Ch1 Introduction And Overview Of Audit Verified Test Bank - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 1
INTRODUCTION AND OVERVIEW OF AUDIT AND ASSURANCE
CHAPTER LEARNING OBJECTIVES
1. Define an assurance engagement.
An assurance engagement involves an assurance provider arriving at an opinion about some information being provided by their client to a third party. A financial statement audit is one type of assurance engagement. This engagement involves an auditor arriving at an opinion about the fair presentation of the financial statements. The audit report is addressed to the shareholders of the company being audited, but other users may read the financial statements. Learning about auditing and assurance requires an understanding of auditing and assurance terminology, including terms such as audit risk, materiality, internal controls, listed entity, and assertions.
2. Explain why there is a demand for audit and assurance services.
Financial statement users include investors (shareholders), suppliers, customers, lenders, employees, governments, and the general public. These groups of users demand audited financial statements because of their remoteness from the entity, accounting complexity, their incentives competing with those of the entity’s managers, and their need for reliable information on which to base decisions. The theories used to describe the demand for audit and assurance services are agency theory, the information hypothesis, and the insurance hypothesis.
3. Differentiate between types of assurance services.
Assurance services include financial statement audits, compliance audits, performance audits, comprehensive audits, internal audits, and assurance on corporate social responsibility (CSR) disclosures.
4. Explain the different levels of assurance.
The different levels of assurance include reasonable assurance, which is the highest level of assurance, limited assurance, and no assurance. Reasonable assurance is provided on an audit of a company’s financial statements. Limited assurance is provided in a review of a company’s financial statements. No assurance is provided in a compilation engagement.
5. Outline different audit opinions
An auditor can issue an unmodified opinion, also known as a clean report, or an unmodified opinion with an emphasis of matter paragraph. Alternatively, a modified opinion may be issued as a qualified, an adverse, or a disclaimer of opinion.
6. Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
It is the responsibility of a company’s governing body to ensure that its financial statements are relevant, reliable, comparable, understandable, and true and fair. It is the responsibility of the auditor to form an opinion on the fair presentation of the financial statements. In doing, so the auditor must maintain professional scepticism and utilize professional judgement and due care.
The firms that provide assurance services include the Big-4 international firms, the national firms (with international links), local and regional firms, and consulting firms that tend to specialize in assurance of CSR and environmental disclosures.
7. Identify the different regulators, legislation, and regulations surrounding the assurance process.
Regulators of the assurance process include the Auditing and Assurance Standards Board (AASB), Canadian Securities Administrators (CSA) and the various provincial securities commissions, and the Canadian Public Accountability Board (CPAB). Relevant legislation includes the Canada Business Corporations Act (CBCA). CPA Canada is the professional accounting body in Canada, responsible for the Chartered Professional Accountant (CPA) designation.
8. Describe the audit expectation gap.
The audit expectation gap occurs when there is a difference between the expectations of assurance providers and financial statement or other users. The gap occurs when user beliefs do not align with what an auditor has actually done.
TRUE-FALSE STATEMENTS
1. Only current investors (not potential investors) are considered to be users of the financial statements.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
2. Insurance hypothesis is a means whereby the investor can guarantee the success of their investment.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
3. A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws, and regulations with which they must conform.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
4. An operational audit is an example of a compliance audit.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
5. The most common types of assurance engagements are financial statement audits, confirmation audits, performance audits, comprehensive audits, and assurance on corporate social responsibility (CSR) disclosures.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
6. The nature of audit procedures refers to the reliance on evidence provided by the client and its management.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
7. It is the auditor’s responsibility to prepare the financial statements.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
8. An auditor can provide a reasonable level of assurance on information other than historical financial information.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
9. A reasonable level of assurance is the highest level of assurance that an auditor can provide.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
10. A no assurance engagement is of little use as no assurance is given to the client.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
11. The Compilation Engagement Report explicitly states that no assurance is being provided.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
CPA: Audit and Assurance
AACSB: Analytic
12. When conducting a review engagement, a practitioner must obtain an understanding of the entity and test the effectiveness of the entity’s internal controls.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
AACSB: Analytic
13. A negative expression of opinion is only given when there is a disagreement with management and the auditor.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
14. All modified audit reports are qualified audit opinions.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
15. The expectation gap is caused by unrealistic user expectations such as the auditor providing complete assurance.
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
16. Martha Minnati was reviewing the previous year’s audited financial statements of a clothing manufacturer. Her manager explained to her that for a financial statement audit, the clothing company was the accountable party, its shareholders were the users, and the subject matter was the financial statements. What kind of audit engagement was her manager describing?
a) consulting engagement
b) assurance engagement
c) review engagement
d) compliance engagement
Difficulty: Easy
Learning Objective: Define an assurance engagement.
