Audit and Assurance Review Questions
Course Introduction
Audit and Assurance is a comprehensive course that explores the principles, procedures, and practices involved in auditing financial statements and related assurance services. The course covers topics such as audit planning, risk assessment, internal control evaluation, evidence gathering, and reporting. Emphasis is placed on professional ethics, auditing standards, and regulatory environments that guide auditors in their responsibilities to stakeholders. Students will develop analytical and critical thinking skills through case studies and real-world scenarios, preparing them to identify and address issues in the audit process and ensure the reliability and integrity of financial information.
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) Herbert Zora is having financial statements prepared by his PA to accompany his tax return. His primary concern is cost. Of the following, the lowest-cost engagement that the PA can perform for Zora's financial statements is
A) compilation.
B) review.
C) audit.
D) WebTrust.
Answer: A
Q2) When do individuals and organizations typically need assurance services?
A) usually only when organizations obtain debt or other loans
B) for five years from the start of an organization until debt is retired
C) only when historical data, such as financial information, needs to be audited
D) on an ongoing basis, as demand for forward-looking information increases
Answer: D
Q3) Which of the following is not a cause of information risk?
A) simple exchange transactions
B) voluminous data
C) remoteness of information
D) biases and motives of the provider
Answer: A
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) Who do the external auditors and the internal auditors usually report to?
A) senior management
B) audit committee
C) chief executive officer
D) director of internal audit
Answer: B
Q2) There are many elements of quality control at the firm level. Which element does "processes should exist for following up internal and external complaints" relate to?
A) engagement performance
B) engagement quality control review
C) documentation
D) general human resource policies
Answer: B
Q3) The most common organizational form used by public accounting firms is
A) sole proprietorship or partnership.
B) professional corporation.
C) corporation.
D) co-operative.
Answer: A
Page 4
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Chapter 3: Legal Liability
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Sample Questions
Q1) Enron and Equity Funding are companies that suffered from large frauds by corporate management. One important lesson with respect to such cases is that
A) when a company does really well financially it is important to suspect that such results are always inflated.
B) an investigation of the integrity of management is an important part of deciding upon the extent of audit work.
C) securities and exchange commissions expect auditors to be perfect in their assessment of management.
D) partners and staff should cooperate in preparing working papers that prove the accuracy of the financial statements.
Answer: B
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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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) Each of the following situations involves a possible violation of the provincial institutes Rules of Professional Conduct. For each situation, (1) decide whether or not the Rules have been violated, and (2) briefly explain how the situation violates (or does not violate) the Rules.
A) Johnny Line has a successful dentistry practice in Calgary. Johnny has recommended one of his patients to Leslie King, public accountant. To show gratitude for the referral, Leslie has agreed to pay Johnny 5% of the fee for audit services rendered by Leslie to Johnny's patient. Leslie discloses the payment agreement to her new client. Violation? Yes No
Q2) Society has attached a special meaning to the term professional. A professional is
A) someone who has passed a qualifying exam to enter the job market.
B) any person who receives pay for the services performed.
C) a person who is expected to conduct himself or herself at a higher level than the requirements of society's laws or regulations.
D) someone who has both an education in the trade and on-the-job experience received under an experienced supervisor.
Q3) List the components of the auditor's professional judgment framework.
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Chapter 5: Audit Responsibilities and Objectives
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Sample Questions
Q1) If the purchase of a long-term note receivable is included as cost of goods sold, there is a violation of the
A) existence objective.
B) completeness objective.
C) classification objective.
D) timing objective.
Q2) The reason auditors accumulate evidence is to
A) defend themselves in the event of a lawsuit.
B) justify the conclusions they have otherwise reached.
C) satisfy the requirements of the relevant provincial securities regulations.
D) enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.
Q3) What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?
