Assurance Services
Practice Questions
Course Introduction
This course provides an in-depth exploration of assurance services, focusing on the theory and practice underlying the processes that enhance the reliability and relevance of information for decision makers. Students will examine traditional audit services alongside a variety of emerging assurance engagements, including attestation and review services. Topics include risk assessment, internal controls, evidence gathering techniques, ethical and legal responsibilities of assurance providers, and current professional standards. Through case studies and practical applications, students develop the analytical skills necessary to evaluate and deliver assurance services across a wide range of contexts.
Recommended Textbook
Auditing The Art and Science of Assurance Engagements 12th 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) What type of information is available from www.sedar.com (System for Electronic Document Analysis and Retrieval)?
A) minutes of shareholders and directors meetings
B) transaction reports from major credit card companies
C) annual reports and management discussion and analysis
D) listings of all of the shareholders on record
Answer: C
Q2) In the audit of an individual's tax return, the criteria used would be
A) an accounting framework.
B) the Income Tax Act.
C) the client's policies for taxable income.
D) the auditor's judgment.
Answer: B
Q3) Auditors General are responsible for auditing which types of organizations?
A) public companies with shares issued to investors
B) private companies that have loans outstanding to banks or other creditors
C) ministries, departments, agencies, and crown corporations
D) any organization that submits tax returns to the tax authorities
Answer: C
3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Securities regulations in Canada are the responsibility of A) a national securities commission.
B) provincial securities commissions.
C) the professional accounting organizations.
D) office of the Auditor General of Canada.
Answer: B
Q2) One of the main advantages of a "big" public accounting firm is
A) their lower professional fees due to economies of scale.
B) their ability to share with the client knowledge and experience from similar companies they have audited.
C) their ability to audit nearly all the largest companies worldwide.
D) the increased reliability of their audit reports.
Answer: C
Q3) A key difference between the PCAOB in the U.S. and the CPAB in Canada is that
A) the CPAB is involved in the development of auditing standards.
B) the PCAOB is involved in the development of auditing standards.
C) the PCAOB conducts practice inspections of public company auditors.
D) the CPAB conducts practice inspections of public company auditors.
Answer: B
Page 4
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Chapter 3: Legal Liability
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Sample Questions
Q1) Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm
A) has failed to follow generally accepted auditing standards (GAAS).
B) deserves to lose the lawsuit.
C) should be asked to defend the quality of the audit.
D) should not be held responsible for the financial loss suffered by others.
Answer: C
Q2) Laws that have been passed through federal or provincial governments are A) statutory law.
B) judicial law.
C) criminal law.
D) common law.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Financial statement users cannot be expected to evaluate audit performance because they will not have the time or the competence to do so. In such a situation, how is public confidence in the quality of professional services enhanced? When there are A) only business majors hired to work as auditing students with public accounting firms. B) adequate controls at the public accounting firm to limit the amount of overtime worked.
C) high standards of performance and conduct on the part of all practitioners.
D) strict rules about the type of work that employees should complete on a daily basis.
Q2) Ethical dilemmas occur when
A) you know what you want to do but the rules say otherwise.
B) businesses disregard the laws and engage in illegal behaviour.
C) a person chooses to act in his/her own interest.
D) a choice must be taken about appropriate behaviour.
Q3) What are the qualities of professional skepticism?
Q4) 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.
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) The sole shareholder of Jade Company had a contractor pave the parking lot at the company building as well as the driveway of his home. Both paving jobs were billed to the company on a single invoice. The general balance-related audit objective affected by this activity is
A) existence.
B) allocation.
C) completeness.
D) rights and obligation.
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) 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 "opportunities" risk factor?
A) The company has lost a major account and income is falling.
B) Two major competitors have gone bankrupt as margins decline in the industry.
C) The Chief Executive Officer owns forty percent of the outstanding share capital.
D) New accounting standards provide three different methods for valuing financial instruments.
Q2) During discussion and inquiry with management, the auditor determined that the company has started a new line of business that requires a substantial investment in manufacturing equipment. The company has also implemented wireless scanning for its warehouse and inventory. Which of the following techniques will the auditor likely use to corroborate these statements?
A) further inquiry of the accounting personnel
B) inspection of recent sales invoices for types of sales
C) use of analytical procedures, comparing last year to this year
D) observation during the plant tour
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Chapter 7: Materiality and Risk
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Q1) If audit risk is increased, what happens to detection risk?
A) It stays the same.
B) It increases.
C) It changes based upon the audit procedures conducted.
D) It decreases.
Q2) Which of the following would be a signal of possible problems with management integrity?
A) reliance on debt rather than equity for financing permanent assets
B) rotation of holidays in the supervisory area over a period of months
C) rapidly declining profits or increasing losses over a period of years
D) frequent disagreements with regulators and the Canada Revenue Agency
Q3) Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is
A) total assets.
