Forensic Auditing Final Exam
Course Introduction
Forensic Auditing explores the specialized field of auditing aimed at investigating and examining financial records to detect, prevent, and respond to fraud and financial misconduct. The course covers the techniques and procedures used to identify irregularities, gather evidence, and support legal proceedings related to financial crimes. Students will learn about the legal and ethical considerations of forensic audits, methodologies for analyzing financial data, and the roles and responsibilities of forensic auditors in various organizational settings. Through case studies and practical exercises, the course equips students with the analytical skills necessary to support litigation, dispute resolution, and regulatory compliance.
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) In the audit of an individual's tax return, the auditor should demonstrate competence in the use of
A) external databases that contain economic statistics.
B) standard personal and corporate tax preparation software.
C) the Income Tax Act and accompanying regulations.
D) database management software for the use of client based research.
Answer: C
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 an example of auditing rather than accounting?
A) recording purchase amounts in the expense accounts
B) posting the daily sales totals to the general ledger
C) recording cash received in the customer account files
D) evaluating whether accounts receivable are collectible
Answer: D
Page 3
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Chapter 2: The Public Accounting Profession and Audit Quality
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Q1) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in increased independence requirements for auditors. The impact of this requirement in Canada was
A) the creation of the CPAB to oversee Canadian audit professionals.
B) revisions to the rules of professional conduct for CPAs.
C) additional training requirements for becoming an auditor.
D) modification of the type of opinion provided in an assurance engagement by an auditor.
Answer: B
Q2) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies' auditors and develop audit standards. The impact of this requirement in Canada was
A) the creation of new auditing standards to ensure better quality control for audits.
B) revision to the rules of professional conduct for CPAs.
C) additional training requirements for becoming an auditor.
D) the creation of the CPAB to oversee Canadian audit professionals.
Answer: D
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Chapter 3: Legal Liability
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Sample Questions
Q1) Bigland and Betton, PAs, is being sued by a bank for potential negligence during an audit engagement that was completed over five years ago. Which of the following actions during that audit engagement will help ensure that the suit is fairly assessed?
A) good quality documentation
B) honest management at the client
C) low employee turnover
D) good employee memory of events
Answer: A
Q2) A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n)
A) engagement letter.
B) letter of representation.
C) confirmation letter.
D) expert witness.
Answer: A
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Page 5
Chapter 4: Professional Judgment and Ethics
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Sample Questions
Q1) 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
Q2) Generally, all of the rules of professional conduct for CPAs apply to A) students in public practice.
B) students and members.
C) all members.
D) members in public practice.
Q3) Xiao, PA, is the auditor of Minkle Credit Union, a medium-sized credit union. Xiao has prepared a management letter with several serious control weaknesses. Management agrees with the facts, but does not want to present the letter with the weaknesses to the audit committee or the board of directors. Management has implied that they will request a change of auditors if your firm presents the management letter to the board. Required: Discuss the actions that Xiao should take. Justify your response.
Q4) List the components of the auditor's professional judgment framework.
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Page 6
Chapter 5: Audit Responsibilities and Objectives
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Q1) Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
A) no assurance that they will be detected.
B) the same reasonable assurance provided for other items.
C) assurance that they will be detected, if material.
D) assurance that they will be detected, if highly material.
Q2) Which of the following statements is true regarding a difference between general audit objectives and specific audit objectives for an account balance?
A) The general audit objectives are applicable to every account balance on the financial statements.
B) The specific audit objectives are applicable to every account balance on the financial statements.
C) For any given account, usually only one audit objective must be met to conclude the transactions are properly accounted.
D) The general audit objectives are stated in terms tailored to the engagement.
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) A thorough understanding of the client's business and industry and knowledge about the company's operations are essential for doing an adequate audit. Why do auditors need greater knowledge about major customers and suppliers and related risks?
A) Information technology connects these organizations, so they affect each other.
B) Information technology provides rapid information about organizations.
C) There is increased importance of human capital and other intangible assets.
D) Joint ventures and strategic alliances affect client business risks.
Q2) The existence of advanced automated systems affects the audit process. Which of the following characteristics is an indicator of the presence of an advanced automated information system?
