External Auditing
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Course Introduction
External Auditing is a comprehensive course that examines the principles, procedures, and practices involved in the independent examination of financial statements by external auditors. The course explores the regulatory framework governing auditing, ethical considerations, risk assessment, audit planning, evidence gathering, and the evaluation of internal controls. Emphasis is placed on audit methodologies, reporting standards, and the auditors role in ensuring the credibility and reliability of financial information for stakeholders. Case studies and real-world scenarios are integrated to provide practical insights into the audit process and professional judgment required in various audit engagements.
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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Q1) One of the reasons that an auditor must be competent is so that they can
A) select the type and amount of evidence to accumulate.
B) explain to staff how the bookkeeping should be done.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
Answer: A
Q2) Which of the following terms best describes the increased likelihood that unreliable information will be provided to decision makers?
A) audit risk
B) information risk
C) inherent risk
D) business risk
Answer: B
Q3) An accountant records information. When conducting an audit, the auditor must possess
A) an ability to interpret generally accepted accounting frameworks.
B) an education beyond the bachelor's degree.
C) an ability to classify transactions by type.
D) an ability to organize and summarize economic events.
Answer: A
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) CAS 200 explains that as part of general qualifications and conduct, the auditor should be professionally competent. Which of the following help the auditor achieve competence?
A) using due care in the performance of all aspects of auditing
B) having an objective state of mind and independence from the client
C) having formal education and practical experience, and pursuing continuing education
D) conducting the audit using a risk-based approach and being skeptical
Answer: C
Q2) Dimitri works at a large public accounting firm. Dimitri referred one of his friends for a junior auditor position. Dimitri's friend was hired despite the fact that he had a criminal record. The partner at the firm did not perform a background check on Dimitri's friend since he was recommended by an employee. Which element of quality control has been compromised?
A) general ethical requirements
B) independence
C) general human resource policies
D) engagement performance
Answer: C
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Chapter 3: Legal Liability
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Sample Questions
Q1) Amin is distraught. Six months ago, a big-box stereo store opened just down the street from his independent stereo and music business and now he is unable to continue operating his business. Only eight months ago, you issued an unqualified audit opinion on his financial statements that showed the financial results of a well-run, profitable store. Amin's business is experiencing A) customer expectation gap. B) audit failure.
C) fiduciary duty.
D) business failure.
Answer: D
Q2) 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
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Page 5
Chapter 4: Professional Judgment and Ethics
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Q1) The rules of accounting bodies in Canada require their members to behave in the best interest of the profession and the public. Identify the situation where the accountant is acting in the best interest of the profession. An accountant
A) reports a fellow accountant after noticing that the accountant helped a client with tax evasion.
B) openly criticizes a fellow accountant's competencies after having lost a bid for a new client.
C) brags about his competence and professional title, and encourages clients to invest in a new venture he is starting.
D) refuses to cooperate with the new auditor after having lost a client.
Q2) Which of the following situations best describes an advocacy threat? PA has been hired to
A) consult with the corporate controller and the bank manager about the conditions for financing a loan.
B) manage the accounting department for three weeks while the corporate controller is on vacation.
C) complete the personal tax returns of all executive management.
D) prepare the year end journal entries for a subsidiary company.
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Chapter 5: Audit Responsibilities and Objectives
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Q1) Gabori Company would like to pay less income tax this year. It decided that it could do this by understating its inventory values, increasing costs of goods sold. This was done by deliberately pricing the inventory at incorrect amounts, so that it would be shown at a lower value than it was really worth (for example, items worth five dollars each were shown at fifty cents each). Which management assertion has been violated?
A) valuation
B) accuracy
C) statement presentation
D) completeness
Q2) XYZ Brick Company decided to inflate sales by recording fictitious sales. Several non-existent clients were created and the sales were added into the sales journal throughout the year. The general transaction-related audit objective affected by these actions is
A) occurrence.
B) completeness.
C) accuracy.
D) posting and summarization.
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Chapter 6: Client Acceptance and Planning the Audit
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Q1) The auditor will obtain a copy of the client's articles of incorporation (if applicable) and retain a copy in the permanent file. Important information in the articles of incorporation includes
A) the interest rates currently being paid for bonds that have been issued.
B) voting rights of each class of shares issued by the company.
C) which shares have been redeemed by the company in the current year.
D) the interest rates that are being received on long-term notes invested.
Q2) The Sarbanes-Oxley Act requires management to certify that it has informed the auditor and audit committee of any
A) related party transactions.
B) significant deficiencies in business practices.
C) significant deficiencies in internal controls.
D) specific business or industry risk.
Q3) Which of the following would you expect to find in a corporation's bylaws?
A) The kinds and amounts of capital stock authorized.
B) The date of incorporation.
C) The rules and procedures adopted by the shareholders of the corporation.
