Q&A Hero

Q: 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.

Q: 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"

Q: 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

Q: The level of assurance that is provided by the public accountant on a compilation report is A) none. B) low. C) medium. D) high.

Q: 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 highest assurance level to lowest assurance level. A) audit, review, compilation, bookkeeping B) audit, compilation, review, bookkeeping C) review, audit, compilation, bookkeeping D) review, audit, bookkeeping, compilation

Q: A review engagement requires what amount of evidence to be accumulated? A) Minimal B) Moderate C) Extensive D) Maximum

Q: 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

Q: As part of a loan agreement that it is thinking of obtaining, Always Quick Manufacturing Limited has decided that it will use accounts receivable and inventory as security for working capital funds. The bank has indicated that in addition to an annual financial statement audit, that it would require quarterly assurance on the accounts receivable and inventory amounts. The type of assurance required has not been stated. The bank has told Jose, the owner of the company, that he would need to provide a detailed inventory list and an aged accounts receivable trial balance on the fifteenth of each month for the information as at the preceding month end. Jose would like to know what his alternatives are. Required: Your partner is going to meet with Jose next week, and would like you to prepare a memo to file that will be used as part of the meeting. The memo should include a list of alternative types of engagements that could be used to provide assurance on the accounts receivable and inventory balances.

Q: Outline the three performance standards of CICA Handbook section 5025, "Standards for Assurance Engagements."

Q: Define "direct reporting engagements."

Q: Define "attest engagements."

Q: Define "assurance engagements."

Q: Which of the following matters would be addressed in a report on the results of applying specified auditing procedures to financial information other than financial statements? A) An opinion with respect to the quality of the information examined B) Explanations of the differences between audit, review and special engagements C) The factual results of the procedures D) Provision of negative assurance with respect to the accounts examined

Q: An engagement for applying specified auditing procedures to financial information other than financial statements provides no assurance. This results in A) a report that can be readily tailored to any type of engagement. B) a broad set of audit procedures being conducted for specific information. C) frequent disagreement between auditor and client with respect to results. D) distribution of the report normally being restricted.

Q: What is the purpose of an auditor reporting on the effectiveness of internal control over financial reporting? To A) attest to the effectiveness and efficiency of internal controls at an organization. B) state an opinion on management's assessment of the effectiveness of internal controls. C) provide an alternative to the operational audits conducted by internal auditors. D) state that the controls are in conformity with standards with respect to internal controls.

Q: 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

Q: In addition to having modifications of wording for the financial statement audit opinion, other types of opinions can have modifications as well. Which one of the following describes a situation where there would be a qualification or disclaimer of opinion for a direct reporting engagement? The A) subject matter does not conform to the criteria. B) information is not presented fairly. C) practitioner conducted alternative procedures where there was a scope limitation. D) practitioner and management disagree about the content of the report.

Q: For the conduct of an assurance engagement, the practitioner is required to identify or develop criteria to evaluate the subject matter. Identify some characteristics of suitable criteria. A) relevance, reliability, neutrality, understandability, completeness B) reliability, accuracy, neutrality, timeliness C) understandability, completeness, timeliness, free from bias D) completeness, timeliness, free from bias, competent

Q: 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 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.

Q: The Federal Auditor General provides the results of operational audits to Parliament in Auditor General reports. What type of engagements are these? A) direct reporting B) attest engagement C) review engagement D) compilation engagement

Q: Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm. Leon Levy is the auditor in charge of the audit. The accountable party in this assurance engagement is A) Leon Levy. B) Pilott & Levy. C) management of Thermos Inc. D) the board of directors of Thermos Inc.

Q: You have just signed off the audit report on the financial statements of your client. What type of engagement did you complete? A) Review B) Direct reporting C) Attest and assurance D) Operational

Q: "An engagement where the practitioner expresses a conclusion on a written assertion about a subject prepared by a party accountable for the assertion, such as management" is the definition of a(n) A) audit engagement. B) attestation engagement. C) review engagement. D) assurance engagement.

Q: "An engagement where, pursuant to an accountability relationship between two or more parties, a practitioner is engaged to issue a written communication expressing a conclusion concerning a subject matter for which the accountable party is responsible" is the definition of a(n) A) audit engagement. B) assurance engagement. C) review engagement. D) compilation engagement.

Q: Auditing, 12e (Arens) 21.1 Describe how assurance engagement general standards are different from and similar to audit standards

Q: There are five conditions that must be met before an auditor can issue a standard unqualified report. Discuss each of these five conditions.

