Test Bank Chapter 14 Completing And Reporting On The Audit - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 14
COMPLETING AND REPORTING ON THE AUDIT
CHAPTER LEARNING OBJECTIVES
1. Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
During the engagement wrap-up, the auditor reviews planned audit procedures to ensure they are completed, finalizes any open items (including review notes and to-do items), ensures that all necessary documentation is in the working paper files and removes any unnecessary documentation, reconsiders their risk assessment and fraud risk, reconsiders materiality, performs analytical procedures, assesses misstatements, and performs subsequent events procedures.
2. Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
The auditor is required to consider whether the going concern assumption is the correct basis upon which the financial statements have been prepared. That is, is the entity viewed by the auditor, management, and those charged with governance as continuing into the foreseeable future with neither the intention nor the need to liquidate, to cease trading, or to seek protection from creditors?
3. Understand the purpose of and the procedures performed in the review for contingent liabilities and commitments.
It is the auditor’s responsibility to perform procedures to verify that there are no unrecorded or undisclosed lawsuits or claims that could result in the financial statements being materially misstated.
4. Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
There are two types of subsequent events. Type 1 subsequent events are those that provide additional evidence with respect to conditions that existed at year end. These are required to be adjusted for in the financial statements. Type 2 subsequent events are those that provide evidence with respect to conditions that developed subsequent to year end; these are not required to be recorded in the financial statements, but are considered for inclusion as a disclosure note.
5. Analyze misstatements and explain the difference between quantitative and qualitative considerations when evaluating misstatements.
Quantitative and qualitative considerations of misstatements include the risk of undetected errors remaining, the effect of the misstatements on compliance with covenants or agreements, whether the misstatements are errors or judgemental misstatements, whether any prior-period unadjusted misstatements exist and could affect the current period’s results, the likelihood that these differences will become material in the future, the sensitivity of the misstatements, the significance of the misstatements for the known users of the financial statements, the effect of offsetting differences in financial statement captions, and the dollar amount (quantity) of the misstatements.
6. Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements.
The final phase of the audit is to assess all of the audit evidence obtained and determine whether it is sufficient and appropriate to reduce the risk of material misstatement in the financial statements to an acceptably low level. Based on the evidence gathered, the audit opinion on the financial statements will be determined.
7. Describe the components of an audit report.
The audit report includes a title, an addressee, an audit opinion, a basis of opinion, possibly key audit matters, other matters, management’s and the auditor’s responsibility for the financial statements, the name of the engagement partner, the auditor’s signature, the date of the report, and the auditor’s address. KAMs are the matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements.
8. Identify the types of modifications to an audit report.
The overall conclusion reached at the end of the audit can be unmodified, unmodified with an emphasis of matter, modified with a qualification, modified with an adverse opinion, or modified with a disclaimer of opinion.
9. Explain what reporting is required to management and those charged with governance.
All audit matters of governance interest—that is, items that are important and relevant to those charged with governance in overseeing the financial reporting and disclosure process—should be reported to management and those charged with governance by the auditor. This is a required communication that can be provided verbally or in writing, with written communications (or evidence of such communications) preferred.
10. Understand the various types of other engagements that auditors may be asked to perform.
A practitioner may be asked to perform engagements other than those involving financial information and tax engagements. These other engagements include reports prepared in accordance with a special purpose framework or a basis of accounting other than GAAP; reports on a single financial statement line item, such as inventory or gross sales; assurance reports; reports on compliance with contractual agreements, such as covenants; reviews of interim financial statements, such as for companies listed on a stock exchange in the United States; reports on applying specified procedures to financial information other than financial statements, such as reports on the accuracy of expenditures; and reports on the application of accounting principles either to a specific, actual transaction or to the financial statements overall as well as reports on supplementary matters.
TRUE-FALSE STATEMENTS
1. Subsequent events procedures are normally performed through to and including the date of
the auditor's report.
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
2. Sufficiency relates to the quality of audit evidence gathered.
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
3. Generally, the further into the future an event is likely to take place, the greater the
uncertainty surrounding the event.
Difficulty: Easy
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
4. A type 1 subsequent event provides evidence with respect to conditions that developed
subsequent to year end.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
5. The uninsured loss of inventory as a result of fire subsequent to year end is an example of a
type 2 subsequent event.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
6. An error is an intentional misstatement in the client's financial statements.
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
7. The client's compliance with contractual requirements of operating agreements is an example
of a qualitative factor that may cause misstatements of quantitatively immaterial amounts to be
considered material.