D) The types of business activities that the corporation is authorized to conduct.
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Chapter 7: Materiality and Risk
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Q1) An important role of inherent risk assessment during the audit process is the need to A) document the quality of the disaster recovery plan.
B) attempt to predict where misstatements are most and least likely in the financial statement segments.
C) train the audit staff to assess the integrity of management.
D) increase the level of analytical review.
Q2) A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed.
B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.
Q3) If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is A) $6300.
B) $778.
C) $63 000.
D) $77 778.
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Chapter 8: Internal Controls and Control Risk
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Q1) The board of directors is essential for effective corporate governance because it has ultimate responsibility to
A) make sure management implements proper internal control and financial reporting processes.
B) assist management in the preparation of the financial statements.
C) test internal controls and ensure they are working properly.
D) provide a report to the auditor confirming that internal controls are working properly.
Q2) Internal controls can never be regarded as completely effective. Even if systems personnel could design an ideal system, its effectiveness depends on the A) adequacy of the computer system.
B) proper implementation by management.
C) ability of the internal audit staff to maintain it.
D) competency and dependability of the people using it.
Q3) An important type of protective measure for safeguarding assets and records is A) adequate segregation of duties among personnel.
B) proper authorization of transactions.
C) the use of physical precautions.
D) adequate documentation.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Which of the following characteristics of samples would make the sample more sufficient?
A) Samples that contain at least one of each type of transaction that is in the population and have a high number of sample items.
B) Samples that contain items with a high likelihood of error and have large dollar values as well as being representative of the population.
C) Samples that contain multiple items from different layers of the population (strata) as well as all items that are above the materiality threshold.
D) Samples that contain items that have a high likelihood of error as well as being related to the audit assertions that are being tested.
Q2) The auditor is tracing from the duplicate sales invoices to related shipping documents with respect to the occurrence transaction-related audit objective. This type of evidence is
A) independent.
B) relevant.
C) timely.
D) related to external documentation.
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Chapter 10: Audit Strategy and Audit Program
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Q1) In the context of an audit of financial statements, substantive tests are audit procedures that
A) may be eliminated under certain conditions.
B) are designed to discover significant subsequent events.
C) may be either direct tests of financial balances or analytical tests.
D) will increase proportionately with the auditor's reliance on internal control.
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) Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.
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Chapter 11: Audit Sampling Concepts
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Q1) One of the purposes of using statistical sampling is to quantify sampling risk. For which of the following audit tests would sampling risk be zero?
A) The auditor used monetary unit sampling to select a sample of payroll payments.
B) The auditor used attribute sampling to select a sample of shipping documents.
C) The auditor sent empty (zero balance) external confirmations to suppliers with large dollar balances.
D) The auditor sent external confirmations to all financial institutions used by the client.
Q2) When systematic sample selection is used, the first item is selected randomly and all other items are selected automatically. If the characteristic of interest is not distributed randomly in the population, the systematic selection creates the possibility of A) bias.
B) abnormal frequency distribution.
C) judgmental intervention in the process.
D) selecting mostly larger dollar items.
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Chapter 12: Audit of the Revenue Cycle
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Q1) After the items for confirmation have been selected, the auditor must maintain control of the confirmations until
A) the names are provided to the client's personnel to type the envelopes.
B) the sealed envelopes are provided to the client's personnel to be mailed.
C) the responses are received by the client with the return mail.
D) they are returned by the debtor to the auditor.
Q2) One of the key internal controls to prevent transactions in the sales and collection cycle to fictitious customers is to
A) have the bank reconciliation done by someone who is independent of the treasury function.
B) account for the integrity of the numerical sequence of sales orders.
C) compare customer numbers entered to the customer master file.
D) include the sales price list of all products in the computer files.
Q3) What information would be considered semi-permanent as well as transaction information?
A) customer number or code
B) customer credit limit
C) transaction amount
D) current balance outstanding
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Page 14
Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) Comparing expenses to prior years is an effective analytical procedure for accounts payable because expenses from year to year are
A) relatively stable.
B) erratic.
C) variable.
D) dynamic.
Q2) The test of details of balances procedure to "inspect the accounts payable trial balance and master file for related parties, notes, or other interest-bearing liabilities" satisfies the objective of
A) existence.
B) completeness.
C) classification.
D) detail tie-in.
Q3) The purpose of the audit procedure to "trace receiving reports issued before year-end to related vendors' invoices" is to determine that all A) merchandise received is included in accounts payable.
B) merchandise received is included in inventory.
C) merchandise was received.
D) invoices have been paid.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Q1) The existence of an adequate storeroom with a competent custodian in charge results in the orderly storage of inventory and can protect inventory from theft and misuse. How would an auditor assess these controls?
