TEST BANK for Auditing: The Art and Science of Assurance Engagements, 14th Canadian Edition by Arens by welldoneassistant

Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 1 The Demand for Audit and Other Assurance Services 1.1

Define an assurance engagement.

1) What is the nature of the service provided when an auditor evaluates information using suitable criteria and issues a report that attests to the reliability of the information? A) internal audit engagement B) review engagement C) compilation engagement D) attestation engagement Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 2) The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations, child labour guidelines, and other employee welfare issues. What type of service is No-Name providing? A) assurance B) attest C) review D) compilation Answer: A Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 3) Which of the following is an example of an attestation engagement? A) accounting and bookkeeping services for the accounts B) an audit of internal controls over financial reporting C) preparation of the annual financial statements with notes D) completion of provincial and federal tax returns Answer: B Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 4) 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, need to be audited D) whenever assurance is provided by a practitioner who is independent and unbiased Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement.

5) A major type of assurance service performed by large public accounting firms is A) auditing. B) reviewing. C) compilation. D) management consulting. Answer: A Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 6) Two types of services provided by public accounting firms are audits and reviews. Discuss the similarities and differences between these two types of services. Which type provides the most assurance? Answer: Two primary types of services are audits of historical financial statements and reviews of historical financial statements. While both services involve the accumulation and evaluation of evidence regarding assertions made by management in the company's financial statements, an audit involves a more extensive examination and provides a higher level of assurance about the client's financial statements than a review. Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 1.2

Define auditing and its purpose.

1) Which of the following illustrates the definition of auditing with respect to the evidence analysis process? A) accumulation and evaluation of evidence regarding assertions B) learning about different types of computing technology, such as mainframes C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 2) Auditing should be done by a qualified A) chartered accountant. B) certified management accountant. C) competent and independent person. D) professional accountant. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

3) Which of the following illustrates the definition of auditing with respect to the reporting process? A) accumulation and evaluation of evidence about balance sheet accounts B) reporting on the degree of correspondence between financial statements and ASPE/IFRS C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 4) In the audit of historical financial statements by PA firms, the criteria used are A) generally accepted auditing standards. B) relevant accounting frameworks. C) regulations of the Canada Revenue Agency. D) regulations of the provincial securities commissions. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 5) A large PA firm has assessed evidence collected during an engagement. Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS). A high level of assurance was obtained. The type of engagement conducted was A) an audit. B) a review. C) management consulting. D) a compilation. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 6) The auditor and the entities being audited should agree on the criteria to be used in the audit A) well in advance before the audit starts. B) after the audit planning has been done. C) as they progress with the audit, as they can determine which criteria are most suitable. D) at the end of the audit. Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose.

7) George had a conversation with the accounting personnel and documented information about how the accounting systems function. He has also placed copies of accounting forms in his files. George is performing which task? A) accounting procedures B) evidence gathering C) tax audit D) audit report preparation Answer: B Diff: 3 Learning Objective: 1-2 Define auditing and its purpose. 8) One of the reasons that an auditor must be competent is so that they can A) understand the engagement risks and the criteria used by the client. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 9) 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 10) It is important for the auditor to be independent because A) otherwise, the auditor would not charge a fair rate to the client. B) otherwise, the auditor might not be as knowledgeable of the subject matter and the criteria. C) this will prevent bias in accumulating and evaluating evidence. D) the Canadian tax authorities require that the auditor be independent. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 11) As an external auditor is paid a fee by a client company, he or she A) is absolutely independent and may conduct an audit. B) may still be sufficiently independent to conduct an audit. C) is never considered to be independent. D) must receive approval from the relevant provincial securities commission before conducting an audit. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 4 Copyright © 2022 Pearson Canada, Inc.

12) The independent auditor's report is the A) communication of the outcome of auditor's evaluation to the users. B) set of audited financial statements. C) invoice of the auditor detailing the work they have performed. D) report presented to management about the possible improvements. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 13) In the audit of a corporate tax return, the CRA 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 Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 14) In the audit of an individual's tax return, the criteria used would be A) an accounting framework. B) the Income Tax Act. C) the client's policies for taxable income. D) the auditor's judgment. Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 15) 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) that the corporate income tax return is in compliance with the Income Tax Act. Answer: D Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

16) Figure 1-2

Use your knowledge of the definition of auditing and Figure 1-2: Audit of a Corporate Tax Return to explain how an auditor would conduct a Corporate Tax Return audit. Answer: First, the concept of a competent, independent person requires that the practitioner who is conducting an assurance engagement should have "adequate proficiency," which means that the tax auditor should be competent in the fields of taxation and the fields that need to be assessed, such as accounting, information systems, data management and access and internal controls. The auditor should also use due care and have an objective state of mind. This means that the auditor should be independent of the client and do their best using their skills when conducting the audit. The second part of Figure 1-2 relates to the accumulation and evaluation of evidence using a risk-based approach. This means that the auditor would collect evidence based upon risks of violations in the tax return by the client. The next three parts are connected. The auditor determines the correspondence of the information provided by the client (which could be the financial statements, tax return and the quality of the calculations within the tax return) to established criteria (the Income Tax Act). Finally, the auditor issues a report (Notice of Assessment) to summarize the findings. Diff: 2 Learning Objective: 1-2 Define auditing and its purpose.

1.3

Explain why there is a demand for audit and other assurance services.

