Advanced Auditing Final Exam
Course Introduction
Advanced Auditing delves into the complex aspects of auditing theory and practice beyond the foundational concepts. The course explores critical topics such as risk assessment, internal control evaluation, audit sampling, and the application of advanced analytical procedures. Students will examine regulatory environments, ethical considerations, forensic auditing, and the use of technology in audit processes. Emphasis is placed on problem-solving and case studies to enhance understanding of real-world challenges auditors face, including fraud detection, audit planning, and reporting in highly regulated industries. The course prepares students to critically evaluate and implement auditing standards in diverse and dynamic business contexts.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 13th 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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Sample Questions
Q1) A typical objective of an operational audit is for the auditor to
A) determine whether the financial statements fairly present the entity's operations.
B) evaluate the feasibility of attaining the entity's operational objectives.
C) evaluate the effectiveness of an internal process.
D) report on the entity's relative success in attaining profit maximization.
Answer: C
Q2) Which of the following illustrates the definition of auditing with respect to the evidence analysis process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) learning about different types of computing technology, such as mainframes
C) writing an operational audit report that is tailored to the client's situation
D) making sure that the auditor is competent and understands evidence gathering
Answer: A
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3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) 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
Q2) There are many elements of quality control at the firm level. Which element does "employees should be adequately trained in the skills needed to conduct audits and reviews" relate to?
A) leadership and responsibilities within the firm
B) independence
C) general human resource policies
D) extent of professional development
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) Describe each of the six defences a public accounting firm can normally use when facing legal claims by clients.
Answer: Lack of duty of care: The public accounting firm could claim that there was no implied or expressed contract to perform between the public accounting firm and the client.
Absence of misstatement: The financial statements as relied upon are accurate in all material respects.
Absence of negligence: The public accounting firm could claim that the audit was performed in accordance with GAAS.
Absence of causal connection: The public accounting firm could claim that the auditor's substandard performance did not cause the damages suffered by the client. Contributory negligence: The public accounting firm could claim that the client's actions either caused the loss or interfered with the auditor's ability to discover the cause of the loss.
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) You are having lunch with a former employee of your firm, a friend of yours. Gino had been laid off last year when he had failed to pass his professional examinations for the third year in a row. Gino told you that he managed to obtain a CPA designation in the past year, and has started his public practice. He has been circulating flyers and electronic email announcements with fixed rates: $400 for a compilation engagement, $1000 for a review, and $5000 for an audit where revenues are less than $1 million, $15 000 for an audit for a client with revenues up to $5 million. He already has clients to keep him busy for the next three months. He even has some feelers for clients that he personally handled while he was working for your firmthere were a lot of contacts developed during the five years that he was working there! To help attract some of the larger clients, he is considering not charging any fee for the first ten hours spent on tax-related services.
Gino ended the conversation by asking you if you would like to join him in his new firm, because at this rate he'll need a second person real soon!
Required:
Identify the violations in the professional rules of conduct and explain why they are violations.
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) 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.
Q2) Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of
A) environmental protection laws for the production facility.
B) insider securities trading regulations by senior management.
C) employment equity laws for a large group of non-unionized employees.
D) income tax laws and incorrect calculation of income taxes payable.
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.
Q4) 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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Page 7
Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing prepaid expenses and related expense accounts with those of prior years?
A) to understand the client's industry and business
B) to assess going concern
C) to identify possible misstatements
D) to reduce tests of controls
Q2) If management and salespeople are compensated on the basis of achieving high sales targets, there is increased incentive to record sales before they have been earned. In such a situation, the auditor will increase the extent of testing for which of the following transaction-related audit objectives for sales?
A) cutoff and classification
B) classification and occurrence
C) occurrence and cutoff
D) completeness and cutoff
Q3) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
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8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) How much control does the auditor have over inherent risk?
A) The auditor adjusts the controls that are considered (high level of control).
B) The auditor considers inherent risk for the business as a whole (some control).
C) The auditor assesses the factors that make up inherent risk (no control).
D) The auditor calculates inherent risk values as a residual (no control).
Q2) Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?
A) It increases inherent risks associated with revenue cutoff and existence assertions.
B) It increases inherent risks associated with revenue cutoff and completeness assertions.
C) It increases control risks associated with revenue cutoff and existence assertions.
D) It increases control risks associated with revenue cutoff and completeness assertions.
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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Page 9
Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store. The system Carrie is looking at currently costs $60 000 and is expected to be effective for 5 years. In order to justify the implementation of the security tag system, average theft per year should be at least
A) $1000.
B) $12 000.
C) $60 000.
D) Theft should be prevented at all costs.
Q2) Which one of the following is an example of a specific authorization?