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
8. The final phase of an audit is to assess all of the audit evidence obtained and determine
whether it is sufficient and appropriate.
Difficulty: Easy
Learning Objective: Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements.
Section Reference: 14.6 Evaluating the conclusions and forming an opinion
CPA Competency: Audit and Assurance
AACSB: Analytic
9. The auditor's responsibility for the financial statements includes selecting and applying
appropriate accounting policies.
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
10. A limitation on the scope of the auditor's work could result from an inability to perform
procedures or an imposition by the entity.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
11. An unqualified audit report with an emphasis of matter should be issued if a subsequent
event has occurred that has resulted in a new audit report being prepared on a revised financial
statement.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
12. Matters of governance that the auditor may wish to discuss with those charged with
governance include any practical difficulties encountered in performing the audit.
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
13. As soon as practicable, the auditor should communicate weaknesses in internal controls to
management or those charged with governance.
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
14. A public auditor in practice can only perform audits and reviews and is prohibited from
completing non-assurance engagements such as compilations of financial information and tax
engagements.
Difficulty: Easy
Learning Objective: Understand the various types of other engagements that auditors may be asked to perform.
Section Reference: 14.10 Other engagements
CPA Competency: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
15. Mostafa Torabi, the partner on the Tory, Jimenez LLP audit called a meeting of his senior staff during the engagement wrap-up. Which of the following areas would be the least likely to be covered during the wrap up?
a) consideration of the amount used for materiality
b) removal of all unnecessary documentation from the engagement files
c) performing analytical procedures on the adjusted financial statements
d) preparation of budgets for the following year’s audit
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
16. Ron Nucci is trying to gather sufficient appropriate evidence. Which of these are factors to
consider in evaluating the sufficiency and appropriateness of audit evidence?
a) audit risk
b) control risk
c) quality of information obtained
d) business risk
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
17. Which of the following are areas are not normally covered during the wrap-up of an audit
engagement?
a) Perform subsequent events procedures.
b) Consider the amount used for materiality.
c) Reconsider the assessments of internal control at the entity level and the risk of fraud.
d) Preliminary analytical procedures.
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
18. When misstatements or deviations from controls are found in planned procedures,
consideration should always be given to:
a) the need to modify or perform further audit procedures.
b) the reason for the misstatement or deviation.
c) both a and b.
d) none of the above.
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
19. The going concern assumption means the viability of a business to
a) remain in business for the foreseeable future.
b) maintain the current level of sales.
c) the viability of the business to operate in its current market.
d) increase the level of sales.
Difficulty: Easy
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
20. An auditor’s consideration of the going concern assumption does not include considering
a) knowledge of conditions and events obtained during planning and performing the audit.
b) any material uncertainties about the entity’s ability to meet obligations as they fall due.
c) changes in the industry in which the entity operates which could affect future operations.
d) the auditor’s final assessment of audit risk.
Difficulty: Medium
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
21. Under the going concern assumption:
a) an entity is viewed as not likely to continue in operation for the foreseeable future.
b) an entity's assets and liabilities are recorded at liquidation values.
c) an entity is viewed as continuing in business for the foreseeable future.
d) an entity is considered to be a separate legal entity from its owners.
Difficulty: Easy
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
22. Which of the following factors is not relevant when management is assessing the going
concern assumption?
a) whether the auditor specializes in the client's industry
b) the time into the future that an event is likely to take place
c) the nature and condition of the entity's business
d) the size and complexity of the entity
Difficulty: Easy
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
23. When Jussi Hallonen was reviewing existing or possible obligations on the balance sheet, he was told that the outcome for these obligations was uncertain and that the company was awaiting a future event. Jussi Hallonen was reviewing
a) accruals.
b) going concern.
c) materiality.
d) contingent liabilities.
Difficulty: Medium
Learning Objective: Understand the purpose of and the procedures performed in the review for contingent liabilities and commitments.
Section Reference: 14.3 Contingent liabilities
CPA Competency: Audit and Assurance
AACSB: Analytic
24. For contingent liabilities, an auditor is not required to review which of the following?
a) legal expense accounts for unexpected fluctuations
b) minutes of meetings of those charged with governance
c) correspondence with taxation authorities
d) correspondence with suppliers
Difficulty: Easy
Learning Objective: Understand the purpose of and the procedures performed in the review for contingent liabilities and commitments.