Section Reference: 1.1 Auditing and assurance defined
CPA Competency: Audit and Assurance
AACSB: Analytic
17. An engagement performed by an auditor or practitioner to enhance the reliability of the subject matter can best be described as a(n)
a) compilation engagement.
b) review engagement.
c) consultancy engagement.
d) assurance engagement.
Difficulty: Easy
Learning Objective: Define an assurance engagement.
Section Reference: 1.1 Auditing and assurance defined
CPA Competency: Audit and Assurance
AACSB: Analytic
18. An example of the three parties in an assurance engagement would be:
a) audit client, employee, customer.
b) audit client, supplier, auditor.
c) auditor, shareholder, general public.
d) auditor, general public, employees.
Difficulty: Easy
Learning Objective: Define an assurance engagement.
Section Reference: 1.1 Auditing and assurance defined
CPA Competency: Audit and Assurance
AACSB: Analytic
19. A limitation of an audit is caused by
a) the nature of financial reporting.
b) the nature of audit procedures.
c) the need for the audit to be conducted within a reasonable period of time and at a reasonable cost.
d) all of these answers are correct
Difficulty: Easy
Learning Objective: Define an assurance engagement.
Section Reference: 1.1 Auditing and assurance defined
CPA Competency: Audit and Assurance
AACSB: Analytic
20. Which of the following groups would be considered users of the financial statements?
a) governments
b) current shareholders
c) general public
d) all of these answers are correct
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
21. The causes of information risk do not include
a) independence.
b) complexity.
c) reliability.
d) competing incentives.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
22. An audit is one way for investors to insure against at least part of their loss should the company they invest in fail – this is an example of
a) agency theory.
b) information hypothesis.
c) insurance hypothesis.
d) competing incentives.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
23. According to the agency theory, demand for audit is due to conflicts between
a) managers and owners.
b) managers and agents.
c) owners and principals.
d) auditors and owners.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
24. While awaiting a meeting in his firm’s boardroom, the senior partner, Bill Goldsworthy,
read the following statement in an article in The Globe & Mail: “The greater the perceived
quality of the information contained in the financial statements, the more likely it will be relied
upon by the users of that information.” This statement best describes
a) the expectations gap.
b) agency theory.
c) information hypothesis.
d) insurance hypothesis.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
25. As users of the financial statements, suppliers would least consider which of the
following aspects of the financial statements?
a) solvency of the entity
b) profitability of the entity
c) return on investment of the entity
d) corporate social responsibility of the entity
Difficulty: Medium
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
26. Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because
a) it is the sole basis for the calculation of taxes owed to the government.
b) it can determine whether certain regulations have been complied with.
c) it can gain a better understanding of the entity’s activities.
d) governments need to assess the entity so that they can provide the entity with grants that will benefit society.
Difficulty: Medium
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
27. Agency theory can be described as the theory of
a) hiring an agency to review the work of the management, in this case it is the auditor.
b) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party’s work.
c) the relationship between the owner and the management of the business when the owner is not the manager of the business.
d) the relationship between the auditor and the management of the business.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
28. Insurance hypothesis tells us that
a) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.
b) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail.
c) investors cannot insure themselves against loss when investing in an entity.
d) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
29. Vera Sobczyk spent a week at a client’s wholesale operation determining whether the
client’s remittances to the tax authorities were in accordance with tax regulations. This is an
example of a(n)
a) taxes payable mandate.
b) financial audit.
c) operational audit.
d) compliance audit.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
30. Ming Yao reviewed the operations of a basketball academy. His objectives were to
determine how effectively the academy delivered its many programs. What kind of an audit
did he perform?