Q: Double dating a report is done when A) the parent company and their subsidiaries have different year ends. B) the auditor finishes his work later than planned. C) a material event occurs after the date of the auditor's report and affects the period that was audited D) a material event occurs after the date of the auditor's report and before the date the report is issued.

Q: If the balance sheet of a company is dated December 31, 2012, the audit report is dated March 6, 2013, and both are released to the public on March 15, 2013, this indicates that the auditor has searched for material unrecorded transactions and events that occurred up to A) December 31, 2012. B) March 6, 2013. C) March 15, 2013. D) December 31, 2013.

Q: The audit report date is important to users because it indicates the last day A) of the fiscal period. B) on which the financial statements may be filed with the provincial securities commission. C) on which users may institute a lawsuit against either client or auditor. D) of the auditor's responsibility for the review of significant events that occurred after the date of the financial statements.

Q: The appropriate date for the audit report for a public company is the one on which the A) client's fiscal year ended. B) auditor and client entered into a contract. C) board of directors approved the financial statements. D) auditor prepares and delivers the report to the client.

Q: Clark Kent is a PA partner at the firm of Kent, Lane and Lang, a limited liability partnership. Kent's firm has just completed the audit of a client with a March 31, 2012, year end. How should the audit report be signed? A) Clark Kent, PA B) Kent, Lane and Lang, LLP C) Clark Kent, LLP D) Kent, Lane and Lang, PAs

Q: One of the most controversial parts of the auditor's report is the meaning of the term "presents fairly." What does the auditor's opinion mean when these words are used? The A) values in the financial statements represent the net realizable values of the assets of the entity. B) financial statements are accurate and provide a true and fair representation of the entity's current financial position. C) values in the financial statements represent the value of the entity now, if it were liquidated on an open market. D) financial statements are fairly presented in accordance with the financial reporting framework described in the opinion paragraph.

Q: The phrase "in our opinion" indicates that A) the auditor performed the audit on a test basis. B) the auditor's judgment can be relied upon. C) the auditor relied on their knowledge to perform the audit. D) there may be some information risk associated with the financial statements.

Q: The independent auditor's opinion explains how much evidence the auditor collects during the independent audit. How much evidence is collected? A) sufficient and appropriate to provide a basis for the audit opinion B) sufficient to state that there are no material errors in the financial statements C) appropriate to be able to evaluate the exact accuracy of the accounting estimates D) sufficient and appropriate to conclude the financial statements present a true and fair view of the economic events of the organization

Q: It is management's responsibility to select the accounting policies that are used in the preparation of the financial statements. What is the auditor's responsibility with respect to these accounting policies? A) approve the accounting policies that are used, so that an opinion can be stated on the fairness of the financial statements B) evaluate the appropriateness of the accounting policies that are used and of the associated estimates made C) tell management which accounting policies should be selected, so that accurate estimates can be made for year end adjustments D) recalculate the estimates that are used for the accounting policies (such as bad debt allowance and warranty expenses)

Q: The use of the term "reasonable assurance" is intended to indicate that an audit cannot be expected to A) completely eliminate the possibility that a material error or fraud exists. B) consider or search for minor errors. C) be compliant with the generally accepted accounting principles for every account. D) provide assurance of no material errors or irregularities to investors who are using the financial statements for investment decisions.

Q: In the scope paragraph of the audit report, the use of the term "reasonable assurance" is intended to indicate that A) no misstatements exist in the financial statements. B) no material misstatements exist in the statements. C) there is some possibility that material misstatements still exist in the financial statements. D) there is a possibility that immaterial misstatements still exist in the financial statements.

Q: Management has several responsibilities that are important to the auditor. One of these is that management is responsible for A) internal controls that prevent material misstatements either due to fraud or error. B) maintaining control of evidence (such as confirmations) until assessed by the auditor. C) evaluating evidence against acceptable criteria. D) providing reasonable assurance that the financial statements are fairly stated.

Q: The scope paragraph of the standard unqualified audit report in the auditor responsibility section states that the audit is designed to A) discover all errors and/or irregularities. B) discover material errors and/or irregularities. C) obtain reasonable assurance whether the statements are free of material misstatement. D) conform to a generally accepted financial reporting framework.

