Ethics in Auditing Exam Preparation Guide
Course Introduction
Ethics in Auditing examines the fundamental principles and codes of conduct that guide professional auditors in their responsibilities to clients, employers, and the public. The course addresses the moral and legal obligations of auditors, including the importance of objectivity, integrity, confidentiality, and professional skepticism. Students explore real-world cases of ethical dilemmas, learn frameworks for ethical decision-making, and review contemporary regulatory and industry standards. By understanding and applying ethical principles, future auditors are equipped to uphold public trust and maintain the credibility of the audit profession.
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) 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) 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
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Page 3
Chapter 2: The Public Accounting Profession and Audit Quality
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Sample Questions
Q1) 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
Q2) During which phase(s) of the financial statement audit does the auditor "evaluate evidence" when using a risk assessment approach?
A) the risk assessment phase
B) the risk response phase
C) the reporting process phase
D) the risk assessment, risk response, and reporting phases
Answer: D
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4
Chapter 3: Legal Liability
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Sample Questions
Q1) Pierre, a CPA, was convicted of stealing money from his clients and deliberately preparing personal tax returns that were false. In addition, Pierre will likely
A) need to take additional training courses to upgrade his tax skills.
B) need to defend himself to prove non-negligent performance.
C) be charged with misconduct by his professional institution (or order).
D) have lack of privity with the federal and provincial tax authorities.
Answer: C
Q2) The standard of due care to which the auditor is expected to be held is referred to as the
A) prudent person concept.
B) common law doctrine.
C) due care concept.
D) reckless regard doctrine.
Answer: A
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Chapter 4: Professional Judgment and Ethics
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Q1) When the users of financial statements have confidence in the independence of the public accountant, it is referred to as independence in
A) fact.
B) appearance.
C) conduct.
D) total.
Q2) What should a PA do if approached by a client where he and his firm lack or do not have access to the technical knowledge required to complete the audit?
A) subcontract the audit to another firm
B) indicate that they can do a review engagement, not an audit
C) decline the new audit engagement
D) conduct the engagement, but prepare a qualified audit report
Q3) As a member of a professional accounting association, when considering the applicability of the rules of professional conduct, a PA would be responsible for compliance by
A) themselves only.
B) their partners in the practice and themselves.
C) their employees.
D) themselves, their employees, and partners.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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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) The decision to continue doing the audit of an existing client is
A) as important as deciding whether or not to accept a new client.
B) less important than deciding whether or not to accept a new client.
C) more important than deciding whether or not to accept a new client.
D) only to be reconsidered if the client's operations or upper management has changed.
Q3) Tests of details of balances are specific procedures intended to A) identify the details of internal controls.
B) prove that the accounts with material balances are classified correctly.
C) test for monetary errors in the financial statements.
D) prove that the trial balance is in balance.
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Chapter 6: Client Acceptance and Planning the Audit
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Sample Questions
Q1) The Canadian Auditing Standards state that the auditor must develop an audit plan. List and explain the components that must be included in the auditor's plan.
Q2) When the auditor has properly planned and performed the audit to reduce risk to an acceptably low level that is consistent with the objective of the audit, this means that the auditor has conducted enough work to
A) reduce inherent risks to an acceptable level.
B) increase detection risk to a satisfactory level.
C) detect errors in internal controls so that control risk can be set higher.
D) detect material misstatements to the targeted level of assurance.
Q3) A client's performance measurement system includes key performance indicators that management uses to
A) measure its profitability.
B) compare its performance with prior periods.
C) prepare the financial statements.
D) measure progress toward its objectives.
Q4) Knowledge of the client's industry and external environment can be obtained in different ways. Discuss some of the ways that this knowledge can be obtained.
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Chapter 7: Materiality and Risk
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Sample Questions
Q1) The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and determined a detection risk of 10%. If control risk had been 80%, detection risk would be about
A) 16%.
B) 10%.
C) 6%.
D) 5%.
Q2) 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.
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.
Page 9
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) The auditor may identify some risks that cannot be effectively tested by substantive tests alone. For example, when there are paperless transactions (perhaps using EDIelectronic data interchange). To address these risks, the auditor is required to A) assess the design effectiveness of relevant controls and test them. B) obtain an understanding of the controls and test them if reliance is intended. C) obtain an understanding of the controls and assess their design effectiveness. D) test the controls that address the paperless aspects of the transactions.