B) net income.
C) net working capital.
D) net income before taxes.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
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Chapter 8: Internal Controls and Control Risk
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Q1) The first step for management in the risk assessment process is to identify factors that may increase risk, for example failure to meet prior objectives. Then, management will
A) assess the likelihood of the risk occurring.
B) make sure that procedures are developed to eliminate the risk.
C) estimate the significance of that risk.
D) develop specific actions to reduce the risk to an acceptable level.
Q2) Jenny is the information technology support manager at CMH. Jenny is considered to be a super-user at CMH since she can circumvent normal controls. In order to address the risk of super-users, management should
A) remove the super-user.
B) establish effective compensating controls.
C) update the background check on the super-user on a yearly basis.
D) ensure that the super-user is familiar with the code of conduct of the company.
Q3) 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.
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Page 10
Chapter 9: Audit Evidence
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Sample Questions
Q1) A) There are four important purposes of analytical procedures. Identify each of these four purposes and for each purpose give a specific example of an analytical procedure that an auditor might perform.
B) Identify each of the five major types of analytical procedures and give an example of each.
C) One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions concerning evidence accumulation in later phases of the audit.
Q2) Most auditors prefer to replace external confirmation with analytical procedures whenever possible because the
A) analytical procedures are more reliable.
B) external confirmations are more expensive.
C) analytical procedures are more persuasive.
D) tests of details are more difficult to interpret.
Q3) Identify and explain the three determinants of the persuasiveness of evidence.
Q4) Identify the characteristics that working papers should have. For each characteristic, briefly explain why it is important.
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Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) Risks of fraud are assessed at which level(s) of the audit?
A) overall audit, transaction-related audit objectives
B) balance-related audit objectives only
C) overall audit, cycle, and account
D) cycle, account, and transaction-related audit objectives
Q2) You are conducting the audit of a medium-sized company that has a chief accountant and three employees. Segregation of duties is excellent, with jobs allocated to provide maximum levels of controls. Segregation is supported by accounting software with user identification and passwords that limit functions to the appropriate jobs.
Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a job-sharing basis so that all employees did some of every task to keep the work more interesting? Why?
Q3) When does the auditor normally conduct tests of controls?
A) prior to the completion of the tests of details
B) after the completion of all analytical review
C) prior to the preparation of the client risk analysis
D) prior to the finalization of the audit risk model
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Page 12
Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) 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.
Q2) An underlying feature of the random-based selection of items is that each A) stratum of the population be given equal representation in the sample.
B) each item in the population must be randomly ordered.
C) each item in the population should have an equal opportunity to be selected.
D) each item must be systematically selected using replacement.
Q3) The auditing standards indicate that
A) it is preferable to use statistical sampling instead of non-statistical sampling.
B) it is preferable to use non-statistical sampling instead of statistical sampling.
C) it is equally acceptable to use either statistical or non-statistical sampling.
D) non-statistical sampling should only be used if statistical sampling is too costly to use.
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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) A document that describes which accounts receivable accounts are to be written off and why is called a(n)
A) uncollectible account authorization form.
B) journal entry authorization form.
C) master file change form.
D) sales returns and allowances journal.
Q2) Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?
A) Shipping documents are matched to invoices.
B) Shipping details are automatically used as the invoicing source.
C) Shipping documents are prenumbered and accounted for.
D) Transactions are summarized daily for posting to the general ledger.
Q3) Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the
A) collectability of the balances confirmed.
B) ownership of the balances confirmed.
C) existence of the balances confirmed.
D) internal control over balances confirmed.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The purchase order, usually in writing, is a legal document that is
A) a non-binding agreement between client and vendor.
B) an offer to buy.
C) not enforceable if it is not in writing.
D) an acceptance of a vendor's catalogue offer to sell.
Q2) Discuss the key internal controls related to the disposal of manufacturing equipment.
Q3) Which of the following controls help to ensure that the receipt of raw materials for inventory is recorded in the correct period?
A) Supplier details are automatically retrieved from the supplier master file.
B) Receiving staff write down the date goods are received on the bill of lading.
C) Accounting staff record the date that goods are received in the accounting systems.
D) The transaction date entered must be the same as the system date.
Q4) State six specific balance-related audit objectives for accounts payable and for each objective describe one common test of details of balances.
Q5) Describe the audit procedures typically used to test for out-of-period liabilities (also referred to as the search for unrecorded accounts payable).
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) A common inventory observation procedure is to select a random sample of tag numbers and identify the tag with that number attached to the actual inventory. The audit objective being achieved by this procedure is
A) inventory as recorded on tags exists (existence).
B) existing inventory is counted and tagged (completeness).
C) inventory is counted accurately (accuracy).
D) inventory is classified correctly (classification).
Q2) When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that
A) all goods purchased before year-end are received before the physical inventory count.
B) no goods held on consignment for customers are included in the inventory balance.