Q: Under the Canadian Auditing Standards, the introductory paragraph of the independent auditor's report indicates that the auditor has audited the balance sheet, the income statement, the cash flow, a summary of accounting policies and notes and A) the statements of retained earnings. B) the statement of changes in equity. C) management's discussion and analysis letter. D) the internal controls of the company.

Q: According to CAS 700, the standard unqualified report's title should be A) Unqualified report of the auditor. B) Audited financial statements. C) Auditor's report. D) Independent auditor's report.

Q: The most common type of audit report contains A) an adverse opinion. B) a disclaimer of opinion. C) a qualified opinion. D) an unqualified opinion.

Q: 20.1 State the requirements for a standard unqualified audit report

Q: Julia is in the process of auditing the legal liability section of the financial statements. The controller indicated that he did not want her to contact their external lawyers and he is refusing to grant her access to the detail of the legal expense for the year and any legal invoices. What should Julia do in this situation? Indicate the steps, in the proper order, that should be taken.

Q: Your client, Huge Telephone Company (HTC), has encountered troubled times, due to deregulation. There is competition for local telephone business and long distance telephone business. The high speed lines for internet access provided via the telephone network have not been selling as well as expected. A new quirk is that many large cities are going to provide free wireless services by installing wireless transmitters on telephone poles, and is only offering to pay a pittance for the use of the telephone poles. HTC has been able to retain reasonable profits by cutting staff to a bare minimum and outsourcing many services. However, due to several labour contracts and federal legislation that will increase services, you have doubts about the ability of the company to renew a major bond issue this coming year. Required: How does the above information affect the audit report?

Q: The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard auditor's report that may be necessary, and give reasons. State your assumptions. A) During 2012, your client was sued by a customer who had a serious car accident as a result of scrap metal that had been dumped in the parking lot. The customer drove over the scrap metal, which was imbedded in the tires of her vehicle. The tires blew, and the car went out of control on a major highway. The amount in dispute is $400,000, with estimated legal bills of about $20,000. The client does not wish to disclose the suit in the financial statements. B) During the current year, your client leased a large amount of equipment. As the lease qualifies as a capital lease, the equipment has been recorded as an asset, with the corresponding liabilities recorded on the financial statements. The implicit interest rate in the lease is seven percent. The annual payments due over the terms of the lease have been disclosed in the notes to the financial statements.

Q: The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard 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. Fund raising is handled primarily by means of electronic mail and door to door canvassing by volunteers. Volunteers conducting canvassing provide receipts at the door using prenumbered receipts. Funds raised by email are sent receipts by email.

Q: The following are two unrelated situations. For each situation outline possible deviations (if any) from a standard auditor's report that may be necessary, and give reasons. State your assumptions. A) Queen Lake Construction Ltd. uses an aggressive revenue recognition policy under the percentage of completion method for long-term construction contracts. Your review of this year's contracts indicates that several projects look as if they will be high in revenue for the first two years, and then have negligible earnings for the next three years. B) Maple Manufacturing Limited constructs furniture out of maple wood. The furniture is prized for its durability and craftsmanship. Last year, the company received a letter from a governmental agency advising that it had been found that the factory was located on contaminated land that leached hazardous chemicals into the air. This was a preliminary letter stating that a full investigation into the health effects was underway. Management stated that everything is OK - the investigation was terminated. However, the lawyer refused to sign the legal letter with respect to several lawsuits with respect to employee claims for long term disability due to a nervous disorder that affected employees' ability to work. Neither the investigation nor the lawsuits are disclosed in the notes to the financial statements.

Q: Discuss how materiality affects audit reporting decisions.

Q: There are two conditions requiring a departure from an unqualified audit report. Discuss each of these conditions and state the appropriate audit report for each condition.

Q: The primary auditor who relies on a secondary auditor A) is responsible for any deficiencies in the secondary auditor's work. B) will mention the name of the secondary auditor if he or she decides that an unqualified opinion is appropriate. C) will never mention the name of the secondary auditor in his or her report even if the report is qualified. D) has no responsibility for checking the work of the secondary auditor.

Q: When Dussault & Montgomery relied on Groves & Padden, another PA firm, to audit the Quebec subsidiaries of one of their audit client, Dussault & Montgomery should A) assess Groves & Padden's professional qualifications. B) ask Groves & Padden to also sign the auditor's report. C) send one of their auditors to Quebec to supervise the work being done by Groves & Padden. D) issue a qualified opinion for the financial information pertaining to the Quebec subsidiaries.