1) A bank manager is evaluating an application for a bank loan from a new corporate client. The bank manager decides to request audited financial statements. Which of the following likely informed this decision? A) The bank manager is seeking to lower the risk-free interest rate that applies to the corporation. B) The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk. C) The bank manager is unsure that the client will be able to continue operating successfully in the future given the economic climate. D) The bank manager believes audited financial statements will be necessary for the Canada Revenue Agency. Answer: B Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 2) What is the most appropriate method for an organization to lower information risk related to its financial statements? A) Hire a good CPA to complete its bookkeeping work. B) Use a high-quality software package to keep track of information. C) Have an independent financial statement audit conducted. D) Have an independent operational audit conducted on effectiveness. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 3) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank will make a loan to Frost Corp, a snow removal company. Further, Frederic has to decide how much they will lend to Frost and at what rate. Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest? What factors are impacted by auditing and how? Answer: Factors: 1. Risk-free interest rate: The rate the bank could earn in a risk-free investment such as Canada Treasury bills. 2. Business risk for the customer: Possibility that the customer will not be able to repay their loan because of economic or business conditions. 3. Information risk: Possibility that the information upon which the business decisions are made were inaccurate. Audits impact information risk. Having a set of audited financial statements can reduce the information risk and increase the likelihood that the bank will make the loan and even at a reduced interest rate due to the reliance it can place on the audited financial statements. Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7 Copyright © 2022 Pearson Canada, Inc.

4) ZK3 Ltd. is a successful 20-year-old private Canadian family-owned business. The company is owned equally by four siblings who are all involved in managing the daily operations of the company. A private equity company is contemplating an investment in ZK3 and insists on audited financial statements. The following are likely explanations for the private equity company's request except A) biases and motives of ZK3 management. B) Canada Revenue Agency requirements for audited financial statements. C) reducing information risk to the private equity investor. D) remoteness of information related to ZK3's operations. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 5) Information risk can be caused through any one of the following except A) remoteness of information. B) low volume of data. C) biases and motives of the provider. D) complex exchange transactions. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 6) The underlying conditions that create demand by users for reliable financial information include the fact that A) more reliable information will allow investors to calculate the rate of return on their investment. B) governments rely on such information to create tax policies. C) there is a need for the expression of an opinion as to the fairness of financial statements. D) users are separated from accounting records by distance and time. Answer: D Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7) Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario. Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable CPA on staff in the Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala's financial statement auditors assist in addressing? A) Concerns over business risk B) Concerns over remoteness of information C) Concerns over client risk D) Concerns over assessment risk. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 8 Copyright © 2022 Pearson Canada, Inc.

8) Annual financial statement audits are required for which of the following situations? A) Canadian corporations as part of their tax filings with the Canadian Revenue Agency B) American corporations as part of filing their tax returns with the IRS C) Public companies and large not-for-profit organizations D) Private companies Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9) How does a financial statement auditor help reduce information risk, and make financial statements more trustworthy and reliable? A) By bringing integrity, independence, competence, and knowledge of financial statement reporting to the audit of the financial statements. B) By ensuring the business is using its resources efficiently. C) By verifying that the company has a credible CSR plan. D) By confirming that the company is only taking reasonable business risk. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10) Information risk can be reduced through any one of the following except A) having the user verify the information. B) providing audited financial statements to users. C) having the chief financial officer certify and sign off on the financial statements. D) having the user share information risk with management. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 11) A bank manager is evaluating a loan application for Leonard & Ebelle, the private parent company with three subsidiaries in different sectors, including real estate, retail, and banking. The bank manager has received the unaudited consolidated financial statements for Leonard & Ebelle. The bank manager decides to request audited financial statements from Leonard & Ebelle as a precondition for approving the loan. The following could justify the bank manager's request, except A) audits are mandatory for large private companies. B) concerns over remoteness of information. C) concerns over voluminous data. D) concerns over complex exchange transactions. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services.

1.4

Explain why there is a demand for audit and other assurance services.

1) Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations. An auditing firm has been engaged to assess air quality and compare results to legislated requirements. What type of audit or engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 2) As part of its loan agreement, Big Bank requires that only accounts receivable less than 60 days old be used as collateral. An auditor has been engaged to provide assurance that the accounts receivable on the list provided to the bank are indeed less than 60 days old. What type of engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 3) A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n) A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 4) Which of the following is most difficult to evaluate objectively? A) efficiency and effectiveness of operations B) compliance with government regulations C) presentation of financial statements in accordance with a generally accepted accounting framework D) internal controls in use at a small company Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

5) A typical objective of an operational audit is for the auditor to A) determine whether the financial statements fairly present the entity's operations. B) evaluate the feasibility of attaining the entity's operational objectives. C) evaluate the effectiveness of an internal process. D) report on the entity's relative success in attaining profit maximization. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 6) Which of the following audits can be regarded as being solely "compliance" audits? A) Canada Revenue Agency's examinations of the returns of taxpayers. B) the Auditor General's evaluation of the computer operations of governmental units. C) an internal auditor's review of his employer's payroll authorization procedures. D) a public accounting firm's audit of the local school district. Answer: A Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 7) Which of the following is an example of a financial statement audit? A) determining whether ABC's financial statements overall do not violate any debt covenants B) determining whether ABC's overall financial statements are stated in conformity with IFRS C) evaluating the effectiveness and efficiency of internal controls used to create account balance D) evaluating the effectiveness and efficiency of internal controls used to record transactions Answer: B Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 8) What is the primary difference between internal and external auditors? A) the methodology used to conduct financial statement audits B) the level of competence required C) the parties to whom the auditor is responsible D) the level of objectivity required Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 9) Which of the following organizations establishes ethical standards and standards for the practice of Internal Auditing? A) Information Systems Audit and Control Association (ISACA). B) Institute of Internal Auditors (IIA). C) Society of Management Accountants of Canada (SMAC). D) Chartered Professional Accountants of Canada (CPA). Answer: B Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

