Assurance Services
Final Test Solutions
Course Introduction
Assurance Services explores the theoretical foundations and practical applications of independent professional services that improve the quality or context of information for decision makers. The course covers the concepts and standards underlying assurance engagements, including financial statement audits and reviews, internal controls, risk assurance, and compliance audits. Students learn how assurance services add value by enhancing the reliability and relevance of information, and examine the ethical responsibilities and regulatory frameworks governing providers. Through case studies and practical exercises, students develop skills in planning, executing, and reporting on assurance services across a variety of organizational contexts.
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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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 is an example of accounting rather than auditing?
A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
Answer: B
Q3) One of the reasons that an auditor must be competent is so that they can
A) select the type and amount of evidence to accumulate.
B) explain to staff how the bookkeeping should be done.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
Answer: A
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Canadian Auditing Standards (CASs) are best described as
A) the CPA Canada Handbook, plus published research and public accounting firm practices in auditing.
B) Canadian generally accepted auditing practices developed by public accounting firms.
C) material that is fully codified in the CPA Handbook developed in Canada.
D) the existing research that has been published about auditing that is used by firms.
Answer: A
Q2) General qualifications and conduct standards indicate that performance of all aspects of auditing should be performed with due care. This means that the auditor must fulfill his/her duties
A) in accordance with the CAS.
B) carefully and in a timely manner.
C) to the satisfaction of the client.
D) diligently and carefully.
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) 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
Q2) A client is suing a PA firm, claiming that the firm is responsible for the losses suffered from a fraud in the payroll department that was not uncovered during the year-end testing done by the auditor. The auditors did indicate to management that controls over payroll calculations and payments were weak, as there was improper segregation of duties. The auditor's best defence is
A) contributory negligence.
B) absence of negligence.
C) absence of causal connection.
D) no damages.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Why does a self-review threat pose a problem when conducting an audit engagement?
A) The audit can be conducted more efficiently.
B) You are auditing your own work, and may not detect inadequacies.
C) The audit is more expensive, as you have to provide clear documentation.
D) The auditor may not have the expertise to complete the special work.
Q2) In applying professional judgment, the auditor must be able to justify a decision on the basis that it
A) is carried out with truthfulness and forthrightness.
B) meets the underlying principles of only GAAS.
C) considers the impact on management's performance.
D) helps the company improve its profitability.
Q3) Describe an ethical dilemma that an auditor or an accountant might face in his or her business career. Then illustrate how the auditor or accountant might use the five-step approach presented in Chapter 4 to resolve the dilemma. Be specific.
Q4) List the components of the auditor's professional judgment framework.
Q5) What is the difference between auditors and lawyers with respect to privileged information?
Q6) What are the qualities of professional skepticism?
Page 6
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed "select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers." Camilla is concerned that some of the inventory in the store might be on consignment. The account-balance-related objective that Camilla is concerned about is
A) rights and obligation (ownership).
B) accuracy.
C) valuation.
D) existence.
Q2) 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.
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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Sample Questions
Q1) Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "incentives or pressures" risk factor?
A) Customer demand for a new product line was significantly less than expected.
B) Management and the auditors disagree on how to value a large contract in progress.
C) There is only one board member who understands financial statements and she has suffered a heart attack.
D) There has been significant turnover in the accounting department in the last year.
Q2) The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?
A) electronic data interchange systems for purchase orders, sales invoices, and payments
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically controlled equipment used in the manufacturing process
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8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) The first step in applying materiality is
A) estimating the misstatement in a segment for each functional cycle.
B) setting a judgment about materiality for the financial statements as a whole.
C) estimating the combined effects of errors.
D) comparing the error estimate with the materiality levels.
Q2) Audit risk is ordinarily set by the auditor during planning and A) held constant for each major cycle and account.
B) held constant for each major cycle but varies by account.
C) varies by each major cycle and by each account.
D) varies by each major cycle but is constant by account.
Q3) When external users place heavy reliance on the financial statements it is appropriate that
A) audit risk be increased.
B) inherent risk be decreased.