A) observation during the audit and inquiry of the accounting staff
B) inquiry of the accounting staff and inspection of theft statistics
C) observation during the inventory count and inquiry of inventory personnel
D) inspection of inventory damage statistics and inquiry of inventory personnel
Q2) A well-designed computerized system of perpetual inventory data files includes information about the
A) units of inventory purchased, sold, and on hand.
B) unit costs of inventory purchased, sold, and on hand.
C) units and unit costs of inventory purchased, sold, and on hand.
D) units of raw materials, work-in-process, and finished goods.
Q3) Master files, worksheets, and reports that accumulate material, labour, and overhead as the costs are incurred are
A) accounting system controls.
B) storeroom documents.
C) finished goods inventory records.
D) cost accounting records.
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Page 16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Q1) 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.
Q2) "Existing payroll transactions are recorded" is the control objective of A) authorization.
B) completeness.
C) existence.
D) accuracy.
Q3) Once the auditor has determined the company's policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to A) recalculate the client's accruals.
B) compare the ledger balance with the journal and the T4 form.
C) confirm the amount with employees.
D) compare the recorded accrued wages with the amount approved in the minutes of the Board.
Q4) Discuss the two most common ways in which employees can defraud a company in the payroll area.
17
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) Describe the risks of error and fraud in the debt or equity accounts.
Q2) A note payable is
A) a long-term account payable.
B) a legal obligation to a creditor secured by assets.
C) an unsecured legal obligation to a creditor.
D) a legal obligation to a creditor that may be unsecured or secured by assets.
Q3) 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
Q4) Discuss the four key controls over notes payable.
Q5) Identify three analytical procedures commonly performed for notes payable.
Q6) Discuss the four characteristics of the capital acquisition and repayment cycle that make it unique from other cycles.
Page 18
Q7) Discuss the internal controls related to owners' equity that are of concern to the auditor.
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Chapter 17: Audit of Cash Balances
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Q1) 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.
Q2) During his examination of a January 19, 2015 cutoff bank statement, an auditor noticed that the majority of cheques listed as outstanding at December 31, 2014 had not cleared the bank. This would indicate
A) a high probability of lapping.
B) a high probability of kiting.
C) that the cash disbursements journal had been held open past December 31, 2014.
D) that the cash disbursements journal had been closed prior to December 31, 2014.
Q3) A) Explain what is meant by kiting and discuss how it is performed.
B) Discuss how an auditor can test for kiting.
Q4) A) Describe each of the major types of cash accounts maintained by business entities.
B) Discuss the advantages of using an imprest bank account for payroll transactions.
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Chapter 18: Completing the Audit
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Q1) Discuss three audit procedures commonly used to search for contingent liabilities.
Q2) If the amount of a probable loss on a contingent liability is not determinable, the liability should be
A) accrued and indicated in the body of the financial statements.
B) disclosed in footnotes but not accrued.
C) neither accrued nor disclosed in footnotes.
D) disclosed in the auditor's report but not disclosed on the financial statements.
Q3) 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.
Q4) IFRS uses specific terminology to refer to the likelihood of the occurrence of an organizational event. Which of the following would require note disclosure in the financial statements adjusted?
A) likely to occur and the amount can be estimated
B) possible that an outflow of resources is not required
C) likelihood is remote
D) amount is yet to be confirmed
Q5) Describe the items the auditor is required to report to the audit committee.
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Page 20
Chapter 19: Audit Reports on Financial Statements
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Q1) The auditor would most likely issue a disclaimer of opinion because of
A) the client's failure to present supplementary information.
B) inadequate disclosure of material information.
C) a client-imposed scope limitation.
D) the qualification of an opinion by the other auditor of a subsidiary where there is a division of responsibility.
Q2) There are two conditions requiring a departure from an unqualified audit report. Discuss each of these conditions and state the appropriate audit report for each condition.
Q3) The scope paragraph of the standard unqualified audit report in the auditor responsibility section states that the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) obtain reasonable assurance of whether the statements are free of material misstatement.
D) conform to a generally accepted financial reporting framework.
Q4) Discuss how materiality affects audit reporting decisions.
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Chapter 20: Other Assurance and Nonassurance Services
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Q1) Which of the following would be required in a compilation?
A) an understanding between the client and the accountant for the services to be provided
B) a formal engagement letter signed by the client
C) management's acknowledgements for its responsibility with regards to the financial statements
D) a confirmation of the auditor's independence
Q2) With respect to working on an engagement to examine a financial forecast or projection included in a prospectus or other public offering document, the public accountant and the client should agree upon
A) allocation of the responsibility of creating the assumptions to the public accountant.
B) the period of time to be covered.
C) delegation of forecast preparation to the public accountant.
D) the fact that the forecast may not be prepared in accordance with standards.
Q3) Define "direct reporting engagements."
Q4) Define "assurance engagements."
Q5) A financial statement review emphasizes four broad areas, one of which is to "perform analytical procedures." State the other three areas emphasized.
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