C) no goods observed during the physical count are pledged or sold.
D) all goods owned at year-end are included in the current period inventory balance.
Q3) State the six functions that make up the inventory and distribution cycle and, for each function, identify the related documents and/or records that would be used by a manufacturing company.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) Which of the following describes the class of transactions associated with payroll?
A) posting costs of purchasing inventory
B) payment of employee services
C) payment of withholding taxes and benefits
D) writing off damaged inventory dropped by employees
Q2) A wage rate form that also documents a change in job responsibility for one of the warehouse employees should be approved by
A) human resources and the corporate controller.
B) the warehouse supervisor and human resources.
C) the warehouse supervisor.
D) human resources.
Q3) The most important control in the payroll cycle is clear, proper documentation of the employees job responsibilities and wages by the appropriate level of authority. This control is associated with which audit objective?
A) completeness
B) classification
C) valuation
D) occurrence
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Tests of details for notes payable interest expense and accrued interest can frequently be eliminated when
A) tests of controls are conducted over authorization and recording procedures.
B) notes are issued by a person independent of the accounting department.
C) the notes payable schedule indicates that all notes have been repaid.
D) results of analytical review are favourable.
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) The normal audit approach for the audit of bonds issued is to
A) examine transactions that occurred near the year-end date only.
B) verify each transaction taking place in the cycle for the entire year.
C) select a statistical sample of transactions throughout the year.
D) rely on controls rather than conducting substantive tests.
Q4) Discuss the overall objectives of the audit of notes payable.
Page 18
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Chapter 17: Audit of Cash Balances
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Q1) Which of the following is an essential internal control in the cash cycle?
A) use of two signatures on payroll cheques and payables cheques
B) independent receipt of the bank statement from the bank
C) careful accounting of the continuity of cheques returned from the bank
D) independent preparation of bank reconciliations
Q2) What is the best way to prevent potential alteration, deletion, or addition of cancelled cheques, duplicate deposit slips, or other documents provided with the bank statement?
A) Have the bank statements be provided unopened to an independent reconciler.
B) Have the person responsible for recording cash receipts do the bank reconciliation.
C) Have the signing officer(s) review the bank reconciliation.
D) Have the bank statements provided to the accounts payable supervisor.
Q3) Sandra is analyzing the cash cycle of her audit client. Which of the following could indicate a liquidity problem?
A) obsolete inventory
B) high level of inventory
C) inventory on consignment
D) backordered inventory
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Chapter 18: Completing the Audit
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Q1) The audit procedures for the subsequent events review can be divided into two categories: 1) procedures normally integrated as a part of the verification of year-end account balances, and 2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures would be in the second category?
A) Examine subsequent-period sales and purchases transactions to determine whether the cutoff is accurate.
B) Correspond with lawyers.
C) Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
D) Compare the subsequent period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.
Q2) Which of the following auditing procedures is ordinarily performed last?
A) reading of the minutes of the directors' meetings
B) confirming accounts payable
C) obtaining a client representation letter
D) testing of the purchasing function
Q3) Discuss three audit procedures commonly used to search for contingent liabilities.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Q1) The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard auditor's report that may be necessary and give reasons. State your assumptions.
A) During 2015, your client was sued by a customer who had a serious car accident as a result of scrap metal that had been dumped in the parking lot. The customer drove over the scrap metal, which became embedded in the tires of her vehicle. The tires blew and the car went out of control on a major highway. The amount in dispute is $400 000, with estimated legal bills of about $20 000. The client does not wish to disclose the suit in the financial statements.
B) During the current year, your client leased a large amount of equipment. As the lease qualifies as a capital lease, the equipment has been recorded as an asset, with the corresponding liabilities recorded on the financial statements. The implicit interest rate in the lease is 7 percent. The annual payments due over the terms of the lease have been disclosed in the notes to the financial statements.
Q2) There are five conditions that must be met before an auditor can issue a standard unqualified report. Discuss each of these five conditions.
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) Sean Clem has done a review engagement and prepared the tax return for your web design business for the last five years. The books and records have always been well organized, although year-end adjusting entries have been required. You do some of the accounting yourself and the rest of the accounting records are handled by your spouse, who is also an employee of the business.
This year, you would like to expand your business to provide ISP (internet service provider) services to your clients. This would involve purchasing additional computer equipment and software. You are also considering hiring an additional employee (you currently have three), and you are looking at obtaining a loan for $100 000 from the bank. The bank says that you should have your records audited, but you are not sure what this will mean.
Required:
What would Sean say to you about the differences between an audit and a review?
Q2) When conducting a review engagement, how is materiality calculated?
A) materiality is not calculated as a lower level of assurance is being provided
B) the concept of significance is used, rather than the concept of materiality
C) always as a percentage of net income before income taxes
D) in the same manner as an audit engagement
Q3) Define "attestation engagements."
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