Assurance Services Exam Solutions
Course Introduction
Assurance Services explores the principles and practices underlying the independent evaluation of information used by decision-makers, emphasizing the role of assurance in enhancing the reliability and relevance of financial and non-financial data. The course covers topics such as the objectives and types of assurance engagements, the regulatory environment, professional standards, risk assessment, internal controls, and evidence gathering techniques. Students examine real-world cases involving audits, reviews, and other attestation services, developing analytical skills necessary to assess risk, materiality, and ethical considerations. Through a combination of theoretical foundations and practical applications, the course prepares students for careers in public accounting, internal audit, and other areas requiring expertise in assurance services.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th Canadian Edition by Alvin A. Arens
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20 Chapters
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Page 2
Chapter 1: The Demand for Audit and Other Assurance Services
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69 Verified Questions
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Sample Questions
Q1) 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
Q2) A reason for a nonprofit organization to be audited is to
A) comply with the laws requiring them to be audited.
B) meet requirements of lenders or funding sources.
C) have a professional accountant perform their bookkeeping.
D) ensure that their financial statements do not contain errors.
Answer: B
Q3) In the audit of historical financial statements by PA firms, the criteria used are
A) generally accepted auditing standards.
B) generally accepted accounting principles.
C) regulations of the Canada Revenue Agency.
D) regulations of the provincial securities commissions.
Answer: B
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Approximately how many public accounting firms in Canada have more than 50 professional staff?
A) 25
B) 50
C) 75
D) 100
Answer: B
Q2) Adequate planning and execution to reduce risk to an acceptable level is a requirement of which category of generally accepted auditing standards?
A) general
B) examination
C) reporting
D) quality
Answer: B
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Chapter 3: Legal Liability
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Sample Questions
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) PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review engagement. The financial statements are used primarily by the shareholders, management, and by the bank. Recently, an employee was fired for stealing computer parts, primarily chips and boards that could easily be placed in a pocket. MDL is suing PA because they believed that audit procedures, such as counting inventory, would have detected this fraud. What is PA's best defence?
A) absence of causal connection
B) lack of negligence
C) contributory negligence
D) duty of care not required
Answer: D
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Frank has discovered that his employer is part of a group of banks that is manipulating interest rates. He would like to stop this practice at his employer but is not sure how best to talk to his boss. He has heard of the GVV (Giving Voice to Values) approach and thinks he may be able to use it successfully because his company has recently implemented new initiatives to empower employees to speak of improvements to business practices. Frank has crafted a useful, powerful response that he could use, taking into account multiple options. He has conducted research to make him more informed on the issue, and has consulted a friend who is expert in this area. What is the next thing he should do before talking to his boss?
A) review the values underpinning the different positions in the value conflict
B) further develop and practice his response (scripting) and get help (coaching)
C) review the different possibilities for action to make sure that he has considered enough
D) check his stakeholder analysis to make sure that it is thorough and complete
Q2) List the components of the auditor's professional judgment framework.
Q3) Identify and describe each of the three parts to the Code of Professional Conduct. Also discuss which parts are officially enforceable and which are not.
Q4) What are the common judgement traps and how can they be avoided?
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met. During your audit planning process, management informed you that they have not taken any action but plan to start construction of the new pollution devices next month. Required:
Explain the impact the above situation has upon your audit planning process.
Q2) 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.
Q3) Transaction cycles begin and end at
A) the beginning and end of the fiscal period.
B) the balance sheet date.
C) January 1 and December 31.
D) the origin and final disposition of the company.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) What are the three main factors that influence the organizational structure of all public accounting firms?
Q2) Mario, the owner of Clayton's ice cream, is giving Steve, the manager of the audit, a private tour of the production facilities. By doing the tour, Steve will
A) be better able to identify control risks.
B) understand the client's business and operations better.
C) be able to gather audit evidence on operational efficiencies.
D) Steve should not be taking a tour alone with the owner as this could compromise his independence.
Q3) Simon owns a clothing store, Simonello. Simonello recently purchased a material amount of fabric from Simonique Inc., a textile company also owned by Simon. With regards to this transaction, the auditors should
A) request a confirmation from Simonique that the transaction took place.
B) inspect the textile received in the warehouse to ensure that the amount sent equals the amount ordered.
C) qualify the audit report, as this puts management's integrity into question.
D) verify that the business relationship is disclosed in the financial statements.
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Page 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) With respect to clients, business risk increases when conditions, events, circumstances or inactions
A) adversely affect the entity's ability to achieve its objectives.
B) cause employees to not do their job properly.
C) result in the company continuing profitable operations.
D) result in an assessment of poor internal controls.