Q2) A) The COSO internal control framework consists of five components. Describe each of these components.
B) Custody of assets and reconciliation should be separated to contribute to strong internal control. List the general categories of activities that should be separated.
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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Chapter 9: Audit Evidence
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Sample Questions
Q1) If most companies in the industry use FIFO inventory valuation and straight-line depreciation, and the audit client uses LIFO and double-declining balance, comparisons of client and industry data
A) will be a meaningful highlight of the result of these differences in accounting methods.
B) will enable the auditor to spot errors but not irregularities. C) will enable the auditor to spot irregularities but not errors.
D) may not be meaningful, affecting the comparability of data.
Q2) Which of the following types of evidence would be considered most reliable in the audit of accounts payable?
A) review of internal budgets for the period under audit
B) inquiry of management with respect to recent purchases
C) inspection of client purchase orders
D) inspection of supplier invoices
Q3) The auditor's decisions regarding evidence accumulation can be broken into five subdecisions. One decision relates to determining the nature of the audit procedure to be used to collect the evidence; i.e., "which audit procedures to use." Identify and discuss the remaining four audit evidence decisions that the auditor makes.
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11
Chapter 10: Audit Strategy and Audit Program
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Sample Questions
Q1) When considering the relationships between types of audit tests and evidence, which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls?
A) inspection, recalculation, observation, inquiry, and reperformance
B) inspection, recalculation, external confirmation, and reperformance
C) recalculation, observation, inquiry, analytical procedures, and reperformance
D) analytical procedures, inspection, recalculation, and reperformance
Q2) When considering the relationships between types of audit tests and evidence, which of the following procedures is used only for tests of details of balances?
A) inspection
B) recalculation
C) reperformance
D) external confirmation
Q3) Audit risk is assessed at which level of the audit?
A) account
B) cycle
C) transaction-related audit objective
D) overall audit
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Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) You are working on the testing of internal controls over price changes in the inventory system. You completed the controls testing to determine whether all price changes were approved by the senior accountant, by reference to master file change forms. In order to place reliance on this control, your audit supervisor has decided that the error rate in the population should be less than 1%. When you calculated your sample size, you used a confidence level of 90% and predicted an error rate of less than one percent. Based on these decisions, you examined 150 inventory price master file change forms. In your testing you uncovered two deviations. Based on these results, you calculate that the actual error rate in the population could be as high as 2.33%.
Required:
A) What actions are available to you regarding your planned reliance on the master file change controls?
B) What are the advantages and disadvantages of each action?
C) How would you decide which action to take?
Q2) A common use of block testing is testing
A) cutoff.
B) existence.
C) authorization.
D) valuation.
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Page 13
Chapter 12: Audit of the Revenue Cycle
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Sample Questions
Q1) The defalcation process that postpones entries for the collection of accounts receivable to conceal an existing cash shortage is referred to as
A) kiting.
B) lapping.
C) computer fraud.
D) financial statement fraud.
Q2) Most companies recognize sales when
A) a customer order is received.
B) the merchandise is shipped.
C) the merchandise is received by the customer.
D) cash is received on account.
Q3) The primary purpose of accounts receivable confirmation is to satisfy the A) existence objective.
B) existence and cutoff objectives.
C) accuracy and cutoff objectives.
D) existence, accuracy, and cutoff objectives.
Q4) State the five specific balance-related audit objectives as applied to accounts receivable.
Q5) Outline the key areas that the auditor would review as part of general controls.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Sample Questions
Q1) The internal control that requires "approval of acquisitions at the proper level" satisfies the objective of A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
Q2) One of the ways to prevent the use of fictitious suppliers to steal company funds is to A) have adequate network access controls to prevent unauthorized access to transaction files.
B) ensure that accounts payable programs are available only in source code.
C) establish controls to establish only approved vendors.
D) reconcile the accounts payable trial balance to the general ledger.
Q3) Because of the importance of tests of controls for acquisitions and cash disbursements, it is common in this audit area to use
A) attributes sampling.
B) variables sampling.
C) probability-proportional-to-size sampling.
D) block sampling.