A) custom-designed operational or strategic information systems
B) use of packaged software to process sales both locally and across Canada
C) use of customer relationship management systems to manage sales information
D) numerically controlled equipment used in the manufacturing process
Q3) What is the purpose of developing a client risk profile? List the steps involved in developing a client risk profile.
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Chapter 7: Materiality and Risk
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Q1) With respect to clients, business risk increases when conditions, events, circumstances or inactions
A) adversely affect the entity's ability to achieve its objectives.
B) cause employees to not do their job properly.
C) result in the company continuing profitable operations.
D) result in an assessment of poor internal controls.
Q2) If detection risk is reduced, the amount of evidence the auditor accumulates will A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.
Q3) If the auditor sets a low dollar amount as materiality,
A) more evidence is required than for a high amount.
B) less evidence is required than for a high amount.
C) the same amount of evidence is required as for a high dollar amount.
D) it has no effect on the amount of evidence required.
Q4) Discuss three factors that affect client business risk and therefore audit risk.
Q5) A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.
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Chapter 8: Internal Controls and Control Risk
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Sample Questions
Q1) A major control available in a small company, which might not be feasible in a large company, is
A) a wider segregation of duties.
B) use of sequentially numbered documents.
C) fewer transactions to process.
D) the owner-manager's personal interest in and close relationship with personnel.
Q2) 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.
Q3) A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.
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Chapter 9: Audit Evidence
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Sample Questions
Q1) Those procedures specifically outlined in an audit program are primarily designed to A) prevent litigation.
B) detect errors or irregularities.
C) test internal controls.
D) collect evidence.
Q2) "The detailed instructions for the entire collection of evidence for an audit area" is the definition of a(n)
A) sampling plan.
B) audit procedure.
C) audit plan.
D) audit program.
Q3) To facilitate the working paper preparation process, defaults can be established to automatically insert client name, period covered, and preparer. This can best be done using
A) the junior staff assigned to the engagement.
B) an old-fashioned rubber stamp on each printed page.
C) cut and paste tools in word processing or spreadsheet software.
D) automated working paper software.
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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Sample Questions
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) If the auditor is not using tests of control, then
A) tests of detail must be used.
B) analytical procedures must be used.
C) tests of design of internal controls must at least be used.
D) the auditor will have to qualify the audit opinion.
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Page 12
Chapter 11: Audit Sampling Concepts
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Sample Questions
Q1) Helen found that the expense reports were not properly approved while the senior accounts payable clerk was on vacation in July. Helen decided to perform a test of control on the authorization of expense reports for all the months except for July, which she will test substantively. Helen is allowed to do this because
A) the authorized expense reports for July are not material.
B) it would not be cost beneficial to test the entire population substantively.
C) the authorizations for the month of July are not representative of the population as a whole.
D) compensating controls exist in the payroll reconciliation process.
Q2) A) Discuss what is meant by "sampling risk."
B) Discuss what is meant by "nonsampling risk."
C) Discuss two causes of nonsampling risk. Also discuss ways the auditor can control nonsampling risk.
D) Discuss two ways the auditor can control sampling risk.
Q3) 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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Page 13
Chapter 12: Audit of the Revenue Cycle
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Q1) 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.
Q2) There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective?
A) avoiding recording of returns and allowances for the year
B) recording subsequent period sales as current period sales
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue
Q3) 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.
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Chapter 13: Audit of the Acquisition and Payment Cycle
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Q1) 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.
Q2) A normal audit procedure is to analyze the current year's repairs and maintenance accounts to provide evidence in support of the audit proposition that A) expenditures for capital assets have been recorded in the proper period.
B) capital expenditures have been properly authorized.
C) non-capitalizable expenditures have been properly expensed.
D) expenditures for capital assets have been capitalized.
Q3) The starting point for the verification of current-year acquisitions of manufacturing equipment is normally
A) the manufacturing equipment account in the general ledger.
B) the acquisitions journal.
C) the purchase requisitions file.
D) a client schedule of all acquisitions recorded during the year.
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Chapter 14: Audit of the Inventory and Distribution Cycle
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Sample Questions
Q1) The auditor evaluates the internal transfer of assets and related costs during the A) acquisition and payments cycle.
B) human resources and payroll cycle.