Section Reference: 14.3 Contingent liabilities
CPA Competency: Audit and Assurance
AACSB: Analytic
25. At year-end Faie Bialis sent out accounts receivable confirmations. One of the major
customers of her client confirmed the amount of the receivable. After year end, but prior to the issuance of the audit report, the client declared bankruptcy and an aggrieved shareholder of Faie’s client sued her
firm. What type of subsequent event was this?
a) Type 1
b) Type 2
c) Type 1 and 2
d) this was not a subsequent event
Difficulty: Medium
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
26. When Nicholas Walker released the audit report of Imperial Corp., he did not anticipate that there would follow an announcement two days later that several days after year end his client’s
foreign subsidiary had been nationalized by Libya for non-compliance to environmental laws of
the country. What type of subsequent event was this?
a) Type 1
b) Type 2
c) Type 1 and 2
d) this was not a subsequent event
Difficulty: Medium
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
27. When Kelly Lake was training her staff about the auditor’s responsibility for
subsequent events she made the two following statements:
- Type 2 subsequent events are those events that do not result in changes to financial statements.
- Type 1 subsequent events do not require adjustments to financial statements.
Which of the above statements, if any, is true?
a) (i) only
b) (ii) only
c) both (i) and (ii)
d) neither (i) nor (ii)
Difficulty: Medium
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
28. A subsequent event occurs:
a) before the end of the financial year.
b) between the client's financial year end and the date of the auditor's report.
c) after the auditor completes the tests of controls.
d) after the auditor signs the audit engagement letter.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
29. Which of the following statements is correct regarding a type 1 subsequent event?
a) They are events that do not result in changes to amounts in the financial statements.
b) They occur before the end of the client's financial year.
c) They may be of such significance as to require disclosure in the financial statements.
d) The financial statements are adjusted for any material changes in estimates from these types of events.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
30. Procedures used by an auditor when conducting a subsequent events review include:
a) assessing continued compliance with borrowing limits and loan covenants.
b) enquiring of those charged with governance as to whether any subsequent events have occurred that may affect the financial statements.
c) reading minutes of the meetings of the board of directors.
d) all of the answers are correct.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
31. Which of the following dates is least relevant when considering subsequent events?
a) the date on which the financial statements are approved
b) the audit report date
c) the date on which the financial statements are issued
d) the date the auditor completes the fieldwork
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
32. Type 1 subsequent events are events that
a) occur before the balance sheet date.
b) require changes to amounts in the financial statements.
c) do not require changes to amounts in the financial statements.
d) occur after the end of the financial year and do not affect the financial statements.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
33. Which of the following is not an example of a type 2 subsequent event?
a) the loss of inventory after year end
b) the issuance of shares
c) the bankruptcy of a credit customer subsequent to year end
d) the purchase of a business
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
34. Which of the following is not a procedure used to identify subsequent events?
a) obtaining evidence from the entity’s legal representative concerning litigation and claims
b) assessing continued compliance with borrowing limits and loan covenants
c) performing analytical procedures up to the date of the audit report
d) performing preliminary analytical procedures
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
35. When an error or exception is identified during substantive testing, the first response is to
a) qualify the audit report.
b) understand why the error or exception has arisen.
c) increase the sample size.
d) report the error or exception to the audit committee.
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
36. Which of the following statements regarding judgemental misstatements is incorrect?
a) They are the same as errors.
b) They can arise as a result of a difference in underlying assumptions by the client and the auditor.
c) They are not the same as errors.
d) They can arise as a result of a difference in the application of judgment by the client and the auditor.
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
37. Which of the following are examples of qualitative considerations that may cause
misstatements of quantitatively immaterial amounts to be considered material?
a) the client's compliance with contractual requirements of operating or other agreements
b) key ratios monitored by analysts or other key users of the financial statements
c) both a and b
d) error in the amount of contingent liabilities recorded by the client
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
38. The final phase of an audit includes which of the following?
a) performing substantive tests of account balances
b) gaining an understanding of the client's internal control system
c) confirming the terms of the audit engagement with the auditor
d) determining whether the audit evidence obtained is sufficient and appropriate to reduce the risk of material misstatements in the financial statements to an acceptably low level
Difficulty: Easy
Learning Objective: Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements.
