Auditing Practice Exam
Course Introduction
Auditing is a comprehensive course that explores the principles, practices, and procedures involved in the independent examination of financial statements and related operations to ensure accuracy, transparency, and compliance with regulatory standards. Students will learn about the roles and responsibilities of auditors, the ethics and legal environment of auditing, various types of audits, risk assessment, and internal control systems. The course also covers audit planning, evidence collection, documentation, and reporting, providing both theoretical knowledge and practical skills needed to evaluate an organizations financial integrity and operational effectiveness.
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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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 a corporate tax return, the report provided by the Canada Revenue Agency auditor would describe
A) an opinion on the likelihood of tax return error.
B) the likely accounting errors that could contribute to tax errors.
C) management issues with respect to accurately reporting taxes.
D) corporate income tax overages or income tax underpayments.
Answer: D
Q3) 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
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) There are many elements of quality control at the firm level. Which element does the statement "management within a firm should ensure that qualified personnel monitor and address non-compliance with quality-control procedures" fall under?
A) leadership and responsibilities within the firm
B) general ethical requirements
C) general human resource policies
D) engagement quality control review
Answer: A
Q2) Larger audits may have established procedures that utilize an audit committee whenever there is a dispute between management and the auditors. What is the purpose of such procedures?
A) to ensure that the auditor understands management's point of view
B) to improve the competence of the financial statement auditors
C) to facilitate the auditors' independence from management
D) to help make sure the audit is conducted following GAAS
Answer: C
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Chapter 3: Legal Liability
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Q1) The court ruled that Jones did not rely on the financial statements in his decision to purchase shares of Manumite Limited. Instead, Jones relied upon his discussions with the owners and with financial analysts. This result illustrates A) absence of negligence.
B) lack of privity.
C) contributory negligence.
D) absence of causal connection.
Answer: D
Q2) An example of an audit failure is when the
A) auditor issues an erroneous audit opinion as the result of a failure to comply with the requirements of GAAS.
B) audit opinion is qualified.
C) company files for bankruptcy less than 12 months after receiving an unqualified opinion.
D) auditor issues an erroneous audit opinion as the result of an undiscovered fraud that took place in the period being audited.
Answer: A
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Page 5
Chapter 4: Professional Judgment and Ethics
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Q1) When public accountants are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in A) fact.
B) appearance.
C) conduct.
D) total.
Q2) Which of the following situations would be an example a of self-review threat? Prior to commencing the audit engagement, PA has completed A) personal and corporate tax returns.
B) audit of a company where the client owns a minority interest. C) purchase price allocation calculation for a company that the client purchased during the year.
D) audit of the non-for profit organization of the client.
Q3) What are the qualities of professional skepticism?
Q4) List the components of the auditor's professional judgment framework.
Q5) What are the common judgement traps and how can they be avoided?
Q6) What is the difference between auditors and lawyers with respect to privileged information?
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Chapter 5: Audit Responsibilities and Objectives
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Q1) 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.
Q2) The Big Insurance Company implemented a new computer system to track and record insurance premiums receivable. The program automatically prints invoices and sends them to customers when premiums are due. Due to a program error, a whole series of invoices were included in sales but not in accounts receivable. The general balance-related audit objective affected by this activity is
A) completeness.
B) accuracy.
C) classification.
D) existence.
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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Q1) White Top Telephones is the largest telephone distributor in the province, distributing wired and cordless phones as well as cell phones. Management always seems to be in a rush and is difficult to approach. Unfortunately, this attitude has permeated down to all of the staff. Everyone seems to be hurrying about, doing what needs to be done. Sometimes it seems as if they don't even have time for their customers. Yet, everything seems to get done. The company's website has a lengthy privacy policy statement indicating that customers are number one and that all data is kept secure.
Required:
Explain the importance of the control environment and corporate governance structure. During what phases of the risk assessment and planning process would the control environment and corporate governance structure be documented and assessed?
Q2) One of the purposes of developing a client risk profile is to assist the auditor in A) developing the pertinent audit procedures for tests of internal controls.
B) assessing the client's business risk.
C) locating related parties that need to be disclosed.
D) deciding whether fraud or illegal acts have taken place.
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Chapter 7: Materiality and Risk
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Q1) 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
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) A PA firm can experience high levels of business risk if the audit firm
A) does a poor job preparing client risk profiles.