10) Auditors General are responsible for auditing which types of organizations? A) public companies with shares issued to investors B) private companies that have loans outstanding to banks or other creditors C) ministries, departments, agencies that report to Government D) any organization that submits tax returns to the tax authorities Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 11) The extent and the scope of the audits conducted by Auditors General are determined by A) legislation in the Auditor General's jurisdiction. B) audit partner planning and audit program development. C) the Auditor General and his/her staff. D) the financial statement auditors of the client. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 12) To operate effectively, an internal auditor must be independent of the A) line functions of the organization. B) entity that is being audited. C) employer-employee relationship that exists for other employees in the organization. D) outsourcing organizations used. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 13) The internal audit group typically reports directly to the A) board of directors. B) management of the company. C) external auditor. D) audit committee. Answer: D Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 14) An example of a forensic accounting assignment might be A) determining whether overall financial statements are stated in conformity with IFRS. B) estimating the value of inventory lost in a warehouse theft. C) evaluating the effectiveness of an internal process. D) ensuring compliance with specific legislation. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

15) In operational auditing, the auditor studies business operations and makes recommendations about all of the following except A) economic and efficient use of resources. B) the fairness of the financial statements. C) effective achievement of business objectives. D) compliance with company policies. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 16) We discuss four types of auditors: public accountants, government auditors, Canada Revenue Agency auditors, and internal auditors. Briefly describe the work and responsibilities of each type of auditor. Answer: Public Accountants: Primary function is the audit of financial statements of publicly traded companies and of other organizations requiring audits. The type of audit normally performed is known as an attestation engagement because they attest to the fair presentation of the financial statements. To conduct the audit of financial statements, the auditor must be a licensed public accountant. Government Auditors: Primary function is the audit of ministries, departments, and agencies that report to the government. A government auditor performs the audit function for the government. Canada Revenue Agency Auditors: Primary responsibility is the enforcement of federal tax laws. The Canada Revenue Agency auditors audit the returns of taxpayers to determine whether they have complied with the tax laws. They only perform compliance audits. Internal Auditors: Internal auditors are normally members of the IIA and work for individual companies to audit for management. The internal auditor's responsibilities can vary considerably but often include operations auditing and reporting their findings directly to the board of directors and audit committee. The internal auditor must be independent from the line function in the organization he/she is auditing. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

17) To do an audit, it is necessary to have information in a verifiable form and some criteria by which the auditor can evaluate the information. Required: A. What information and criteria would a public accounting firm use when auditing a company's financial statements? B. What information and criteria would a Canada Revenue Agency auditor use when auditing that same company's tax return? C. What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively? Answer: A. The information used by a public accounting firm in a financial statement audit is the financial information in the company's financial statements. The criteria used are a relevant accounting framework such as IFRS or ASPE. B. The information used by a Canada Revenue Agency auditor is the financial information in the auditee's federal tax return. The criteria are the Income Tax Act and interpretations. C. The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

18) Mega Manufacturing Company (Mega) is thinking about acquiring Localized Small Producer Inc. (LSP), a small manufacturing company that produces related products. Mega has examined the financial statements of LSP, which show only a small profit in the last five years. Management of LSP has taken reasonable salaries, and the cost of goods sold is higher than the industry average for LSP. Mega believes that it will be able to introduce operational efficiencies at LSP, improving the profitability of the small company, if acquired. Required: A. What type of engagement should be conducted to assess the operational efficiencies of LSP? Justify your response. B. Who should be engaged to conduct the engagement? C. What major problems might the auditors encounter when conducting the audit and writing the report? Answer: A. Mega should have an operational audit conducted. An operational audit is a review of any part of an organization's operating procedures and methods for the purpose of evaluating economy, efficiency, and effectiveness. B. The operational audit could be conducted by Mega's internal auditors, assuming that they have internal auditors. It could also be conducted by a public accounting firm. For reasons of independence, if Mega is a listed company, then Mega should engage a different public accounting firm than its present auditors. C. Operational audits are not easily defined. First, the auditors would need to prepare criteria with the assistance of management to define efficiency. Then, the auditors would need to consider the type of evidence that might be available. For example, if LSP has older manufacturing equipment than Mega, LSP might be operating at peak efficiency - evidence will need to be geared to the criteria. Then, the report will need to be prepared in the context of the criteria and the evidence that will be collected. As there are no standard reports in operational auditing, the auditors will need to customize the report based upon the criteria and evidence collected. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

19) Jordan set up a not-for-profit corporation several years ago to provide scholarships to disadvantaged youth in his community. Scholarships Get Up and Go Foundation now has assets of over $5 million and provides about ten university scholarships every year. Jordan is proud of the new doctors, dentists, and other healthcare practitioners that his foundation has funded. Jordan is thinking of starting another foundation in an old building that he has purchased. It would be a youth drop-in centre offering music lessons, art facilities, and gym facilities, and would have links to local high schools to offer homework clubs to encourage good grades. Required: A. Why should Jordan have the financial statements of both of these foundations audited? B. Who would be the users of the financial statements of the foundations? C. What other types of services could PAs provide to Jordan and the foundations? Answer: A. Auditing provides added assurance with respect to the information provided in the financial statements: perhaps he could get a better interest rate on invested funds at a financial institution. It might also give added credibility to potential donors of funds, and would also show the assets, liabilities, and any surplus/deficit are reported in the proper entity and have not been reported or used in the wrong entity. B. Users could be financial institutions that are holding the Foundations' money, Jordan, his employees, donors and potential donors, tax authorities, and organizations that regulate charitable organizations, such as provincial and federal regulatory agencies. If the foundations receive government funding, then the organizations providing funding would also be users of the financial statements. C. PAs could provide advice on how to invest the capital funding that is used for the scholarships. They could help design the accounting procedures in place at both foundations. They could provide bookkeeping and compilation assistance, as well as prepare tax returns and any regulatory filings. They could assist the foundation in obtaining working capital funding for the new drop-in centre, if needed. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.