Section Reference: 14.6 Evaluating the conclusions and forming an opinion
CPA Competency: Audit and Assurance
AACSB: Analytic
39. Which of the following is not a step in forming an opinion on the financial statements?
a) evaluation of the audit evidence obtained
b) evaluation of the effects of unrecorded misstatements
c) evaluating the fair presentation of the financial statements
d) obtaining a signed engagement letter
Difficulty: Easy
Learning Objective: Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements.
Section Reference: 14.6 Evaluating the conclusions and forming an opinion
CPA Competency: Audit and Assurance
AACSB: Analytic
40. When an auditor expresses an unqualified audit opinion, it indicates the
a) entity has complied with the reporting obligations as required by CPAB.
b) internal controls of the entity are operating efficiently and effectively.
c) financial statements are accurate in all respects.
d) financial statements have been prepared in accordance with an applicable accounting framework.
Difficulty: Medium
Learning Objective: Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements.
Section Reference: 14.6 Evaluating the conclusions and forming an opinion
CPA Competency: Audit and Assurance
AACSB: Analytic
41. The components of an audit report include all of the following except
a) title, address, and introductory paragraph.
b) management’s responsibility for the financial statements.
c) a statement that accounting estimates are reasonable.
d)basis for opinion.
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
42. Management's responsibilities for the financial statements do not include which of the
following?
a) selecting and applying appropriate accounting policies
b) expressing an opinion on the financial statements
c) establishing and maintaining internal controls
d) making reasonable accounting estimates
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
43. Which of the following are included in the components of the auditor's report?
a) management's responsibility for the financial statements
b) the client’s opinion on whether the financial statements are fairly presented
c) the date of the completion of the fieldwork
d) any internal control deficiencies
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
44. Which of the following would not be included in an audit report?
a) The auditor's address
b) Opinion paragraph
c) The audit fee charged to the client
d) Management’s responsibility for the financial statements
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
45. When May Flower was unable to perform work on inventory because of a client’s
insistence that she not perform an inventory taking, what kind of audit opinion would she most
likely consider?
a) adverse opinion
b) emphasis of matter
c) limitation of scope
d) disclaimer of opinion
Difficulty: Medium
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
46. When Olga Shapiro mentioned that the financial statements were materially misstated,
what kind of opinion was this?
a) disclaimer
b) emphasis of matter
c) adverse
d) limitation of scope
Difficulty: Medium
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
47. Joshua Hanson knew that his client’s financial statements were misstated but the misstatement was not pervasive. What kind of audit report was he considering?
a) qualified opinion
b) emphasis of matter
c) compilation
d) unqualified opinion
Difficulty: Medium
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
48. If it is not possible to obtain sufficient appropriate audit evidence, the auditor should:
a) express an adverse opinion.
b) express a qualified or disclaimer of opinion.
c) report the client to CPA Canada.
d) express an unqualified opinion with an emphasis of matter.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
49. If the auditor is not able to obtain sufficient appropriate audit evidence, the appropriate audit
opinion will either be:
a) a qualified opinion or an unqualified opinion.
b) a disclaimer of opinion or an emphasis of matter.
c) a qualified opinion or disclaimer of opinion.
d) an emphasis of matter or a qualified opinion.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
50. A limitation on the scope of the auditor's work may result from:
a) damage to accounting records.
b) lack of access to key personnel.
c) absence of adequate accounting records.
d) all of the answers are correct.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
51. Material disagreements with management will result in either:
a) a qualified opinion or adverse opinion.
b) an emphasis of matter or adverse opinion.
c) an adverse opinion or an unqualified opinion.
d) an unqualified opinion or a qualified opinion.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
52. Which of the following is not an area of disagreement with those charged with governance
that may result in a modified audit opinion?
a) the acceptability of accounting policies selected
b) the terms of the audit engagement
c) the method of application of accounting policies
d) the adequacy of disclosures in the financial statements
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
53. A key audit matter is:
a) a qualified report.
b) specific to the entity and highlight matters that, in the auditor’s
professional judgement, were of most significance in the audit of the financial statements
of the current period.
c) never permitted in Canada.
d) a key performance indicator.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
54. The auditor's report will not require a modified opinion where:
a) there is a disagreement with those charged with governance.
b) a limitation of scope of the engagement exists.
c) a significant uncertainty exists.
d) the financial statements are presented fairly.