B) pays its employees wages that are not in line with the market.
C) experiences significant litigation or has clients that do not pay their bills.
D) has a generous vacation policy for its staff.
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) Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store. The system Carrie is looking at currently costs $60 000 and is expected to be effective for 5 years. In order to justify the implementation of the security tag system, average theft per year should be at least
A) $1000.
B) $12 000.
C) $60 000.
D) Theft should be prevented at all costs.
Q2) 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) 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?
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Page 10
Chapter 9: Audit Evidence
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Q1) The audit working papers serve as a record of the evidence accumulated and the results of the audit tests. This helps to demonstrate that the audit was
A) kept properly confidential; information was held secure.
B) completed using Canadian generally accepted accounting principles.
C) organized effectively with no mistakes in calculations.
D) conducted in accordance with Canadian generally accepted auditing standards.
Q2) When an auditor calculates the gross margin as a percent of sales and compares it with previous periods, this type of evidence is called
A) physical examination.
B) analytical procedures.
C) observation.
D) enquiries of client.
Q3) "The detailed instructions for the collection of a particular type of audit evidence" is the definition of a(n)
A) sampling plan.
B) audit procedure.
C) audit plan.
D) audit program.
Q4) Identify and explain the three determinants of the persuasiveness of evidence.
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Chapter 10: Audit Strategy and Audit Program
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Q1) Symco Inc. has a policy that all cash disbursements of $2000 or more must be approved by the treasurer. While performing a test of controls on a sample of disbursements, Craig discovered that the assistant controller had authorized a cash disbursement of $3500 while the treasurer was on vacation. This control deviation is significant only if
A) it is determined that the assistant controller is not qualified to approve cash disbursements of this size.
B) it occurred with sufficient frequency to cause the auditor to believe there may be material dollar misstatements in the statements.
C) the amount of the deviation identified is larger than the planning materiality.
D) the amount of the deviation identified is larger than the planning materiality and no compensating control exists.
Q2) 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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Q1) During the audit of the fixed asset section, the auditor decided to inspect source documents supporting all fixed asset additions exceeding $3000. This type of audit procedure is called a
A) census of the strata over $3000.
B) analytical review.
C) attribute sample.
D) monetary unit sample.
Q2) The acceptable risk of incorrect acceptance (ARIA) has a significant effect on sample size. The relationship of ARIA to sample size is
A) direct (larger ARIA = larger sample).
B) inverse (larger ARIA = smaller sample).
C) variable (sometimes larger, sometimes smaller).
D) not determinable.
Q3) To ensure that all the population items will be properly subjected to the sample selection process, the auditor should
A) use a random number generator for sample selection.
B) use monetary unit sample selection methods.
C) document the range of document numbers in use by the client.
D) test the population for completeness.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Q1) A) An auditor is concerned that accounts receivable may be understated due to sales to customers that have been omitted from the sales journal and from the accounts receivable master file. Describe the procedure(s) the auditor should perform in these circumstances.
B) Describe how the auditor tests the classification objective for accounts receivable.
Q2) Which of the following control weaknesses could result in problems with collectability of accounts receivable?
A) Unauthorized individuals can establish or change credit limits.
B) Matching shipping documents to sales records is done weekly.
C) When there is one error in a batch of transactions, the whole batch is rejected.
D) Cash receipts are matched to the customer accounts rather than against specific invoices.
Q3) The appropriate test of controls for separation of duties is
A) documentation.
B) confirmation.
C) examination.
D) observation.
Q4) Outline the key areas that the auditor would review as part of general controls.
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) The test of transactions that requires the recomputing of cash discounts satisfies the objective of A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q2) Discuss the key internal controls related to the disposal of manufacturing equipment.
Q3) An auditor learns that his client has paid a vendor twice for the same shipment, once based upon the original invoice and once based upon the monthly statement. A control procedure that should have prevented this duplicate payment is
A) attachment of the receiving report to the invoice only.
B) prenumbering of disbursement vouchers.
C) use of a limit or reasonableness test.
D) prenumbering of receiving reports.
Q4) Discuss the audit tests the auditor would use to audit capital assets acquired in prior years.
Q5) Describe the three types of tests that need to be performed by the auditor when auditing a client's data conversion process.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) 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.
Q2) The auditor must verify whether the physical counts were correctly summarized, the inventory quantities and prices were correctly extended, and the extended inventory was correctly footed. These tests are called
A) price tests.