A) resign from the audit
B) inform the Board of Directors
C) consult with a lawyer
D) call the police
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) Your client, Macilbink Ltd., manufactures calendars, books, and magazines. The printing presses that they use are only three years old, yet new technology has been developed that would result in cuts in ink and electricity costs by over 20%, while simplifying the setup process, making smaller production runs more feasible. Macilbink Ltd. is facing lowered demand for its products and will need to change direction or innovate to stay in business. The effect of the new printing technology has resulted in which of the following risk assessment changes by Macilbink Ltd.'s auditors?
A) decreased control risk
B) increased control risk
C) decreased client business risk
D) increased client business risk
Q2) The official record of the meetings of the board of directors and shareholders is contained in the corporate A) bylaws.
B) charter.
C) minutes.
D) license.
Q3) What are the three main factors that influence the organizational structure of all public accounting firms?
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Page 8
Chapter 7: Materiality and Risk
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Sample Questions
Q1) The inherent risk of programming errors (and thus processing errors for the affected application systems) increases when
A) programs are customized by an external software house.
B) the company uses an Internet-based applications service provider.
C) standard software packages are used for processing transactions.
D) programs are customized by an understaffed information system group.
Q2) Assessing design effectiveness and conducting tests of controls are required when the auditor
A) chooses to set control risk below 100 percent and relies on the controls.
B) chooses to set control risk below 100 percent even if there is no reliance placed on controls.
C) is planning the audit.
D) tests the design effectiveness.
Q3) Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?
A) AR / DR
B) IR × CR
C) IR × DR
D) CR × DR
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) You have just finished documenting your understanding of cycle controls at an audit engagement.
Required:
A) Explain how you will identify the controls that will be tested.
B) What process will you follow for weakness in internal controls?
Q2) Management's objectives with respect to internal control include
A) having reasonable assurance that the financial statements are in accordance with IFRS or ASPE.
B) ensuring that all policies and procedures are clearly documented to reduce employee training costs.
C) preventing fraud and illegal activities at all costs.
D) providing reasonable assurance that the goals and objectives important to the entity have been met.
Q3) The methods that management uses to supervise the entity's activities are called A) personnel practices.
B) management control methods.
C) methods of assigning authority and responsibility.
D) management's operating style.
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10
Chapter 9: Audit Evidence
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Sample Questions
Q1) Reperformance is often conducted using computer-assisted audit techniques. The most effective use of generalized audit software for reperformance would be to
A) recalculate a whole class of transactions, helping to quantify dollar errors.
B) determine on a test basis whether posting and summarization is performed accurately.
C) confirm whether evidence has been recorded for the entire period under audit.
D) select a sample of transactions for recalculation.
Q2) At the first day of work at a PA firm, staff are given their own laptop computer for use in working with clients and other data.
Required:
A) What is the typical structure of client working paper files?
B) How is client data protected from unauthorized change?
Q3) Identify and define the seven methods of audit evidence collection. Which two types of evidence are the most expensive? Which three types of evidence are the least expensive? Which type of evidence would be most persuasive when testing the existence objective for long-term assets?
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) A procedure designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances is a(n)
A) substantive test.
B) analytical test.
C) test of controls.
D) definition of dollar-unit sampling.
Q2) CAS 240 requires which of the following to be considered a significant risk?
A) revenue recognition
B) inventory valuation
C) accounts receivable valuation
D) calculation of income taxes
Q3) Audit risk is assessed at which level of the audit?
A) account
B) cycle
C) transaction-related audit objective
D) overall audit
Q4) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Page 12
Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) 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.
Q2) 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.
Q3) 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.
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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Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) The auditor obtains corroborating audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?
A) A substantial number of accounts are in dispute.
B) Internal control over accounts receivable is ineffective.
C) Client records include a large number of relatively small balances.
D) The auditor believes that recipients of the requests are unlikely to give them consideration.
Q2) As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is
A) higher cost of goods sold.
B) increased bad debt expenses.
C) fictitious revenue.
D) fictitious expenses.
Q3) State the five specific balance-related audit objectives as applied to accounts receivable.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The purpose of the audit procedure to "examine underlying documentation for subsequent cash disbursements" is to
A) uncover liabilities on the balance sheet that should not have been recorded until a subsequent period.