Q: Dussault & Montgomery, the auditors of Greenwich Corp., relied on Groves & Padden, another PA firm, to audit the Quebec subsidiaries of Greenwich. The responsibility for the opinion to issue on the financial statements is the responsibility of A) Greenwich Corp. B) Dussault & Montgomery. C) Groves & Padden. D) Dussault & Montgomery and Groves & Padden.

Q: The auditor has set materiality at XYZ Company of $50,000 based upon a percentage of net assets. The company currently has a small profit (only $3,500). Which of the following items would the auditor most likely consider to be material and request an account balance adjustment? A) a misclassification between accounts receivable and accounts payable of $10,000 B) incorrect allocation of a note payable to current rather than long term C) poor wording in a note to the financial statements, making it a bit difficult to understand D) an understatement of depreciation expense, which would increase depreciation by $5,000

Q: The primary concern in measuring materiality when a client has failed to follow an acceptable financial reporting framework is usually A) the total dollar error in the accounts involved, compared with some acceptable base. B) measurability of the dollar error. C) the nature of the item in error. D) whether it can materially affect some future period.

Q: Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces keyboards and other types of computer hardware. Fractal is refusing to consolidate its financial statements, as this would increase the debt to equity ratio to the point that Fractal would violate its debt agreement, although it would benefit the current ratio with a sizeable increase in inventory. Instead, Fractal would like to record the investment in the Malaysian subsidiary at cost. What type of effect does the non-consolidation have upon the financial statements? A) Material and isolated B) Material C) Material and pervasive D) Immaterial

Q: When determining whether an exception is highly material, the extent to which the exception affects different parts of the financial statements must be considered. This is referred to as A) materiality. B) pervasiveness. C) financial analysis. D) ratio analysis.

Q: If inventory is the largest balance on the financial statements, a large misstatement would be so material that the auditor should issue A) an unqualified opinion. B) a qualified opinion. C) an adverse opinion. D) a disclaimer of opinion.

Q: The client has presented all required financial statements with the exception of the statement of cash flows. The auditor has completed the audit and is satisfied that everything, with the exception of the missing statement, is presented fairly. As a result, the auditor would likely issue A) a qualified opinion. B) an unqualified opinion. C) a disclaimer of opinion. D) either an unqualified or qualified opinion.

Q: When a misstatement in the financial statements would affect a user's decision but the overall statements are still fairly stated, it would be appropriate to issue A) an unqualified opinion. B) a qualified opinion. C) an adverse opinion. D) a disclaimer of opinion.

Q: The dollar amount of some misstatements cannot be accurately measured. If, for example, the client was unwilling to disclose an existing lawsuit, the materiality question the auditor must evaluate in such a situation is A) what effect will it have on net income. B) how will it affect management's future decisions. C) does it increase the auditor's exposure to lawsuits. D) what effect will it have on statement users.

Q: Mafah Distribution Limited has requested that the audited financial statements be completed by January 5, five days after the December 31 year end. This means that the auditor will be unable to verify subsequent payments on accounts receivable and will be unable to determine whether accounts payable have been set up correctly. What type of audit report should Mafah receive if the auditor is unable to use alternative procedures for these two audit areas? A) Disclaimer B) Adverse C) Qualified D) Unqualified

Q: Both disclaimers of opinion and adverse opinions are used A) only when the condition is highly material and pervasive. B) whether the condition is material or not. C) regardless of the auditor's independence. D) regardless of the client's choice of accounting method.

Q: An adverse opinion is issued when the auditor believes A) some parts of the financial statements are materially misstated or misleading. B) the financial statements will be found to be misleading or misstated, if an adequate investigation is performed. C) the overall financial statements are so materially misstated or misleading as a whole that they do not present fairly the financial position or results of operations and changes in financial position. D) the audit firm is not independent.

Q: When a misstatement in the financial statements exists but is unlikely to affect the decisions of a reasonable user, it would be appropriate to issue A) an unqualified opinion. B) a qualified opinion. C) a disclaimer of opinion. D) an adverse opinion.

Q: A misstatement in the financial statements can be considered material if A) it overshadows the financial statements as a whole. B) knowledge of the misstatement would affect the decision of a reasonable user of the statements. C) it affects more than one account on the statements. D) it affects only one account on the statements.

Q: The auditor would most likely issue a disclaimer of opinion because of A) the client's failure to present supplementary information. B) inadequate disclosure of material information. C) a client-imposed scope limitation. D) the qualification of an opinion by the other auditor of a subsidiary where there is a division of responsibility.