A) The computer systems automatically reorder inventory when quantities fall below the economic order quantity.
B) The highest credit limit allowed for accounts receivable customers is $100 000.
C) Each sales transaction that exceeds the credit limit of a customer must be approved by the controller.
D) Grocery sales clerks may approve returns of goods less than ten dollars in value.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Inspection of assets is not a sufficient form of evidence when the auditor wants to determine the
A) existence of the asset.
B) quantity and description of the asset.
C) condition or quality of the asset.
D) ownership of the asset.
Q2) An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
A) tests of details of balances.
B) procedures to obtain an understanding of internal controls.
C) specialized audit programs.
D) analytical procedures.
Q3) "The detailed instructions for the entire collection of evidence for an audit area" is the definition of a(n)
A) sampling plan.
B) audit procedure.
C) audit plan.
D) audit program.
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Page 11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) If the auditor is not using tests of control, then
A) tests of detail must be used.
B) analytical procedures must be used.
C) tests of design of internal controls must at least be used.
D) the auditor will have to qualify the audit opinion.
Q2) Jane is a sole practitioner operating out of a local office. She is part of a regional group of firms and occasionally does small audits with the assistance of one staff person. Using automated working paper software, she runs a standard set of analytical review calculations for each audit, then puts them in the working paper file. She does not look at the analytical review process again. Since most of her audit clients have no internal controls, she then calculates materiality and conducts a substantive audit. She prefers to do more substantive testing rather than having to do all kinds of work with internal controls.
Required:
What is wrong with Jane's audit approach?
Q3) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) One of the causes of nonsampling error is
A) the use of inappropriate or ineffective audit procedures.
B) failure to draw a random sample.
C) failure to draw a representative sample.
D) the use of attribute sampling instead of variables sampling.
Q2) One of the ways to reduce sampling risk is to
A) use an appropriate method of selecting sample items from the population.
B) carefully design the audit procedures to be used.
C) provide proper supervision and instruction of the audit team.
D) use variables sampling rather than attribute sampling.
Q3) 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.
Q4) 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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Sample Questions
Q1) Positive accounts receivable confirmations were circularized, and there were many differences where the client stated that the goods had not been received as of the date of the confirmation. In addition to the possibility that the goods were not received by the client, this type of reported difference could be an indication of A) a cutoff misstatement.
B) timing differences with respect to recording sales returns.
C) improper recording of sales allowances.
D) theft of cash or lapping.
Q2) Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?
A) matching of customer number to master file
B) automatic posting of sales to the general ledger account
C) reconciliation of the customer master file to accounts receivable
D) daily point-of-sales control totals matched to cash receipts
Q3) A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for sales.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) ZyCo has recently converted to a new online accounts payable system. To test that all vendor balances have been converted to the vendor master file (completeness), the auditor would
A) conduct cutoff tests for receiving reports and vendor invoices.
B) on a test basis, agree vendor file details for each vendor from the new (online) system to the old (batch) system.
C) on a test basis, agree vendor file details for each vendor from the old (batch) system to the new (online) system.
D) conduct tests of programs to verify that programs in the new systems are functioning as designed.
Q2) The tests of details of balances procedure for manufacturing equipment that requires the auditor to examine vendors' invoices of closely related accounts (such as repairs and maintenance) to uncover items that should be manufacturing equipment would satisfy the audit objective of
A) detail tie-in.
B) existence.
C) classification.
D) accuracy.
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15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) Which analytical procedures will help an auditor identify possible misstatements in compilation, unit costs, or extensions that affect inventory and cost of goods sold?
A) comparing gross margin percentage with previous years
B) comparing unit costs of inventory with previous years
C) comparing inventory turnover with previous years
D) comparing extended inventory value with previous years
Q2) If the auditor is appointed after the year-end of the client, the auditor
A) should qualify the audit opinion for the inventory balance and cost of sales.
B) could attend a current perpetual inventory count and roll backward with the records.
C) should do an inventory count as soon as he is appointed.
D) will inquire with management about the inventory count performed at year-end.
Q3) Obtaining an adequate understanding of the client's business is important in physical observation of inventory because
A) it is required by GAAP.
B) it will help the auditor in assessing the risk of theft of inventory.
C) inventory is normally a significant item.
D) inventory varies significantly for different companies.
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Page 16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) The human resources and payroll cycle is the transaction cycle that begins with A) processing the payment to the employees.
B) the creation of the employee profile in the payroll master file.
C) the employee performing work for the company.
D) the hiring of personnel.
Q2) State the six specific transactions-related audit objectives as related to payroll and for each objective state one common test of controls that can be used to test the objective.
Q3) In auditing the imprest payroll account, which of the following procedures will take the least amount of auditor time?