Q3) What is the role of internal controls during the assessment of inherent risk?
A) Internal controls are considered separately, so they are ignored during the assessment of inherent risk.
B) As the quality of internal controls increases, inherent risk decreases.
C) As the quality of internal controls improves, inherent risk increases.
D) There is a direct relationship between the quality of internal controls and inherent risk.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
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Page 9
Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) When planning the audit, the auditor's decision on the appropriate assessed level of control risk to use is
A) an economic issue, trading off the costs of testing controls against the cost of testing balances.
B) calculated by using the audit risk model.
C) calculated by using a standard formula.
D) determined by using actuarial tables.
Q2) 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.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Which of the following types of evidence would be considered most reliable in the audit of accounts payable?
A) review of internal budgets for the period under audit
B) inquiry of management with respect to recent purchases
C) inspection of client purchase orders
D) inspection of supplier invoices
Q2) 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.
Q3) Inquiry is a valuable technique during the planning phase of the audit because it
A) involves the rechecking of controls to ensure that they are conducted accurately.
B) is a type of audit evidence that provides a very high level of assurance.
C) is conclusive evidence from an independent source.
D) helps obtain information about how procedures and internal controls operate.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) In the context of an audit of financial statements, substantive tests are audit procedures that
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) may be either direct tests of financial balances or analytical tests.
D) will increase proportionately with the auditor's reliance on internal control.
Q2) A standard audit program can dramatically increase
A) audit efficiency.
B) quality of audit evidence.
C) communication among the audit team.
D) the amount of work that can be delegated to more junior staff members.
Q3) Which of the following areas is considered to have a high risk of fraud in the retail industry?
A) point-of-sale sales
B) customer refunds
C) credit sales
D) completeness of payroll
Q4) 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) The sample exception rate equals the number of A) exceptions in the population divided by the sample size.
B) items in the population multiplied by the number of exceptions in the sample.
C) exceptions in the sample divided by the sample size.
D) exceptions in the population divided by the population size.
Q2) An auditor who uses statistical sampling for attributes in testing internal controls should increase the assessed level of control risk when the A) sample rate of exceptions is less than the expected rate of exception used in planning the sample.
B) tolerable exception rate less the allowance for sampling risk exceeds the sample rate of deviation.
C) sample rate of exceptions plus the allowance for sampling risk exceeds the tolerable exception rate.
D) sample rate of exceptions plus the allowance for sampling risk equals the tolerable exception rate.
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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134 Flashcards
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Sample Questions
Q1) It is common to test sales for proper classification as part of testing for A) cutoff.
B) accuracy.
C) valuation.
D) completeness.
Q2) Audit risk is assessed for
A) the financial statements as a whole and is not usually allocated to various accounts or objectives.
B) the financial statements as a whole and then allocated to various accounts.
C) various accounts but not for the financial statements as a whole.
D) various accounts and objectives, and the sum is then assigned to the financial statements as a whole.
Q3) Which of the following control procedures may prevent the failure to bill customers for some shipments?
A) Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B) Each sales order should be approved by authorized personnel.
C) Sales journal entries should be reconciled to daily sales summaries.
D) Each sales invoice should be supported by a shipping document.
Q4) Outline the key areas that the auditor would review as part of general controls.
Page 14
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) Many companies have inventory that is easy to steal and is readily marketable. Which of the following controls helps to prevent theft and misuse of inventory?
A) physical control of inventory from time of receipt until use
B) proper access controls over the inventory master and transaction files
C) dual signatures required on all purchase orders over $10 000
D) purchase requisitions are to be approved by the production manager
Q2) The internal control that requires an "independent verification of calculations and amounts" satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q3) The main focus taken by the auditor in verifying liability balances is on the discovery of
A) liabilities posted to the wrong account.
B) overstated liabilities.
C) understated or omitted liabilities.
D) overstated or extraneous liabilities.
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15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) The client has a perpetual inventory system, and takes an inventory count of 100 items every two weeks for comparison to the perpetual records. There are no plans to have a complete year-end physical count of inventory. How will the auditor conduct the audit of physical inventory?
A) Select an attribute sample of items to count at the year end for comparison to the perpetual records.
B) Select a dollar unit sample of items to count at the year end for comparison to the perpetual records.
C) Use roll-forwards to carry forward the inventory records from the cyclical counts for an attribute sample of inventory items.
D) Conduct test counts and compare the perpetual records with a cyclical count during the interim audit.
Q2) To detect an overstatement or understatement of inventory and cost of goods sold, the auditor may perform an analytical procedure such as comparing
A) gross margin percentage with previous years.
B) inventory turnover with previous years.
C) current year manufacturing costs with previous years.