1.5

Distinguish between accounting and financial statement auditing.

1) Joe is recording sales transactions in the accounting system so that they can be summarized in a logical manner for the purpose of providing financial information for decision-making. Joe is performing A) accounting. B) auditing. C) review. D) management consulting. Answer: A Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 2) 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 Diff: 3 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 3) In auditing accounting data, the concern is with A) evaluating whether recorded information reasonably reflects the economic events that occurred during the accounting period within specified dollar ranges. B) determining if fraud has occurred. C) determining if taxable income has been calculated correctly. D) analyzing the financial information to be sure that it complies with government requirements. Answer: A Diff: 1 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 4) 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 Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing.

5) An accountant records information. When conducting an audit, the auditor must possess A) an ability to interpret relevant 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 Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 6) Auditors are licensed to perform financial statement audits, while accountants are not. Which of the following is a requirement for individuals who perform audits, but not for those performing accounting? A) Objectivity B) Independence C) Integrity D) Requisite education and training Answer: B Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 7) Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To do this, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information. In addition, accountants also help to develop systems to ensure that the entity's economic events are properly recorded in a timely manner and at a reasonable cost. The role of auditors is to determine whether the recorded financial information prepared by accountants reasonably reflects the economic events that occurred. To do this, the auditor must not only understand the principles and rules that provide the basis for preparing financial information, but must also possess expertise in the accumulation and evaluation of audit evidence. It is this latter expertise that distinguishes auditors from accountants. Diff: 1 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing.

1.6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 1) What impact is the presence of factors such as real-time information (such as via the Internet) expected to have upon the demand for assurance services? A) Demand is expected to decline due to the lack of adequate resources. B) Demand is expected to grow due to the increase in large corporations. C) Demand is expected to grow due to the need for forward-looking information. D) Demand is expected to decline as small businesses use the Internet more. Answer: C Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 2) The need to implement philosophies and practices commonly referred to as "improved business practices" comes from A) increased competition resulting in public accounting firms being concerned about keeping clients and maintaining a reasonable profit. B) a CAS pronouncement. C) an IFRA pronouncement. D) a need to increase profitability on assurance type mandates. Answer: A Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 3) In Canada, publicly traded companies are A) required to have audits. B) strongly encouraged to have audits. C) not required to have an audit if they have a review. D) not required to have an audit. Answer: A Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 4) A shareholder of a public Canadian firm can have access to the audited financial statements A) on the Internet. B) by calling the accounting department of the company. C) by requesting a copy from the auditors. D) if he/she holds more than 1% of the shares of the company. Answer: A Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

5) 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 6) A reason for a not-for-profit organization to be audited is to A) comply with the laws requiring them to be audited. B) meet requirements of lenders or funding sources. C) have a professional accountant perform their bookkeeping. D) ensure that their financial statements do not contain errors. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 7) Which of the following services provides a moderate level of assurance about the client's financial statements? A) forecasts and projections B) compliance C) review D) audit Answer: C Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 8) Which of the following is an advantage of a review engagement as compared to an audit engagement? A) For the review engagement, information risk is reduced more than for an audit. B) For the review engagement, the documentation to be provided by the client is greater. C) For the review engagement, the financial statements assessed will have more detail. D) The review engagement requires considerably less work, so is less costly. Answer: D Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

9) The Sarbanes-Oxley Act requires the auditor to attest to the A) accuracy of the financial statements. B) efficiency of the internal controls in financial reporting. C) effectiveness of internal controls. D) compliance of the company with the generally accepted accounting framework. Answer: C Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 10) The reasoning behind the requirements of the Sarbanes-Oxley Act's section 404 (attestation on internal control over financial reporting) is that A) effective controls result in greater profits to organizations, reducing business failures. B) effective controls reduce the likelihood of future misstatements in the financial statements. C) better internal controls can be implemented at a lower cost, improving product quality. D) automated controls improve customer service, resulting in higher product sales. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 11) There is an increasing demand for assurance about computer controls surrounding financial information transacted electronically and the security of the information related to the transaction. This is in large part due to A) the increasing presence of Internet sales in many businesses. B) the use of computer-assisted auditing tools. C) the large volume of transactions and information shared online and in real-time by companies. D) client's uncertainty about the proper functioning of their computer systems. Answer: C Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 12) Which of the following services provides no assurance about the client's financial statements? A) compilation B) review C) audit D) SysTrust Answer: A Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

13) 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 14) When readers are cautioned that the financial statements may not be appropriate for their purposes, the non-assurance service is called a(n) A) SysTrust. B) compilation. C) review. D) audit. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

15) As a PA, you have been asked to prepare your sister Betty's year-end financial statements. Betty is a photographer and is the sole shareholder of a small company called Best Weddings Ltd. She photographs weddings, graduations, and schools, and earns about $75 000 per year. Betty has said that she only needs the financial statements for her tax returns and would like you to prepare the tax returns too. Required: A. Would you be able to prepare the financial statements for your sister? Why or why not? B. If yes, what type of report would you prepare to accompany the financial statements? C. Would you be able to prepare the tax returns for your sister? Why or why not? Answer: A. Yes, the PA would be able to prepare the financial statements as a bookkeeping (or compilation) assignment. No assurance is provided for a compilation, so independence is not required. An audit or review could not be prepared because for those engagements, assurance is provided, which means that the PA would need to be independent. B. A compilation report would be prepared to accompany the financial statements. The report would need to disclose the relationship and that independence was absent. C. Yes, the PA would be able to prepare the tax returns, as assurance is not required for tax returns. Identification of the preparer is required on tax returns. It would be important to discuss with your sister why she wants you to prepare the tax returns (Does she just want to save some money? Or is she trying to prepare tax returns that are fraudulent?). It would be inappropriate (and professionally dangerous) to be associated with false and misleading information, as one could be sued by the tax department and expelled from the profession. Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services.

Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 2 The Public Accounting Profession and Audit Quality 2.1

Describe the public accounting industry.

1) One of the main advantages of a "big" public accounting firm is A) their lower professional fees due to economies of scale. B) their ability to share with the client knowledge and experience from similar companies they have audited. C) their ability to audit nearly all the largest companies worldwide. D) the increased reliability of their audit reports. Answer: C Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2) National network firms are those with A) offices in all major OECD nations. B) international representation in most cities around the world. C) offices in all major Canadian cities. D) national and international affiliations providing services in all major centres. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 3) Public accounting firms in Canada that have more than 50 professional staff are called A) the "Big Four" firms. B) national network firms. C) large regional and local firms. D) small local firms. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 4) What is the size of most small local public accounting firms in Canada? A) fewer than 25 employees B) between 25 and 49 employees C) between 50 and 75 employees D) more than 75 employees Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry.

5) The most common organizational form used by public accounting firms is A) sole proprietorship or partnership. B) limited liability corporation. C) corporation. D) co-operative. Answer: A Diff: 1 Learning Objective: 2-1 Describe the public accounting industry. 6) Large accounting firms are often limited liability partnerships (LLPs) because if their audits are conducted in accordance with CAS (Canadian Auditing Standards), A) partners not on the engagement would not be liable to pay with their personal assets when the LLP is sued. B) improved quality control practices can be initiated using technical personnel. C) more formal requirements are in place when reporting to federal tax authorities. D) partners are liable to pay with only a limited portion of their personal assets when the LLP is sued. Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 7) Most international and national accounting firms in Canada are comprised of professional accountants with the designation A) CIA. B) CPA. C) CFE. D) CISA. Answer: B Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 8) What are the staff levels and responsibilities at public accounting firms? Answer: 1. Partner - Leads the engagement, reviews the overall audit work, and is involved in significant audit decisions. A partner has the ultimate responsibility for conducting the audit and maintaining client relations. Average experience of 10 years. 2. Senior manager - Leads the engagement and reviews the team's work. Works directly with the partner and assists them in client relationships. Average experience of 7-10 years. 3. Manager - Helps the in-charge plan and manage the audit, reviews the in-charge's work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time. Average experience of 5-7 years. 4. Senior or in-charge auditor - Coordinates and is responsible for the audit field work, including supervising and reviewing staff work. Average experience of 2 to 5 years. 5. Staff accountant - Performs most of the detailed audit work. Average experience of 0-2 years. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2 Copyright © 2022 Pearson Canada, Inc.

9) What are the different business organization structures that an accountant may use? What are the advantages of these structures? Answer: Accountants may establish a sole proprietorship, a partnership, a limited liability partnership, or a limited liability corporation. The latter two structures are permitted only in certain provinces, based upon provincial legislation. Advantages: A sole proprietorship is the only choice if there is only one PA. It is a simple business structure. A partnership is used to allocate income to all partners and helps ensure that all partners are responsible for the actions of the organization. A limited liability partnership (or limited liability corporation) is used to limit liability to only those partners who worked on or supervised a particular engagement. This helps protect the personal assets of partners. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2.2

Identify the organizations that affect the public accounting profession and their role.

1) The Canada Business Corporation Act gave authority to Canadian accounting and auditing standard-setters by stating that financial statements A) must be compiled in accordance with International Financial Reporting Standards. B) should be prepared in accordance with the standards in the CPA Canada Handbook. C) must be audited by accountants that reside in Canada. D) should be prepared in accordance with local financial reporting standards. Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 2) The reason for adopting the CASs is to A) comply with requirements in the Canada Business Corporations Act. B) respond to the increased litigation risks faced by auditors. C) be consistent with the international standards of auditing. D) simplify the auditing process. Answer: C Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

3) 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 Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 4) Zara works as an auditor for Quincy, Quentin and Quaid, a public accounting firm in Richmond Hill, Ontario. Zara has decided to leave the firm and establish her own firm in Whitby, Ontario. She plans to offer audits and taxation services. Which organization is responsible for licensing Zara? A) CPA Canada B) CPAB C) PCAOB D) CPA Ontario Answer: D Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 5) What is the purpose of assurance standards issued by the AASB (Auditing and Assurance Standards Board) in Canada? A) to expose the newly established standards to as many groups as possible B) to provide current copies of the standards in advance of being placed in the CPA Handbook C) to provide supporting reference material and other resources D) to set standards for engagements such as reviews and compilations Answer: D Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

6) Lala graduated from York University with a Bachelor of Commerce. He now lives and works in Kingston, Ontario for a small local audit firm. Lala has written and passed the Common Final Exam (CFE) to become a CPA. Which organization is responsible for awarding Lala the CPA designation? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 7) Securities regulations in Canada are the responsibility of A) a national securities commission. B) provincial securities commissions. C) the professional accounting organizations. D) office of the Auditor General of Canada. Answer: B Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 8) Hannah graduated from York University with a Bachelor of Commerce and is now preparing to write the Common Final Exam (CFE). Which organization is responsible for setting the examination and establishing examination standards? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: A Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 9) Who is responsible for developing financial statement audit and assurance standards in Canada? A) AASB (Auditing and Assurance Standards Board) B) standards staff at CPA Canada C) provincial securities commissions D) the accounting firms who conduct financial statement audits Answer: A Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role.