Q: Whenever the client imposes restrictions on the scope of the audit, the auditor should be concerned about the possibility that management is trying to prevent discovery of misstated information. In such cases, which type of report should be issued? A A) disclaimer of opinion, in all cases. B) qualification of both scope and opinion, in all cases. C) disclaimer of opinion, whenever materiality is in question. D) qualification of both scope and opinion, whenever materiality is in question.

Q: When the auditor knows that the financial statements may be misleading because they were not prepared in accordance with an acceptable financial reporting framework, he or she must issue A) a qualified opinion. B) an adverse opinion. C) a disclaimer of opinion. D) a qualified or an adverse opinion, depending on the materiality of the item in question.

Q: The least severe type of report for disclosing departures from an unqualified report is the A) adverse opinion. B) disclaimer of opinion. C) qualified opinion. D) report on unaudited financial statements.

Q: The auditor's report of the Samcorp Company indicates that the auditor is unable to form an opinion on whether the financial statements of the company are fairly presented due to scope restrictions and unavailable and incomplete records. The auditor's report is A) unqualified. B) qualified. C) adverse. D) disclaimer of opinion.

Q: The auditor's report of the Huge Mega Company indicates that the financial statement are fairly presented except for the goodwill balance which does not comply with International Financial Reporting Standards. The auditor's report is A) unqualified. B) unqualified with explanatory paragraph. C) qualified. D) adverse.

Q: If a misstatement is immaterial relative to the financial statements of the entity for the current period and is not expected to have a material effect in future periods, it is appropriate to issue A) an unqualified opinion. B) a qualified opinion. C) an adverse opinion. D) a disclaimer of opinion.

Q: As a result of management's refusal to permit the auditor to physically examine inventory, the auditor has not accumulated sufficient evidence to conclude whether financial statements are stated in accordance with ASPE (Accounting Standards for Private Enterprises). The auditor must depart from the unqualified audit report because A) the financial statements have not been prepared in accordance with GAAP. B) the scope of the audit has been restricted by circumstances beyond either the client's or auditor's control. C) the auditor has lost independence. D) the scope of the audit has been restricted by the client.

Q: Explain four different variations that could occur in unqualified audit reports. For each variation, state how the auditor's report is affected and provide an example.

Q: ProForce Inc. is facing a large lawsuit from its employees. The contingency is significant and may lead to a going concern issue if ProForce is found guilty. ProForce took the adequate measures, as prescribed by IFRS (International Financial Reporting Standards), to account, disclose and present the contingency in the financial statements. The auditor should A) add an emphasis-of-matter paragraph after the opinion paragraph. B) issue a standard unqualified report. C) issue a qualified report. D) deny an audit opinion.

Q: When a material uncertainty exists, the auditor must A) disclose it in the audit report. B) first determine the materiality of the item and whether adequate disclosure is included in the financial statements. C) issue a disclaimer of opinion. D) issue a qualified opinion.

Q: PA firm has been auditing Big Manufacturing Company (BMC) for several years. Last year, BMC converted its inventory and purchasing systems to a new system effective December 31, the date of the year end. To their horror, the PA firm discovered at the beginning of the current error that there was a cut-off error in the accounts payable system of $25 million dollars LAST YEAR. Neither the client nor the firm had detected that the purchases of December 31 had been omitted from the old computer system transaction processing and had been recorded only in the new computer system, understating last year's expenses. Last year's financial statements have been restated and the error disclosed in the notes to both last year's and this year's financial statements. What type of audit opinion will BMC receive this year? A) Qualified B) Disclaimer C) Adverse D) Unqualified

Q: A company has changed its method of inventory valuation from an unacceptable one to one that complies with ASPE (Accounting Standards for Private Enterprises). The auditor's report on the financial statements of the year of the change should include A) no reference to the item assuming that the change has been properly disclosed. B) a reference to a change in accounting principle in the opinion paragraph. C) an explanatory paragraph explaining the change. D) a justification for making the change and the impact of the change on reported net income.

Q: Beem & Lord, a PA firm, audited the financial statements of Frazer Inc. Since this was a first time audit, Beem & Lord did not audit the comparative financial statements, as this was done by the previous auditor. Beem & Lord should expand their report to include an explanation in A) the scope paragraph. B) the management responsibility paragraph. C) the opinion paragraph. D) a paragraph following the opinion paragraph.