C) sales and collection cycle.
D) inventory and distribution cycle.
Q2) Controls that provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totalled, and included in the general ledger at the proper amount are known as A) standard cost records.
B) pricing internal controls.
C) compilation internal controls.
D) count quantity internal controls.
Q3) The form used to request the purchasing department to place orders for inventory items is the
A) purchase order.
B) purchase requisition.
C) materials requisition.
D) bill of lading.
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16
Chapter 15: Audit of the Human Resources and Payroll Cycle
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Sample Questions
Q1) If there is an error in wage rates, such errors can typically escalate into material amounts. What characteristic of the human resources and payroll cycle causes this?
A) many repeated transactions
B) the presence of independent verification
C) the use of outsourcing organizations for payroll
D) an error in the starting cheque number in a cheque run
Q2) "Existing payroll transactions are recorded" is the control objective of A) authorization.
B) completeness.
C) existence.
D) accuracy.
Q3) When auditing the human resources and payroll cycle, the auditor should verify the officers' compensation because
A) officers are more likely to commit fraud.
B) officers' compensation is likely more prone to error.
C) some officers may have complex compensation packages.
D) some officers may be in a position to pay themselves more than the authorized amounts.
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Chapter 16: Audit of the Capital Acquisition and Repayment Cycle
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Q1) A common test of details of balances procedure for notes payable is to examine duplicate copies of notes to determine whether notes were dated on or before the balance sheet date. Which audit assertion is this test of detail associated with?
A) allocation (accuracy)
B) allocation (cutoff)
C) existence
D) completeness
Q2) The test of details of balances procedure that requires the auditor to recalculate accrued interest will satisfy the audit objective of A) existence.
B) completeness.
C) classification.
D) accuracy.
Q3) 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.
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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Sample Questions
Q1) A) Distinguish between i) risks of error, ii) risks of fraud, and iii) risks of inadequate presentation or disclosure of financial information.
B) For each of the three types of risks described in A), provide three examples of major risks of error or fraud in the cash cycle.
Q2) On the last day of the fiscal year, the cash disbursements clerk drew a company cheque on bank A and deposited the cheque in the company account in bank B to cover a previous theft of cash. The disbursement had not been recorded. The auditor will best detect this form of kiting by
A) comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year-end.
B) preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year-end.
C) examining the composition of deposits in both bank A and B subsequent to year-end.
D) examining paid cheques returned with the bank statement of the next account period after year-end.
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Chapter 18: Completing the Audit
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Q1) The auditor has a responsibility to review transactions and activities occurring after the year-end to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited. The auditing procedures required to verify these transactions are commonly referred to as the review for
A) contingent liabilities.
B) subsequent year's transactions.
C) late unusual occurrences.
D) subsequent events.
Q2) There are two categories of lawsuits: outstanding (or asserted) claims, and
A) possible or unasserted claims.
B) disputed claims among several parties.
C) settled claims.
D) claims that could result in material misstatements.
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) 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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Q1) Beem & Lord, a PA firm, audited the financial statements of Frazer Inc. Since this was a first time audit, Beem & Lord did not audit the comparative financial statements, as this was done by the previous auditor. Beem & Lord should expand their report to include an explanation in
A) the scope paragraph.
B) the management responsibility paragraph.
C) the opinion paragraph.
D) a paragraph following the opinion paragraph.
Q2) The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is presented fairly. As a result, the auditor would likely issue
A) a qualified opinion.
B) an unqualified opinion.
C) a disclaimer of opinion.
D) either an unqualified or qualified opinion.
Q3) 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.
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21
Chapter 20: Other Assurance and Nonassurance Services
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Q1) As part of the conduct of a review engagement, which of the following would be a typical procedure used for the assessment of the ending accounts receivable balance?
A) circularization of positive confirmations to all balances exceeding materiality
B) comparison of the age of the accounts receivable to the prior year
C) use of negative confirmations on all large balances
D) detailed examination of all accounts over 120 days to assess the bad debt allowance
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) A financial statement review emphasizes four broad areas, one of which is to "perform analytical procedures." State the other three areas emphasized.
Q4) Define "assurance engagements."
Q5) Define "direct reporting engagements."
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