7) The following are two unrelated situations. For each situation, outline possible deviations (if any) from an unmodified auditor's report that may be necessary, and give reasons. State your assumptions. A. Rosebud Ltd. is a construction company that builds and repairs greenhouses for nurseries. An architect does the design and three different small construction companies are used to build the greenhouses. You are concerned that some of the projects that span the April year-end may result in material losses, even though income has been reported in the coming year. Management has refused permission for you to enter construction sites, as they feel that the construction sites will be dangerous and they do not want to be exposed to such liability. B. Save Our Trees is a charitable organization devoted to maintaining national woodland and green space. Fundraising is handled primarily by means of electronic mail and door-to-door canvassing by volunteers. Canvassing volunteers provide receipts at the door using prenumbered receipts. Donors who give money by email are sent receipts by email. Answer: A. It is assumed that the amounts are material and can be quantified and/or the reporting of losses on the income statement may have a detrimental effect on any creditor relationships. Management is imposing a scope limitation, so that it would be difficult to determine the actual percentage of completion of projects and assess whether revenue is recorded appropriately. A qualification (scope limitation) is required. If the amounts are so large that they would affect the ability of the company to continue as a going concern, a disclaimer of opinion should be issued. B. With both of these fundraising methods (door-to-door canvassing and email requests) it is difficult to provide internal controls to ensure that all funds received are deposited and recorded. If the amounts are considered to be material, then a qualification will be issued with respect to completeness of revenue (the auditor cannot conduct field work to determine completeness, so it is a scope limitation). A qualification will be issued, or if the amounts are considered highly material, then a disclaimer of opinion would be issued, although the latter is unlikely. The qualification or disclaimer would be issued if the auditor cannot conduct alternative procedures to satisfy the completeness objective (e.g., testing of prenumbered tax receipts). Diff: 2 Learning Objective: 18-10 Describe financial statement audits where the auditor decides that a disclaimer of opinion is necessary.

18.11

Discuss how the audit report adds value for the financial statement users.

1) What level of assurance is provided by the auditor in an audit engagement? A) high, but not absolute, level of assurance B) positive level of assurance C) moderate assurance D) high level of assurance Answer: A Diff: 1 Learning Objective: 18-11 Discuss how the audit report adds value for the financial statement users. 2) The new IAASB auditor's report is effective for audits and will be mandatory for listed companies for audits with a year ending A) 31 December 2017. B) 31 December 2016. C) 31 December 2015. D) 31 December 2014. Answer: B Diff: 1 Learning Objective: 18-11 Discuss how the audit report adds value for the financial statement users. 3) An audit report adds value for financial statement users. Qualified opinions, adverse opinions, and disclaimer of opinions can have implications for the auditee. All of the following may be likely consequences of modified opinions except A) a lower credit rating. B) a lower share price. C) criminal prosecution. D) higher interest rates charged by lenders. Answer: C Diff: 1 Learning Objective: 18-11 Discuss how the audit report adds value for the financial statement users. 4) Which of the following consequences may most likely be faced by a public company that receives a qualified opinion, an adverse opinion, or a disclaimer of opinion on its audited financial statements? A) higher credit ratings B) the securities commission may issue a cease trading order C) criminal prosecution D) lower interest rates charged by lenders Answer: B Diff: 1 Learning Objective: 18-11 Discuss how the audit report adds value for the financial statement users. 29 Copyright © 2022 Pearson Canada, Inc.

Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 19 Other Audits, Assurance Engagements, and Related Services 19.1 Distinguish between Other Canadian Standards (OCS) and Canadian Audit Standards and know the types of engagements to which they apply. 1) The Locker Building is a new apartment building in a Vancouver suburb. In order to receive a subsidy from the municipality, it needs to prove that it has complied with the city's new rules about "green efficiency." The "green efficiency" rules are described on the municipality's website and list the requirements a building must meet to be considered green and efficient. Your firm, with the help of an environmental scientist, has been asked to perform a direct reporting engagement for the Locker Building. The suitable criteria, in this case, are the A) green efficiency rules. B) auditor's judgment. C) environmental scientist's judgment. D) federal environmental laws. Answer: A Diff: 3 Learning Objective: 19-1 Distinguish between Other Canadian Standards (OCS) and Canadian Audit Standards and know what types of engagements to which they apply. 2) Blue Sky Inc. is seeking a public accountant to perform either a compilation or a review engagement. What standard will the public accountant apply to the Blue Sky engagement? A) Canadian Auditing Standards (CASs) B) Other Canadian Standards (OCSs) C) CAS 100- 700 for historical financial statements D) CAS 805 for historical financial information other than financial statements Answer: B Diff: 2 Learning Objective: 19-1 Distinguish between Other Canadian Standards (OCS) and Canadian Audit Standards and know what types of engagements to which they apply. 3) Revan LLP, Public Accountants, were contacted by Giovanni Media Inc., who was seeking an auditor. Giovanni's CFO added that what the company requires is an audit of an accounts receivable schedule prepared in accordance with financial reporting provisions established by a regulator, the Canadian Radio and Television Commission. What standard would be appropriate for this engagement? A) CAS 800 for historical financial statements B) Other Canadian Standards (OCSs) C) CAS 100- 700 for historical financial statements D) CAS 805 for historical financial information other than financial statements Answer: D Diff: 2 Learning Objective: 19-1 Distinguish between Other Canadian Standards (OCS) and Canadian Audit Standards and know what types of engagements to which they apply.