B) find the documentation relating to a cash disbursement.
C) uncover payments made in a subsequent accounting period that represent liabilities at the balance sheet date.
D) uncover cash disbursements recorded in a subsequent accounting period that should be recorded in that period.
Q2) A) Describe each of the five business functions that comprise the acquisition and payment cycle.
B) Describe the key documents used in processing purchase orders for the acquisitions and payment cycle.
C) Discuss the key documents and records used in recognizing the liability function in the acquisitions and payment cycle.
Q3) Describe the two objectives that are most important in auditing accumulated amortization. Explain why these objectives are important.
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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) What are inventory price tests and inventory compilation tests? Provide an example of each.
Q3) It is frequently possible to test the physical inventory prior to the balance sheet date when
A) there are accurate perpetual inventory master files.
B) year-end sales are small.
C) the internal control system is no better at year-end than at an earlier point in time.
D) client counts inventory at interim dates.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) Which of the following controls will help to detect unauthorized changes to payroll master files and help to detect whether terminated employees are still being paid?
A) use of authorized change forms
B) periodic review of master files
C) use of master files to print T4s
D) use of master files to print payroll cheques
Q2) 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
Q3) "Existing payroll transactions are recorded" is the control objective of
A) authorization.
B) completeness.
C) existence.
D) accuracy.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) The emphasis in the audit of dividends is on A) ending equity balance.
B) transactions.
C) opening dividends payable balance.
D) confirming the number of shares outstanding.
Q2) 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.
Q3) State the specific balance-related audit objectives applicable to notes payable and interest and, for each objective, identify one common test of details of balances.
Q4) Describe the risks of error and fraud in the debt or equity accounts.
Q5) Most large corporations employ the services of a stock transfer agent for the purpose of
A) maintaining the shareholder records.
B) recording share capital in the accounts.
C) issuing the shares for the company.
D) ensuring that stock issuances are complying with federal and provincial laws.
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Chapter 17: Audit of Cash Balances
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Sample Questions
Q1) Because cash is the most desirable asset for people to steal, it has a higher
A) inherent risk.
B) control risk.
C) detection risk.
D) materiality.
Q2) 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
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.
Q4) From an audit perspective, an imprest bank account at a client can
A) require less time for the audit of general cash.
B) increase audit risk.
C) result in an increase in control risk.
D) improve client internal controls.
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Chapter 18: Completing the Audit
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Sample Questions
Q1) At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the
A) management letter.
B) representation letter.
C) engagement letter.
D) letters testamentary.
Q2) A) Discuss the purposes of performing analytical procedures during the audit completion phase.
B) State the two purposes of the client representation letter.
Q3) 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
Q4) State the two primary types of subsequent events that require consideration by management and evaluation by the auditor and give two examples of each type.
Q5) Discuss the purpose of a management letter.
Q6) Describe the items the auditor is required to report to the audit committee.
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Chapter 19: Audit Reports on Financial Statements
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Sample Questions
Q1) 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.
Q2) PA firm has been auditing Big Manufacturing Company (BMC) for several years. Last year, BMC converted its inventory and purchasing systems to a new system effective December 31, the date of the year-end. To their horror, the PA firm discovered at the beginning of the current year that there was a cutoff error in the accounts payable system of $25 million dollars LAST YEAR. Neither the client nor the firm had detected that the purchases of December 31 had been omitted from the old computer system transaction processing and had been recorded only in the new computer system, understating last year's expenses. Last year's financial statements have been restated and the error disclosed in the notes to both last year's and this year's financial statements. What type of audit opinion will BMC receive this year?
A) qualified
B) disclaimer
C) adverse
D) unqualified
Q3) Discuss how materiality affects audit reporting decisions.
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Page 21
Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) The Federal Auditor General provides the results of operational audits to Parliament in Auditor General reports. What type of engagements are these?
A) direct reporting
B) attest engagement
C) review engagement
D) compilation engagement
Q2) Before performing a review of an entity's financial statements, an accountant should A) complete a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.
Q3) Define "attestation engagements."
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