Difficulty: Easy
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
55. Which items are matters of governance interest that an auditor would wish to discuss with
those charged with governance?
a) the general approach and overall scope of the audit
b) the potential effect on the financial statements of any material risks and exposures
c) material uncertainties related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern
d) all of the answers are correct
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
56. Those charged with governance are accountable for ensuring that the entity achieves its
objectives with regard to which of the following?
a) compliance with applicable laws
b) the level of inventory held
c) the amount of cash in the bank
d) their fiduciary duties
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
57. Matters of governance interest that the auditor may wish to discuss with those charged with
governance include:
a) any practical difficulties encountered in performing the audit.
b) the potential effect on the financial statements of any material risks and exposures.
c) expected modifications to the audit report.
d) all of the answers are correct.
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
58. Governance relates to
a) the responsibility of the audit committee and its relationship to the auditor.
b) the responsibility of those charged with governance regarding compliance with GAAP.
c) responsibilities ensuring that the entity achieves its objectives regarding reliability of financial statements, effectiveness and efficiency of operations, and compliance with laws.
d) the day-to-day operating activities of the entity.
Difficulty: Easy
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
59. An auditor may prepare or provide an opinion on information other than general purpose
financial statement information, on all the following engagements except
a) reports prepared in accordance with a special purpose framework.
b) reports on a component of the financial statements.
c) reports on the expected market value of the share price for the following five years.
d) reports on compliance with contractual agreements.
Difficulty: Easy
Learning Objective: Understand the various types of other engagements that auditors may be asked to perform.
Section Reference: 14.10 Other engagements
CPA Competency: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
60. Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Kyle Harris, the senior auditor at James & Juniper LLP made the following statement to his audit team: “What constitutes sufficient appropriate audit evidence is a matter of judgement.”
b) Pompei Foods Company operates as a specialty food distributor. Jacques Vincent, auditor, has told his staff that the bankruptcy of a credit customer at year end should not be considered a type 1 event.
c) Winnipeg Ice Wolves auditor Lise Parenteau found an omission of a disclosure in the financial statements of the hockey team. She called this an error.
d) Eileen Keen was told by the client that a limitation in the scope of her work would require a modification to the audit report.
Difficulty: Medium
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Learning Objective: Identify the types of modifications to an audit report.
Section Reference: 14.1 Engagement wrap-up
Section Reference: 14.4 Subsequent events
Section Reference: 14.5 Misstatements
Section Reference: 14.8 Identification of the types of modifications to an audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
61. Discuss the factors that are relevant when management is assessing the going concern assumption.
Difficulty: Easy
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
62. Describe two procedures that are necessary for the auditor to perform with respect to contingent liabilities.
Difficulty: Medium
Learning Objective: Understand the purpose of and the procedures performed in the review for contingent liabilities and commitments
Section Reference: 14.3 Contingent liabilities
CPA Competency: Audit and Assurance
AACSB: Analytic
63. Describe two procedures used by the auditor in conducting a review for subsequent events.
Difficulty: Medium
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any)
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
64. Explain the difference between type 1 and type 2 subsequent events and provide examples of each type of event.
Difficulty: Easy
Learning Objective: Compare the two types of (material) subsequent events to determine what effect they have on the financial statements (if any).
Section Reference: 14.4 Subsequent events
CPA Competency: Audit and Assurance
AACSB: Analytic
65. Identify quantitative and qualitative considerations that are taken into account when the auditor evaluates whether misstatements cause financial statements to be materially misstated or if they require additional disclosure.
Difficulty: Medium
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
66. Describe the four steps involved in forming an opinion of the financial statements.
Difficulty: Medium
Learning Objective: Evaluate conclusions obtained during the performance of the audit and explain how these conclusions link to the overall opinion formed on the financial statements
Section Reference: 13.6 Evaluating the Conclusions and Forming an Opinion
CPA Competency: Audit and Assurance
AACSB: Analytic
67. From the list of responsibilities provided below, classify each as either a responsibility of management or a responsibility of the auditor.
List of responsibilities:
- expressing an opinion on the financial statements based on the audit
- establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial statements that are free from material misstatements, whether due to fraud or error
- selecting and applying appropriate accounting policies
- stating that the audit was conducted in accordance with auditing standards (including compliance with relevant ethical requirements)
- describing the audit
- making accounting estimates that are reasonable in the circumstances
- stating that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion
Responsibility of Management | Responsibility of the Auditor |
establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial statements that are free from material misstatements, whether due to fraud or error | expressing an opinion on the financial statements based on the audit |
selecting and applying appropriate accounting policies | stating that the audit was conducted in accordance with auditing standards (including compliance with relevant ethical requirements) |
making accounting estimates that are reasonable in the circumstances | describing the audit |
stating that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion |
Difficulty: Medium
Learning Objective: Describe the components of an audit report
Section Reference: 13.7 Components of the Audit Report
CPA Competency: Audit and Assurance
AACSB: Analytic
68. Explain the difference between management's and the auditor's responsibility for the financial statements.
Difficulty: Easy
Learning Objective: Describe the components of an audit report.