a) operational
b) compliance
c) financial
d) comprehensive
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
31. Matt Fuller reports to the board and evaluates how the company can improve risk
management practices, internal control procedures, and certain governance issues. Who is
he?
a) President
b) Controller
c) Treasurer
d) Internal Auditor
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
32. Which of the following is not true about Corporate Social Responsibility assurance?
a) reporting is voluntary and is becoming more widespread
b) includes both financial and non-financial information
c) is required to be performed by an auditor
d) disclosures include environmental, employee, and social reporting
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
33. Which of the following is a component of the “Other Information” section of the auditor’s report?
a) auditor’s responsibilities with respect to the audited financial statements
b) management’s responsibility for internal controls as they relate to the financial statements
c) responsibility of those charged with governance to oversee the financial reporting process
d) management’s responsibility for other information
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
AACSB: Analytic
34. Which of the following is not a component of the Review Engagement Report?
a) practitioner’s responsibility for the financial statements
b) management’s responsibility for the financial statements
c) practitioner’s opinion over the reasonableness of the financial statements
d) procedures applied to the review engagement and how they differ from an audit engagement
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
AACSB: Analytic
35. Michael Stiller performed work for a client in the real estate business and issued a Compilation Engagement Report. What degree of assurance does a compilation engagement provide to the user of the statements?
a) reasonable assurance
b) moderate assurance
c) no assurance
d) complete assurance
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
36. Theodore Heinrich prepared a set of financial statements based on information provided
to him. He checked mathematical accuracy of the data, and the client complimented him on
the reasonable cost of the work he performed. Theodore performed
a) a compilation engagement.
b) a review engagement.
c) an audit engagement.
d) an operational audit engagement
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
37. Jimmy Bunting, the practitioner at Yanzhou Coal Mining and Minerals, performed the following tasks: he used analytical procedures and he had discussions with management. These activities were a basis for a conclusion on the financial information. What did Jimmy Bunting perform?
a) a qualified report
b) an unmodified opinion
c) a compilation engagement
d) a review engagement
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
38. Which of the following would be an example of a reasonable assurance engagement?
a) the review of annual financial statements
b) the audit of annual financial statements
c) the reporting of procedures performed by the auditor as agreed by the client
d) the compilation of annual financial statements
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
39. The wording of a limited assurance engagement expresses a conclusion that generally states
a) there is nothing wrong with the subject matter.
b) there is something wrong with the subject matter.
c) there is nothing that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.
d) there is something that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
40. In a review engagement, which of the following is least likely to occur during the
engagement?
a) analytical procedures
b) inquiries with management and other personnel
c) substantive audit procedures
d) review of the accounting systems of the entity.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
41. Maggie Oh performed an audit of a client that had undergone flooding to its operations in St-Jean Sur Richelieu. The client was insured and was able to keep operating. However, there was material damage to the client’s warehouse and Maggie felt it would be appropriate to inform the users of the financial statements of this fact in the audit report. This form of audit report is called
a) an adverse opinion.
b) an unmodified opinion – emphasis of matter.
c) a modified opinion.
d) a disclaimer of opinion.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
42. Based on the evidence gathered, if an auditor concludes all noted misstatements in the financial statements to be immaterial, individually and collectively, then the auditor would
a) resign from the engagement.
b) emphasize the errors in the audit report.
c) issue an unqualified opinion.
d) issue a qualified opinion.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
43. An unqualified opinion is also known as a(n)
a) clean opinion.
b) adverse opinion.
c) unmodified opinion.
d) both clean opinion and unmodified opinion.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
44. An example of an unmodified audit opinion is
a) qualified audit opinion.
b) adverse audit opinion.
c) unqualified audit opinion with an emphasis of matter.
d) denial of audit opinion.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
45. Which of the following is not a type of opinion?
a) qualified opinion
b) adjusted opinion
c) adverse opinion
d) disclaimer of opinion
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
46. The following can be said about an emphasis of matter:
a) it is included when the auditor’s opinion has changed and the auditor wants to bring the users’ attention to a particular matter.
b) it is only used in unqualified audit opinions.
c) it is included when the auditor’s opinion has not changed and the auditor wants to bring the users’ attention to a particular matter.
d) it cannot be used when expressing an audit opinion that has pervasive misstatements.