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15
Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) A public accountant observes his client's physical inventory count on December 31. There are eight inventory-taking teams and a tag system is used. The public accountant's observation normally may be expected to result in detection of which of the following inventory errors?
A) The inventory takers forgot to count all the items in one room of the warehouse.
B) An error is made in the count of one inventory item.
C) Some of the items included in the inventory had been received on consignment.
D) The inventory omits items on consignment to wholesalers.
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) Discuss the methodology for designing tests of details of balances for inventory.
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Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) The internal auditor is running a computer-assisted audit test that compares names and wage rates in the personnel files (stored on optical disk) with the wage rates in the payroll master file and the whole year's payroll transaction files. What is the purpose of these tests?
A) to determine whether any employees were not paid in the most recent pay
B) to check for wage rates that are under the amount specified by the union contract
C) to help with the reconciliation of wage rates to the T4 summary
D) to determine whether terminated employees are still being paid
Q2) To test whether the client has fulfilled its legal obligation in submitting payments for all payroll withholdings, the auditor must first
A) contact client's independent legal counsel.
B) know the dates when tax payments are due.
C) trace these payments to the imprest payroll account.
D) determine the client's requirements for submitting the payments.
Q3) State the six specific transactions-related audit objectives as related to payroll and for each objective state one common test of controls that can be used to test the objective.
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Page 17
Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Sample Questions
Q1) 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.
Q2) The tests of details of balances procedure that requires the auditor to trace the totals of the notes payable list to the general ledger satisfies the objective of A) existence.
B) completeness.
C) accuracy.
D) rights and obligations.
Q3) Discuss the overall objectives of the audit of notes payable.
Q4) When the auditor examines the minutes of board of directors' meetings for the amount of the dividend per share and the dividend date, the auditor is checking for A) completeness.
B) valuation.
C) understandability.
D) existence.
Page 18
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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) What is the purpose of an extended test of the bank reconciliation?
A) to verify whether all transactions included in the journals for the last month of the year were correctly allocated to the bank reconciliation
B) to compensate for material weaknesses in internal control with respect to segregation of duties
C) to increase detection risk for the audit of cash
D) to verify whether specific transactions that flowed through the cash account were correctly recorded
Q3) What is an important benefit of independent preparation of bank reconciliations?
A) an opportunity to independently check that cheques have two signatures
B) the client being able to check that the bank is processing transactions correctly
C) the ability to internally verify cash receipt and disbursement transactions
D) the best time to carefully account for cheques issued
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Chapter 18: Completing the Audit
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Q1) An agreement that commits the firm to a set of fixed conditions in the future regardless of what happens to profits or the economy as a whole is a definition of a A) contingent liability.
B) potentially hazardous agreement.
C) commitment.
D) conditional contract.
Q2) Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that came into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation
A) did not take place until after year-end.
B) took place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.
Q3) List four specific matters that should be included in a client representation letter.
Q4) Discuss the purpose of a management letter.
Q5) 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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Q1) When the auditor knows that the financial statements may be misleading because they were not prepared in accordance with an acceptable financial reporting framework, he or she must issue
A) a qualified opinion.
B) an adverse opinion.
C) a disclaimer of opinion.
D) a qualified or an adverse opinion, depending on the materiality of the item in question.
Q2) The appropriate date for the audit report for a public company is the date on which the
A) client's fiscal year ended.
B) auditor and client entered into a contract.
C) board of directors approved the financial statements.
D) auditor prepares and delivers the report to the client.
Q3) 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.
Q4) Discuss how materiality affects audit reporting decisions.
Page 21
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Chapter 20: Other Assurance and Nonassurance Services
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Sample Questions
Q1) You have just signed off the audit report on the financial statements of your client. What type of engagement did you complete?
A) review
B) direct reporting
C) attest and assurance
D) operational
Q2) Identify the reporting standards for compilation engagements.
Q3) "An engagement where the practitioner expresses a conclusion on a written assertion about a subject prepared by a party accountable for the assertion, such as management" is the definition of a(n)
A) audit engagement.
B) attestation engagement.
C) review engagement.
D) assurance engagement.
Q4) A review engagement requires what amount of evidence to be accumulated?
A) minimal
B) moderate
C) extensive
D) maximum
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