D) extended inventory value with previous years.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) When the employees are paid automatically by bank deposits to the employees' accounts, in an effort to identify potential fraud, the auditor can look for
A) duplicated bank account numbers.
B) duplicated names in the master payroll files.
C) unusual employee names.
D) cancelled cheques.
Q2) 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.
Q3) The careful and timely preparation of all payroll withholdings and employer's portion of withholdings is necessary to avoid heavy fines. The most important control in the timely preparation of these returns is
A) computerized preparation of income tax returns.
B) a well-defined set of policies that indicate when each form must be filed.
C) independent verification of computer output by a competent individual.
D) a Gantt chart.
Page 17
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) Presentation and disclosure are important because acceptable financial reporting frameworks require that footnotes adequately describe the terms of notes payable outstanding and the assets pledged as collateral for the loans. Which assertion does this relate to?
A) valuation
B) existence
C) completeness
D) understandability
Q2) If actual interest expense is materially larger than the auditor's independent estimate, one possible cause could be
A) interest payments on unrecorded notes payable.
B) omitted payments of interest (i.e., underpayments).
C) interest payments recorded at the wrong (lower) interest rate.
D) notes payable that were set up incorrectly as short-term notes.
Q3) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Q4) Explain why the auditor's verification of owners' equity is more complex for publicly-held corporations than closely-held corporations.
Q5) Discuss the four key controls over notes payable.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) What audit objective is associated with the comparison of disbursement and receipt information on a bank transfer schedule to the cash disbursements and cash receipts journals?
A) accuracy
B) classification
C) occurrence
D) completeness
Q2) The auditor uses a proof of cash to determine whether
A) internal controls over cash have been functioning effectively in the period under audit.
B) all recorded cash receipts were deposited and whether all recorded cash disbursements were paid by the bank.
C) accounts receivable was properly recorded and whether cash receipts transactions were properly recorded.
D) accounts payable was properly recorded and whether cash disbursement transactions were properly recorded.
Q3) Outline the audit procedures that would be performed when testing electronic receipts and payments.
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19
Chapter 18: Completing the Audit
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Sample Questions
Q1) One of the purposes of a client representation letter is to
A) reduce the amount of audit procedures performed by the auditor.
B) document the responses from management to inquiries about various aspects of the audit.
C) serve as audit evidence for the accuracy of the contingent liabilities.
D) reduce the detection risk.
Q2) When auditing contingent liabilities, the primary objective at the initial stage of the tests is to determine
A) the materiality of any liability.
B) what constitutes adequate disclosure of the liability.
C) the likelihood of the liability.
D) the existence of the liability.
Q3) What action will a lawyer likely take if they have information about a lawsuit that was not mentioned by the client?
A) They will tell the auditor the number of suits and request the auditor to contact the client.
B) They will request the client to notify the auditor about the lawsuit.
C) They will not mention the lawsuits since they are confidential.
D) They will refuse to answer the legal letter, since it is incorrect.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) Dussault & Montgomery, the auditors of Greenwich Corp., relied on Groves & Padden, another PA firm, to audit the Quebec subsidiaries of Greenwich. The responsibility for the opinion to issue on the financial statements is the responsibility of A) Greenwich Corp.
B) Dussault & Montgomery.
C) Groves & Padden.
D) Dussault & Montgomery and Groves & Padden.
Q2) The auditor would most likely issue a disclaimer of opinion because of A) the client's failure to present supplementary information.
B) inadequate disclosure of material information.
C) a client-imposed scope limitation.
D) the qualification of an opinion by the other auditor of a subsidiary where there is a division of responsibility.
Q3) Discuss how materiality affects audit reporting decisions.
Q4) Explain four different variations that could occur in unqualified audit reports. For each variation, state how the auditor's report is affected and provide an example.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Identify the reporting standards for compilation engagements.
Q2) Define "assurance engagements."
Q3) Four different engagements that the auditor can complete are compilation, bookkeeping, audit, and review. Rank these engagements with respect to the level of assurance provided from highest assurance level to lowest assurance level.
A) audit, review, compilation, bookkeeping
B) audit, compilation, review, bookkeeping
C) review, audit, compilation, bookkeeping
D) review, audit, bookkeeping, compilation
Q4) Why is it important for the review engagement report to state that the review is not an audit?
A) to make sure that the public accountant is not sued
B) to clarify that only review engagement procedures were used during the engagement
C) to make users aware that a review provides a lower level of assurance
D) so that the user does not ask any unnecessary questions about the engagement
Q5) Outline the three performance standards of CICA Handbook section 5025, "Standards for Assurance Engagements."
Q6) Define "direct reporting engagements."
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