4) What level of assurance is provided by Canadian standards for review engagements? A) total assurance B) reasonable assurance C) limited assurance D) no assurance Answer: C Diff: 2 Learning Objective: 19-1 Distinguish between Other Canadian Standards (OCS) and Canadian Audit Standards and know what types of engagements to which they apply. 19.2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 1) Four different engagements that the auditor can complete are compilation, bookkeeping, audit, and review. Rank these engagements with respect to the level of assurance provided from the highest assurance level to the lowest assurance level. A) audit, review, compilation, bookkeeping B) audit, compilation, review, bookkeeping C) review, audit, compilation, bookkeeping D) bookkeeping, compilation, review, audit Answer: A Diff: 3 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 2) Performing inquiry, analytical procedures, and discussion with the limited objective of assessing whether the information being reported on is plausible within the framework of appropriate criteria is the definition of a(n) A) compilation. B) review. C) audit. D) examination. Answer: B Diff: 1 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements.

3) Leon Levy, a partner at the audit firm where you work, asked you to work on the audit of the balance sheet of Geminy Corp. Geminy is not a public company and has not been required to have audited financial statements in the past. This year, due to a new bank loan, its bank requested that audited financial statements be provided. Who are the primary users in this assurance engagement? A) Leon Levy B) the bank C) management of Geminy Corp D) shareholders of Geminy Corp Answer: B Diff: 3 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 4) A review engagement requires what amount of evidence to be accumulated? A) minimal B) moderate C) extensive D) maximum Answer: B Diff: 2 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 5) Which of the following components of an engagement letter would apply to both a review engagement and a compilation engagement? A) negative assurance will be provided so there is no assurance that fraud will be detected B) no assurance will be provided since only mathematical accuracy will be verified C) procedures used during the engagement will be limited to analytical review and inquiry D) a statement that an audit is not to be performed and that no opinion will be expressed Answer: D Diff: 2 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements.

6) Sean Clem has done a review engagement and prepared the tax return for your web design business for the last five years. The books and records have always been well organized, although year-end adjusting entries have been required. You do some of the accounting yourself and the rest of the accounting records are handled by your spouse, who is also an employee of the business. This year, you would like to expand your business to provide ISP (internet service provider) services to your clients. This would involve purchasing additional computer equipment and software. You are also considering hiring an additional employee (you currently have three), and you are looking at obtaining a loan for $100 000 from the bank. The bank says that you should have your records audited, but you are not sure what this will mean. Required: What would Sean say to you about the differences between an audit and a review? Answer: • An audit has a higher degree of assurance, so additional work will be required. • This will result in a higher fee for the work completed. • It will be important to document the role of the auditor and management clearly. • The report may be qualified if it is not possible to audit the opening balances. • It may be possible to continue to have a review engagement rather than an audit if the owner (you) has other collateral to offer - then the bank would not require such a high level of assurance. Diff: 3 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 7) List the financial statement users and the suitable engagements that auditors perform for them. Answer: The financial statement users and the suitable engagements that auditors perform for them are: 1. Stakeholders of a publicly accountable entity - Audit 2. A private company that has outside investors or external financing - An audit, review, or compilation depending upon the assurance needs of the stakeholders 3. A private company that has plans to grow and attract new stakeholders and financing - An audit or a review, depending upon the assurance needs of the stakeholders. If the company has plans to go public, then an audit would be advisable. 4. Family members and a few close friends of a private company - A review or a compilation, depending upon how involved the users are with the company operations 5. Management and for the tax returns - A review or a compilation Diff: 3 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements.

8) What is meant by limited assurance? Answer: Limited assurance is the level of assurance obtained where engagement risk is reduced to a level that is acceptable in the circumstances of the engagement, but where the risk is greater than for a reasonable assurance engagement; also referred to as moderate assurance. It is expressed in the form of negative assurance as to the PA's awareness of any information indicating that the assertions are not presented in conformity with the applicable criteria. Diff: 3 Learning Objective: 19-2 Understand the level of assurance and evidence requirements for review and compilation engagements, and recommend appropriate engagements. 19.3 Understand the requirements for review engagements and discuss relevant professional standards. 1) A review engagement includes A) obtaining an understanding of the internal controls. B) tests of controls or transactions. C) inquiry, analytical procedures, and discussion. D) independent confirmation or physical examination. Answer: C Diff: 1 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 2) When would the public accountant conduct audit procedures during a review engagement? A) When junior staff are assigned to the engagement. B) When required to assess plausibility. C) When it is a first-time review engagement. D) When a higher level of assurance is required for the bank. Answer: B Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 3) As part of the review engagement for a small manufacturing company, which of the following would be a typical review procedure for the sales cycle? A) review of internal controls over the granting of credit B) examination of sales documents to ensure credit approval is documented C) recalculation of the taxes and extensions on a sample of invoices D) comparison of sales and gross profit to the prior year Answer: D Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards.