B) compilation tests.
C) cost tests.
D) mechanical tests.
Q3) To protect the inventory, Globus Corp wants to assign the custody of inventory to a specific responsible individual. Globus can accomplish this by
A) having a designated employee to authorize movement of inventory.
B) requiring employees to have photo id cards.
C) having restricted access to the production facility.
D) performing frequent inventory counts.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) "Recorded payroll payments are for work actually performed by existing employees" is the control objective of
A) authorization.
B) completeness.
C) occurrence.
D) accuracy.
Q2) Otto decided to outsource the payroll function to Magna Plus. The controller of Otto should still
A) recalculate the payroll and its remittance to ensure accuracy.
B) review and authorize each individual payment to employees.
C) review the payroll journal and compare the total hours worked with the payroll time records.
D) inquire with the manager of Magna Plus if they suspect any unusual transactions.
Q3) A form issued for each employee summarizing the earnings record for the calendar year is the
A) rate authorization form.
B) summary payroll report.
C) payroll master file.
D) T4 form.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Control risk for notes payable is usually assessed as low. This occurs because internal controls are normally good for notes payable and A) creditors would complain if the notes are not paid.
B) interest expense can easily be distinguished from bank service charges.
C) there are a small number of large transactions for this type of transaction.
D) inclusion in the accounts payable listing helps track the notes.
Q2) State the four audit concerns for capital stock and describe how the auditor typically verifies each of these areas.
Q3) Two of the audit objectives for notes payable are important because a misstatement could be material even if one note is omitted or incorrect. Which assertions are they?
A) completeness and valuation
B) existence and completeness
C) accuracy and existence
D) completeness and accuracy
Q4) Describe the three objectives of the auditor's examination of owners' equity.
Q5) 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.
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Chapter 17: Audit of Cash Balances
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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) The audit procedure that requires the auditor to record the last cheque number used on the last day of the year and subsequently trace to the outstanding cheques and the cash disbursements journal is performed to satisfy the audit objective of
A) detail tie-in.
B) existence.
C) completeness.
D) allocation.
Q3) During the audit of cash, the focus of the audit is to
A) do substantive tests of payments for supplies.
B) conduct control tests of sales transactions.
C) verify the bank reconciliation.
D) conduct control tests over payments.
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Chapter 18: Completing the Audit
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Q1) What audit approach is used to search for unknown commitments?
A) include as part of the search for subsequent events
B) conduct with substantive tests associated with the cutoff assertion
C) perform as part of the audit of each cycle or audit area
D) include with the legal letter sent to lawyers
Q2) Which level of risk does the auditor normally assign to the presentation and disclosure-related assertion of completeness for contingent liabilities and subsequent events?
A) low risk for inherent risks that required information may not be disclosed in the notes
B) medium for control risk with respect to identifying relevant events
C) medium with respect to providing adequate detail for the notes
D) high risk that all required information may not be disclosed in the notes
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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Chapter 19: Audit Reports on Financial Statements
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Q1) Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned about the possibility that management is trying to prevent discovery of misstated information. In such cases, which type of report should be issued?
A) a disclaimer of opinion in all cases
B) a qualification of both scope and opinion in all cases
C) a disclaimer of opinion whenever materiality is in question
D) a qualification of both scope and opinion whenever materiality is in question
Q2) 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.
Q3) Analyze the "Auditor Responsibility Section" of the standard Independent Auditor's Report. Explain the intended purpose of the sentences in this section.
Q4) Discuss how materiality affects audit reporting decisions.
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Page 21
Chapter 20: Other Assurance and Nonassurance Services
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Q1) Which of the following matters would be addressed in a report on the results of applying specified auditing procedures to financial information other than financial statements?
A) an opinion with respect to the quality of the information examined
B) explanations of the differences between audits, reviews, and special engagements
C) the factual results of the procedures
D) provision of negative assurance with respect to the accounts examined
Q2) The statement that "nothing came to our attention that would indicate that these statements are not fairly presented" expresses which of the following?
A) disclaimer of an opinion
B) negative assurance
C) negative confirmation
D) piecemeal opinion
Q3) Define "direct reporting engagements."
Q4) Describe the professional standards that must be followed when undertaking a compilation engagement as specified by the CICA Handbook.
Q5) Identify the reporting standards for compilation engagements.
Q6) Define "attestation engagements."
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