Section Reference: 14.7 Components of the audit report
CPA Competency: Audit and Assurance
AACSB: Analytic
69. List five examples of matters of governance interest that the auditor may wish to discuss with those charged with governance.
Difficulty: Medium
Learning Objective: Explain what reporting is required to management and those charged with governance.
Section Reference: 14.9 Communication with those charged with governance
CPA Competency: Audit and Assurance
AACSB: Analytic
ESSAY QUESTIONS
70. Explain why the global financial crisis has resulted in the number of potential and actual legal liability insurance claims and explain how auditors can deal with the risk of litigation in tough economic times.
Difficulty: Easy
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Section Reference: 14.1 Engagement wrap-up
CPA Competency: Audit and Assurance
AACSB: Analytic
71. Explain the potential threats to independence relating to review engagements and how an auditor can safeguard against these threats.
Difficulty: Easy
Learning Objective: Understand the various types of other engagements that auditors may be asked to perform.
Section Reference: 14.10 Other Engagements
CPA Competency: Audit and Assurance
AACSB: Analytic
72. Demand for forensic accounting has grown following the collapses of Enron and WorldCom. Explain the important characteristics of forensic accountants and the main techniques they use to investigate fraud.
Difficulty: Easy
Learning Objective: Analyze misstatements and explain the difference between quantitative
and qualitative considerations when evaluating misstatements.
Section Reference: 14.5 Misstatements
CPA Competency: Audit and Assurance
AACSB: Analytic
CASE QUESTION
73. David Davidson, the partner in charge of the Bombardier Aerospace audit, was reviewing the work his team had completed.
Bombardier is a Canadian company. They used to be involved in recreational equipment such as Ski-Doo snowmobiles and Sea-Doo watercraft. Their Aerospace division, however, is probably their best known operating segment and is known as a leading manufacturer of commuter jets containing 50-100 seats.
Bombardier’s operations were by far the largest of the aerospace companies in Montreal and several of the new programs were very ambitious and very risky. It seemed to David that every review he performed had material misstatement possibilities.
David was thinking that an audit of this magnitude was challenging his abilities in evaluating what was sufficient and appropriate audit evidence.
When David started the audit of the current year’s operations, he was surprised with the events that took place in 2015 at the Bourget and Farnborough air shows. The anticipation for Bombardier’s new CSeries aircraft turned out to be less than positive as other manufacturers seemed to pile up the orders. Airbus executives had also been claiming for months that their company’s introduction of a new engine option (NEO) for the A320 narrowbody voided the business case for the CSeries.
Although Bombardier has been able to get commitments up to 100 aircraft, the company is only one-third of the way to its goal of 300 orders for the CSeries scheduled service entry in late 2017. This also still leaves Bombardier 350 aircraft short of the sales required for the project to break even.
As Bombardier attempts to expand its aircraft product line into medium-sized aircraft (100-149 seats), it is entering a space that is getting very close to the market segment dominated by industry giants, Boeing and Airbus. While those companies tend to focus on even larger aircraft, they may want to protect themselves by defending against Bombardier in the medium-sized aircraft segment because Bombardier could later expand into the lucrative large-aircraft segment. Bombardier’s $3.4-billion bet on the market for narrow-bodied aircraft faces a potential threat: a price war instigated by Boeing Co. and Airbus SAS.
David Davidson had an uneasy feeling about the viability of the Aerospace sector of the company’s operations.
Required:
a) Describe the factors that David Davidson and his firm will have to consider in evaluating the sufficiency and appropriateness of audit evidence at Bombardier Aerospace.
b) What factors are relevant when management assesses the going concern issue at Bombardier?
Difficulty: Medium
Learning Objective: Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
Learning Objective: Understand the considerations when assessing the going concern assumption used in the preparation of the financial statements.
Section Reference: 14.1 Engagement wrap-up
Section Reference: 14.2 Going concern
CPA Competency: Audit and Assurance
AACSB: Analytic
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