C) inherent risk be increased.
D) audit risk be decreased.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
Q5) 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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Sample Questions
Q1) The operational responsibility and the recording of transactions are normally kept separate
A) to centralize activities in order to be more cost efficient.
B) to ensure unbiased information is recorded.
C) because operational personnel rarely have the necessary accounting skills to record transactions.
D) to avoid confusion of responsibilities and duplication of efforts.
Q2) The essence of an effectively controlled organization lies in the
A) effectiveness of its auditor.
B) effectiveness of its internal auditor.
C) attitude of its employees.
D) attitude of its management.
Q3) The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called
A) tests of details of balances.
B) tests of controls.
C) analytical procedures.
D) a walk-through.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Which of the following forms of evidence would be least persuasive in forming the auditor's opinion?
A) the auditor's count of marketable securities
B) correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker
C) minutes of the board of director's meeting authorizing the purchase of stock as an investment
D) responses to auditor's questions by the president and controller regarding the investments account
Q2) Identify and explain the three determinants of the persuasiveness of evidence.
Q3) For each of the following audit procedures, state and describe the type of audit evidence, state the audit assertion that it applies to, and describe the reliability of the evidence (with reasons).
A) Watch staff scan products and enter cash received.
B) Reconcile daily cash drawer receipts (cash, debit card sales, credit card sales) with daily sales for one week.
C) Calculate daily gross profit and gross profit by product line.
D) Account for a sequence of sales documents.
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11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Greenvale Construction Limited was started by four brothers who lived in the Toronto area. Over time, the brothers moved to different parts of the country. They decided it was a good idea to keep the company and organize their work as separate divisions under the same company. There are now three divisions, one for each of the brothers who are actively involved in construction. The fourth brother, Ted, is responsible for accounting and record keeping. Ted went back to school and completed an accounting designation, and now has three employees in the accounting area. Each of the brothers has moved on to specialize in a different kind of construction work. In Toronto, it is mainly new home construction. In Edmonton, the work is primarily renovations of large homes and small commercial enterprises. In Halifax, the work is mid-sized to large commercial projects. All of the brothers prefer to subcontract their work rather than hiring full time construction employees, although some of the subcontract relationships have lasted over fifteen years now.
Required:
Explain what you would do to document your understanding of internal control for Greenvale. Identify potential risk areas where you would need to focus additional attention.
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Page 12
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) You have just been given the approval to conduct statistical sampling for the audit of capital assets acquisitions. Previously, this work was completed using a judgmental sample.
Required:
Explain the key areas where decisions need to be made when conducting audit work using a statistical sample.
Q3) When the auditor intends to evaluate a sample statistically, the only acceptable selection method is
A) probabilistic selection.
B) judgmental selection.
C) haphazard selection.
D) block selection.
Q4) 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?
Page 13
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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) Comparison of individual customer balances with previous years will detect what type of possible misstatement?
A) misstatement in gross profit and bad debt expense
B) overstatement or understatement of bad debt expense
C) overstatement or understatement of allowance for uncollectible accounts
D) misstatements in accounts receivable and related income statement accounts
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 controls pertains to audit trails in the batch processing of sales transactions?
A) groups of documents are totalled
B) audit trail is available in electronic form
C) the focus is on preventing incorrect transactions
D) remittance advice information is matched to sales invoice numbers
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The internal control that requires "new vendors and changes to vendor file be approved" satisfies the objective of
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q2) Segregation of duties has an important role in providing for good quality internal controls. Which of the following segregation of duties improve controls over the inventory and distribution cycle?
A) the purchasing department should not be responsible for updating the economic order quantity
B) the accounting staff should not be responsible for the data entry of supplier invoice detail
C) the inventory transaction processing systems should not be accessible to the receiving department
D) the purchasing department should not be responsible for authorizing the acquisition of or receiving the goods
Q3) Discuss the key internal controls related to the disposal of manufacturing equipment.
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Page 15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) If the auditor concludes that the physical controls over inventory are so inadequate that inventory will be difficult to count, the auditor should
A) inquire of management the additional controls that can be put in place to enable a better count to be carried out.