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Different audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
47. A financial statement auditor is required to audit all of the following except
a) income statement and balance sheet.
b) statement of cash flows.
c) management discussion and analysis.
d) notes to the financial statements.
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
48. For a financial report to be relevant, it must
a) be free from material misstatement.
b) have an impact on the decisions made by users regarding the performance of the entity.
c) be periodically audited by an independent auditor.
d) include an audit report
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
49. For a financial report to be reliable, it must
a) be free from material misstatement.
b) have an impact on the decisions made by users regarding the performance of the entity.
c) be periodically audited by an independent auditor.
d) be reviewed by an internal auditor
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
50. When conducting an audit, an auditor should use
a) professional scepticism.
b) professional judgement.
c) due care.
d) all of these answers are correct
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
51. The top tier of accounting firms is comprised of
a) Deloitte, Ernst & Young, PricewaterhouseCoopers (PwC), and KPMG.
b) Ernst & Young, PricewaterhouseCoopers (PwC), KPMG, and BDO.
c) Deloitte, Ernst & Young, KPMG, and Grant Thornton.
d) WHK Group, Deloitte, KPMG, and PricewaterhouseCoopers (PwC).
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
52. Mary Logan was careful to undertake her audits in a most responsible manner. Her audit manager complimented her on her diligence and how well she documented her work at the different stages of the audit process. Which element of responsibility did she display?
a) due care
b) professional judgment
c) professional scepticism
d) professional attitude
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
53. Larry Dibitonto is a partner in his firm and runs management consulting, mergers and
acquisitions, insolvency, tax, and accounting services. How are these services referred to
collectively?
a) audit
b) non-assurance services
c) reviews
d) compilations
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
54. In addition to the preparation of financial statements, it is also the responsibility of those
charged with governance to
a) identify the financial reporting framework to be used in the preparation and presentation of their financial statements.
b) establish and maintain internal controls that are effective in preventing and detecting material misstatements.
c) selecting and applying appropriate accounting policies and making reasonable accounting estimates.
d) all of these answers are correct
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
55. Which of the following is not true in relation to comparability?
a) able to identify trends that may influence their perception of how well the entity is doing
b) able to assess performance of the entity over time and with other entities
c) able to be understood
d) able to consistently apply accounting principles
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
56. Professional scepticism does not involve
a) the professional requirement that all management representations be substantiated with supporting documentation.
b) seeking independent evidence to corroborate information provided by their client.
c) being suspicious when evidence contradicts documents held by their client or inquiries made of client personnel.
d) the attitude adopted by the auditor when conducting the audit.
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
57. The largest accounting firms in Canada are known collectively as the
a) ‘Big-3’.
b) ‘Big-4’.
c) ‘Big-5’.
d) ‘Big-6’.
Difficulty: Easy
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
58. Auditors of reporting issuers are required to be a member in good standing with
a) CPAB.
b) CSA.
c) CPA Canada.
d) OSFI.
Difficulty: Easy
Learning Objective: Identify the different regulators, legislation, and regulations surrounding the assurance process.
Section Reference: 1.7 The role of regulators and regulations
CPA Competency: Audit and Assurance
AACSB: Analytic
59. Under the Canada Business Corporations Act, the auditor has a responsibility to form an opinion on the company’s
a) operations.
b) independence.
c) financial statements.
d) tax calculation.
Difficulty: Easy
Learning Objective: Identify the different regulators, legislation, and regulations surrounding the assurance process.
Section Reference: 1.7 The role of regulators and regulations
CPA Competency: Audit and Assurance
AACSB: Analytic
60. The expectation gap is caused by
a) realistic auditor expectations.
b) unrealistic user expectations.
c) realistic user expectations.
d) unrealistic auditor expectations.
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
61. The expectation gap cannot be reduced by
a) auditors performing their duties properly.
b) enhanced reporting to explain what processes have been followed in arriving at an audit or a review opinion.
c) assurance providers reporting accurately the level of assurance being provided.
d) management preparing the financial statements.
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
62. The audit expectation gap is the difference in the expectations of the
a) assurance providers and the financial statement users.
b) assurance providers and the audit client.
c) audit client and the financial report or other users.
d) audit client and the regulator.