A) tests of controls
B) risk analysis and obtaining an understanding of controls
C) analytical procedures
D) tests of details of balances
Q4) 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.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Describe the audit procedures and related audit assertions for the audit of dividends.
Q2) Comparison of individual notes payable outstanding with the prior year could detect what type of possible misstatement?
A) misstatement of interest expense or accrued interest, or omission of a note payable
B) omission or misstatement of a note payable
C) misclassification of a note payable as long-term rather than current
D) misstatement of notes payable, interest expense, or accrued interest
Q3) What procedure can an auditor use to determine whether notes payable on the notes payable schedule are properly classified?
A) Review the notes to determine whether any are with related parties.
B) Confirm notes payable.
C) Examine corporate minutes for loan approval.
D) Examine notes, minutes, and bank confirmations for restrictions.
Q4) Discuss the internal controls related to owners' equity that are of concern to the auditor.
Q5) Describe the risks of error and fraud in the debt or equity accounts.
Q6) Discuss the four key controls over notes payable.
Page 18
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) A) "Failure to bill a customer" is an example of an error that results in the failure to receive cash, but would not be discovered as part of the audit of the bank reconciliation. State three other examples of errors or irregularities that result in the improper payment of, or failure to receive, cash, but would not be discovered during the audit of the bank reconciliation. How are these types of misstatements normally uncovered in the audit?
B) State three examples of errors or irregularities that normally would be uncovered during the audit of the bank reconciliation.
Q2) What is an important benefit of independent preparation of bank reconciliations?
A) an opportunity to independently check that cheques have two signatures
B) the client being able to check that the bank is processing transactions correctly
C) the ability to internally verify cash receipt and disbursement transactions
D) the best time to carefully account for cheques issued
Q3) A) Many auditors prove the subsequent period bank statement if a cutoff statement is not received directly from the bank. Discuss the purpose of proving the subsequent period statement, and explain the audit procedures performed during the proof of cash. B) Discuss the circumstances in which an auditor would prepare a proof of cash.
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19
Chapter 18: Completing the Audit
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Sample Questions
Q1) Klein Corporation has reported a loss for the 6th year in a row. Klein also has a large bank loan due in the coming year, bringing its current ratio to .60. Further, due to recent economic slowdown, Klein had to increase its bad debt expense by 4% and also saw its largest client, Forest Prairie file for bankruptcy. Forest Prairie's purchases made up 18% of Klein's total sales in the past year. Forest Prairie also had an unpaid balance to Klein at year end.
To reduce expenses Klein has reduced employee training from 5 days to 1 day. During the year, an employee was seriously injured in the production process when his arm was caught in a press. The employee has filed a lawsuit against Klein for $1 000 000 and claims that he was not properly trained to use the equipment. The legal proceeding for this case should begin in the next fiscal year. Since Klein has never been involved in such a lawsuit before, the legal counsel indicated that they were not able to estimate the amount and likelihood that Klein would have to pay.
Required:
Evaluate the going concern situation at Klein and indicate what the auditor would be required to do under CAS 570.
Q2) State three types of information that should be included in a standard letter of inquiry of a client's law firms.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) The auditor has set materiality at XYZ Company of $50 000 based upon a percentage of net assets. The company currently has a small profit (only $3500). Which of the following items would the auditor most likely consider to be material and request an account balance adjustment?
A) a misclassification between accounts receivable and accounts payable of $10 000
B) incorrect allocation of a note payable to current rather than long term
C) poor wording in a note to the financial statements, making it a bit difficult to understand
D) an understatement of depreciation expense, which would increase depreciation by $5000
Q2) The ASPE (Accounting Standards for Private Enterprises) financial reporting framework normally requires the auditor to report using the corresponding figures approach. This means that the auditor reports on
A) the current year's financial statements.
B) both periods under audit: the current and prior year.
C) three years: the current and prior year, and the effects of the prior year.
D) only the ending balances of the general ledger accounts.
Q3) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) What is the purpose of an auditor reporting on the effectiveness of internal control over financial reporting?
A) To attest to the effectiveness and efficiency of internal controls at an organization.
B) To state an opinion on management's assessment of the effectiveness of internal controls.
C) To provide an alternative to the operational audits conducted by internal auditors.
D) To state that the controls are in conformity with standards with respect to internal controls.
Q2) Leon Levy, a partner at the audit firm where you work, asked you to work on the audit of the balance sheet of Geminy Corp. Geminy is not a public company and has not been required to have audited financial statements in the past. This year, due to a new bank loan, its bank requested that audited financial statements be provided. Who are the primary users in this assurance engagement?
A) Leon Levy
B) the bank
C) management of Geminy Corp
D) shareholders of Geminy Corp
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