B) conduct additional control tests over the pricing and compilation of inventory to obtain a higher degree of accuracy.
C) rely on the perpetual inventory master files rather than the physical count.
D) expand the observation of physical inventory tests to ensure that an adequate count is carried out.
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) State six specific balance-related audit objectives for physical inventory observation and, for each objective, describe one common test of details of balances related to that objective.
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16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) The WhirlyGig Factory Ltd. manufactures whirly gigs of many different sizes and types. The company employs 55 employees, all paid on an hourly basis. Employees fill in time sheets and hand them in every Monday to the payroll clerk, Pamela. For factory employees, the time sheet shows the hours worked by product job number, and indicates if the job has been completed. The payroll clerk tracks the hours worked by job. When a job is complete, she compares the totals to the estimate made by the owner, Faruq. A bonus is paid for actual hours paid less than the estimated amount. Every Wednesday, Pamela prepares the cheques and gives them to Faruq for signing. Pamela then staples the cheques to the payroll stubs. Pamela hands out the office cheques and gives the other cheques to the factory supervisor for distribution. Required:
A) Identify control weaknesses and their impact, and provide recommendations for improvement.
B) What is the impact of the control weaknesses upon your audit approach?
Q2) Discuss the two most common ways in which employees can defraud a company in the payroll area.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) When setting the objectives for auditing notes, the auditor should consider inherent risks associated with
A) recording errors.
B) uncollectible notes.
C) duplicated notes.
D) management bias.
Q2) Comparison of the total balance in notes payable, interest expense, and accrued interest with these accounts in 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) Describe the risks of error and fraud in the debt or equity accounts.
Q4) Responsibility for the issuance of new notes should be vested in the
A) board of directors.
B) accounting department.
C) accounts payable department.
D) purchasing department.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Which of the following misstatements could be detected as part of the tests of a bank reconciliation?
A) payment of interest to a related party at an incorrect rate
B) exclusion of mortgage interest receivable from the balance sheet
C) deposits recorded as cash receipts at the end of year, but included as outstanding deposits (deposits in transit)
D) a defalcation of cash by interception of collections before they are recorded
Q2) 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.
Q3) A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.
Q4) 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) 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) When several staff are working together on an audit engagement, what type of quality control review is conducted on a daily basis?
A) the partner reviews the electronic files
B) team review by interview
C) second partner review
D) manager review of sections
Q3) State the three conditions required for a contingent liability to exist.
Q4) 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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Sample Questions
Q1) The most common type of audit report contains
A) an adverse opinion.
B) a disclaimer of opinion.
C) a qualified opinion.
D) an unqualified opinion.
Q2) The auditor's report of the Samcorp Company indicates that the auditor is unable to form an opinion on whether the financial statements of the company are fairly presented due to scope restrictions and unavailable and incomplete records. The auditor's report
A) is unqualified.
B) is qualified.
C) is adverse.
D) is a disclaimer of opinion.
Q3) The dollar amount of some misstatements cannot be accurately measured. If, for example, the client was unwilling to disclose an existing lawsuit, the materiality question the auditor must evaluate in such a situation is
A) what effect will it have on net income.
B) how will it affect management's future decisions.
C) whether it may increase the auditor's exposure to lawsuits.
D) what effect it will have on statement users.
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) Which of the following engagements would most likely be a compilation engagement?
A) An engagement with respect to financial statements attached to a personal tax return.
B) An engagement with respect to financial statements for a large public company.
C) An engagement with respect to financial statements for a company that has a large bank loan.
D) An engagement with respect to financial statements that accompany future-oriented information to obtain financing.
Q2) Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm. Leon Levy is the auditor in charge of the audit. The accountable party in this assurance engagement is
A) Leon Levy.
B) Pilott & Levy.
C) management of Thermos Inc.
D) the board of directors of Thermos Inc.
Q3) Outline the three performance standards of CICA Handbook section 5025, "Standards for Assurance Engagements."
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