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
63. Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Maurice Lecuyer feels that an internal auditor that reports to the chief financial officer of the company can be as independent as an auditor that reports to the audit committee.
b) Jillian Humphrey discovered a very material overstatement in the financial statements of Humphrey’s Holistic Medicine. She felt that the misstatement would have an impact on the decisions of users of the financial statements, and indicated to her audit senior that she would be including it as an “emphasis of matter” paragraph in the audit report.
c) An auditor is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
d) An assurance engagement involves evaluation or measurement of subject matter against criteria.
Difficulty: Medium
Learning Objective: Define an assurance engagement.
Learning Objective: Differentiate between types of assurance services.
Learning Objective: Explain the different levels of assurance.
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.1 Auditing and assurance defined
Section Reference: 1.3 Different assurance services
Section Reference: 1.4 Different levels of assurance
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
64. Outline the reasons for the demand for assurance services.
Difficulty: Easy
Learning Objective: Explain why there is a demand for audit and assurance services.
Section Reference: 1.2 Demand for audit and assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
65. The main assurance service the general public are familiar with are financial statement audits. Briefly describe the other services that an auditor can provide.
Difficulty: Easy
Learning Objective: Differentiate between types of assurance services.
Section Reference: 1.3 Different assurance services
CPA Competency: Audit and Assurance
AACSB: Analytic
66. Identify the three levels of assurance. Identify the three types of engagements relating to each level of assurance and the expression of opinions that would be provided by the assurance provider
Level of Assurance | Type of Engagement | Expression of Opinion |
Reasonable | Audit | Positive |
Limited | Review | Negative |
None | Agreed-Upon Procedures | None |
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA Competency: Audit and Assurance
AACSB: Analytic
67. Identify the three types of engagements, the level of assurance each engagement provides, and describe the types of procedures that would be performed for each engagement.
Difficulty: Easy
Learning Objective: Explain the different levels of assurance.
Section Reference: 1.4 Different levels of assurance
CPA: Audit and Assurance
AACSB: Analytic
68. What does pervasive mean? What report would an auditor use if financial statements contained a misstatement that was material and pervasive?
Difficulty: Easy
Learning Objective: Outline different audit opinions.
Section Reference: 1.5 Difference audit opinions
CPA Competency: Audit and Assurance
AACSB: Analytic
69. How is the expectation gap caused and how can the effects on the expectation gap be reduced?
Difficulty: Easy
Learning Objective: Describe the audit expectation gap.
Section Reference: 1.8 The audit expectation gap
CPA Competency: Audit and Assurance
AACSB: Analytic
CASE QUESTION
70. Vince Deroy owns Val D’Or Vineyards, a successful winery in the Thousand Islands region. Annual sales are $3,500,000 and he has a $1,200,000 loan with a local bank.
Sales are split between wine sales (88%) and wine tasting and catering (12%).
Vince has excellent personal relationships with his suppliers and has been provided with special contractual terms which allow him delays of up to 120 days to make invoice payments. These arrangements run out this year and he will have 30 days to pay after being invoiced.
The bank has made the $1,200,000 loan to Val D’Or Vineyards based on an understanding that the company will undergo an annual audit of its financial statements.
Vince is an astute entrepreneur and has set up an advisory board which consists of his bank manager, another wine grower in the region, his old high school ethics instructor and track coach, himself, and his accountant.
The board has discussed certain issues including the following:
• The need for assurance service providers to audit his financial statements so that users can be provided with assurance that his statements are relevant and reliable.
• Non-audit services that would provide advice on special projects he may be considering in the future.
• A proper accounting firm to conduct an audit mandate.
Required:
a) What is the objective of a financial statement audit and how does it relate to Val D’Or Vineyards?
b) Vince Deroy’s financial statements must be relevant and reliable. What do these two terms mean in the context of this case?
c) What three characteristics should Val D’Or Vineyards’ auditors possess when conducting an audit? Explain them briefly.
d) What are non-audit services? Can you describe possible non-audit services that Val D’Or Vineyards might employ?
Difficulty: Medium
Learning Objective: Differentiate between types of assurance services.
Learning Objective: Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services.
Section Reference: 1.3 Differentiate assurance services
Section Reference: 1.6 Preparers and auditors
CPA Competency: Audit and Assurance
AACSB: Analytic
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