4) As part of the conduct of a review engagement, which of the following procedures would be appropriate for assessing the ending value of accounts payable? A) sending zero-balance confirmations to frequently used suppliers B) use of negative confirmations to suppliers with material balances C) comparison of the accounts payable balances by supplier to the prior year D) examination of invoices received after the year-end to ensure that they were recorded in the proper period Answer: C Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 5) 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 Answer: B Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 6) As part of the conduct of a review engagement, which of the following procedures would be appropriate for assessing the ending value of inventory? A) discussion with management with respect to the costing method used B) observation of the inventory count C) observation of the warehouse, paying particular attention to dusty and damaged goods D) confirmation with customers that are holding consignment inventory with respect to quantity and condition of the inventory Answer: A Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 7) When is negative assurance used during a review engagement? A) when the standards applicable to a review engagement have been met B) if a qualification is required during the review engagement C) when the criteria associated with a review engagement have not been satisfied D) when the practitioner is unable to set appropriate criteria for the review engagement Answer: A Diff: 3 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards.

8) When assessing the plausibility of the financial statements for a review engagement, the auditor will use which of the following criteria for auditing a small, privately held company? A) standards of efficiency and effectiveness B) the audit objectives associated with the audit of financial statements C) an acceptable reporting framework such as ASPE D) an enterprise risk-management framework to help detect fraud Answer: C Diff: 2 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 9) 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 Answer: B Diff: 1 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 10) The fact that a client has a material accounting departure for failure to follow ASPE would require the accountant to disclose that fact in a separate paragraph giving rise to the modification when the accountant is performing A) a compilation. B) a review and an audit. C) either a compilation or a review. D) neither a compilation nor a review, only an audit. Answer: B Diff: 1 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards. 11) A financial statement review emphasizes four broad areas, one of which is to "perform analytical procedures." State the other three areas emphasized. Answer: • Obtain knowledge of the client's business. • Have an understanding/discussions with management concerning information received and the information being reported on. • Make inquiries of client personnel to determine whether the financial statements are fairly presented. Diff: 2 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards.

12) Yvan is preparing the audit plan for Share the Wealth, a non-profit organization. Share the Wealth is a large Montreal-based organization that receives corporate donations and has many stores that collect and re-sell costume jewelry and clothing. The purpose of the organization is to build recreation areas for children in less-fortunate areas of the city. Share the Wealth was started by two sisters. One of the sisters is still actively involved in the organization, but the other sister has been devoting less time to the organization since she has had triplets. Share the Wealth has a total of eight stores in Montreal where individuals can drop off donations and customers can purchase the second-hand clothing and costume jewelry. Share the Wealth has a total of 12 employees who work in the various stores. Depending on the schedule and availability, the employees will randomly be assigned to a store for the week. Required: Provide three procedures that Yvan should consider when performing the review engagement of Share the Wealth. Answer: Student answers may vary. - Awareness of fraud risk: Is leadership organized? Is there volunteer and staff rotation? In the case of Share the Wealth, risk is increased since it appears that only one of the sisters is managing the operations now. There may be risk that she is overwhelmed or unable to run the operations on her own. On the other hand, the risk of fraud is diminished since it appears that the staff changes location each week. This will help early detection of fraud. Yvan should inquire how the revenues (funds) were spent during the year. He should ask whether the funds are spent for valid operating expenses and the remaining spendings are in line with the objective of building recreation spaces in less-fortunate communities. - Yvan should perform analytical procedures (e.g., comparing gross profit by location) - Yvan should inquire of management how regulatory filings are handled Diff: 2 Learning Objective: 19-3 Understand the requirements for review engagements and discuss relevant professional standards.

19.4 Understand the requirements for compilation engagements and discuss relevant professional standards. 1) 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 Answer: A Diff: 3 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 2) A notice to reader is included in what type of engagement? A) audits B) reviews C) compilations D) all types of engagements Answer: C Diff: 2 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 3) Which of the following components of an engagement letter would apply to both a review engagement and a compilation engagement? A) negative assurance will be provided, so there is no assurance that fraud will be detected B) no assurance will be provided since only mathematical accuracy will be verified C) procedures used during the engagement will be limited to analytical review and inquiry D) a statement that each page of the statements should be clearly marked "unaudited" Answer: D Diff: 2 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 4) You have just recently become a member of your local non-profit housing co-op by moving into the largest unit. The board of directors has asked that you handle the review engagement but you are concerned about independence. What is a practical way for you to stay in the co-op but also perform the review engagement? A) Request a bylaw stating that the accountant cannot vote for board members. B) Do a compilation rather than a review engagement. C) Have all the preparation work for the review engagement completed by a board member. D) Include a paragraph in the review engagement report stating that you are not independent. Answer: A Diff: 3 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 9 Copyright © 2022 Pearson Canada, Inc.

5) Richard is performing a compilation engagement. Richard is concerned that the information is A) arithmetically correct. B) accurate. C) complete. D) in accordance with ASPE. Answer: A Diff: 1 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 6) A compilation presents information, in the form of financial statements, that is the representation of management. The public accountant who prepares the compilation undertakes to express A) limited assurance on the statements. B) minimal assurance on the statements. C) no assurance on the statements. D) full assurance on the statements. Answer: C Diff: 2 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 7) Which of the following engagements would most likely be a compilation engagement? A) An engagement with respect to financial statements attached to a personal tax return. B) An engagement with respect to financial statements for a large public company. C) An engagement with respect to financial statements for a company that has a large bank loan. D) An engagement with respect to financial statements that accompany future-oriented information to obtain financing. Answer: A Diff: 3 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards. 8) Which of the following procedures would most likely be conducted by an accountant during a compilation engagement? A) Enquire of management with respect to the purpose of new capital assets. B) Compare gross profit on a year-by-year basis over the last five years. C) Circularize negative accounts receivable confirmations. D) Assemble and recalculate the financial statement allocations. Answer: D Diff: 3 Learning Objective: 19-4 Understand the requirements for compilation engagements and discuss relevant professional standards.