentation or disclosure of financial information.
B) For each of the three types of risks described in A) provide three examples of major risks of error or fraud in the cash cycle.
Q2) 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.
Q3) The auditor has examined the financial statements, particularly the cash flow statement, and the notes to the financial statements to determine that all relevant information is presented clearly. Which audit assertion is associated with this audit test?
A) classification
B) allocation
C) understandability
D) valuation
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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Q1) What situation represents a contingent liability for a company?
A) A candy company's monthly production requires 1000 kg of chocolate. The company entered into a contract with a chocolate producer to purchase 6000 kg of chocolate over the next six months at the market price.
B) A bike company learned that a racer using its bike was seriously injured in an accident on December 30th, 2015, as the front wheel of the bike was released as the result of a manufacturing defect. The company had not received a claim at December 31st, 2015, but management expects to receive a claim.
C) A restaurant received a $10 000 claim from a customer for emotional damages as a result of poor service. The legal counsel of the restaurant indicated that the claim was not supported and there was less than a 5% chance that the restaurant would have to pay.
D) A hotel chain was found guilty by a judge for not refunding customers who had online reservations. The hotel chain will have to pay $50 000 to various customers in the following year.
Q2) A) Discuss the purposes of performing analytical procedures during the audit completion phase.
B) State the two purposes of the client representation letter.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Q1) The primary auditor who relies on a secondary auditor
A) is responsible for any deficiencies in the secondary auditor's work.
B) will mention the name of the secondary auditor if he or she decides that an unqualified opinion is appropriate.
C) will never mention the name of the secondary auditor in his or her report even if the report is qualified.
D) has no responsibility for checking the work of the secondary auditor.
Q2) The "unqualified report with explanatory paragraph" or the "unqualified report with modified wording"
A) arise as a result of an incomplete audit.
B) arise when the financial statements are not quite "presented fairly."
C) meet the criteria of a complete audit with satisfactory results but further explanation is required.
D) meet the criteria of a complete audit but with unsatisfactory results.
Q3) There are two conditions requiring a departure from an unqualified audit report. Discuss each of these conditions and state the appropriate audit report for each condition.
Q4) Discuss how materiality affects audit reporting decisions.
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Page 21
Chapter 20: Other Assurance and Nonassurance Services
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Q1) A compilation presents information, in the form of financial statements, that is the representation of management. The public accountant who prepares the compilation undertakes to express
A) limited assurance on the statements.
B) minimal assurance on the statements.
C) no assurance on the statements.
D) full assurance on the statements.
Q2) Performing inquiry, analytical procedures, and discussion with the limited objective of assessing whether the information being reported on is plausible within the framework of appropriate criteria is the definition of a(n)
A) compilation.
B) review.
C) audit.
D) examination.
Q3) Define "assurance engagements."
Q4) Define "direct reporting engagements."
Q5) Describe the professional standards that must be followed when undertaking a compilation engagement as specified by the CICA Handbook.
Q6) Define "attestation engagements."
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