Q&A Hero

Q: When considering each material type (or class) of transactions during the audit, which general transaction-related audit objectives are assessed during the audit? A) those transaction-related audit objectives where there is the highest risk of error B) all five transaction-related audit objectives C) those transaction-related audit objectives where there are poor internal controls D) primarily completeness, occurrence and accuracy, since this is where most errors occur

Q: If the purchase of a long-term note receivable is included as cost of goods sold, there is a violation of the A) existence objective. B) completeness objective. C) classification objective. D) timing objective.

Q: Gabori Company would like to pay less income tax this year. It decided that it could do this by understating its inventory values, increasing costs of goods sold. This was done by deliberately pricing the inventory at incorrect amounts, so that it would be shown at a lower value than it was really worth (for example, items worth five dollars each were shown at fifty cents each). Which management assertion has been violated? A) valuation B) accuracy C) statement presentation D) completeness

Q: Frankinfurter Limited decided that it wanted to improve earnings. To do this, it understated its expenses by omitting unpaid expenses from the accrued liabilities account at year end. Which management assertion has been violated? A) existence B) disclosure C) rights and obligations D) completeness

Q: Management assertions are A) directly related to auditing standards. B) directly related to accounting standards. C) indirectly related to auditing standards. D) indirectly related to accounting standards.

Q: Management assertions are A) stated in the footnotes to the financial statements. B) implied or expressed representations about the accounts in the financial statements. C) explicitly expressed representations about the financial statements. D) provided to the auditor in the engagement letter, but are not disclosed on the financial statements.

Q: Your PA firm audits the Barney Bloke Parts company, which manufactures plastic bumpers and other automobile parts in eight factories scattered across southern Ontario. The company has a December year end. It is now November 14. The planning file indicates that internal controls in the accounts receivable area are poor, as there has been significant employee turnover. A review of the prior year's working paper file indicates that there was a poor response to the accounts receivable and accounts payable confirmation requests. There were several errors in inventory pricing and problems with obsolescence. Required: List the financial statement cycles that need to be tested. For each cycle, identify at least one transaction that needs to be examined. For that transaction, identify a management assertion that may have a high risk of error associated with it and explain why you believe the risk of error is high.

Q: Often, numerous classes of transactions affect the ending balance of a particular general ledger account. This is handled during the audit engagement by A) ensuring that tests are conducted for each class of transactions. B) obtaining a high level of assurance for at least one of the transaction types. C) using a combination of assurance for each class of transactions and for the ending balance. D) testing only the ending balance, as this is the significant amount on the financial statements.

Q: For the most part, auditors treat each transaction cycle A) separately as the audit is being performed. B) as an interrelated unit with the other cycles throughout the entire audit. C) as a separate business unit with different audit teams. D) as a joint venture with other clients in the same industry.

Q: Transaction cycles begin and end at A) the beginning and end of the fiscal period. B) the balance sheet date. C) January 1 and December 31. D) the origin and final disposition of the company.

Q: Marianne is currently performing tests of controls on the presence of an employee code of conduct, the presence of a whistle blower line and on how management responded and implemented systematic penalties for instances where violations of the code of conduct existed. Marianne is currently evaluating the A) industry and business environment. B) risk of fraud. C) client acceptance. D) entity-level controls.

Q: Prior to looking at the specific cycles, the auditor will first A) inquire and document corporate governance systems. B) perform tests of controls on significant cycles. C) perform analytical review of specific accounts. D) perform a risk assessment for the audit of the organization.

Q: Pet Shop Ltd. is a large retail outlet with ten full time employees in addition to the owner. You dropped by on your way home one day to organize the audit planning process for the coming year, and noticed brand new terminals at the cashier's desk. One of the employees was having fun zapping inventory items. The owner teased him about the new laser scanning devices and told him to get to work to see which items needed to be ordered. It turns out that Pet Shop Ltd. has implemented a new point of sale computer system that is integrated with inventory. The last time you were there to buy dog food (about three months ago) there were old computer terminals that were no longer functional and recorded sales transactions manually in the sales journal. Required: List the three sections of the audit. For each section, explain how these new computer systems might affect the audit process.

Q: Sean Clem has done a review engagement and prepared the tax return for your web design business for the last five years. The books and records have always been well organized, although year end adjusting entries have been required. You do some of the accounting yourself and the rest of the accounting records are handled by your wife, who is also an employee of the business. This year, you would like to expand your business to provide ISP (internet service provider) services to your clients. This would entail you purchasing additional computer equipment and software. You are also considering hiring an additional employee (you currently have three), and you are looking at obtaining a loan for $100,000 from the bank. The bank says that you should have your records audited, but you are not sure what this will mean. Required: A) What would Sean say to you about the differences between an audit and a review? B) Identify the issues that Sean needs to consider during the planning of the audit.

Q: You have been assigned the in-charge-auditor for a new client, Beltair House. Beltair House is a non-profit charitable organization which operates a home for unwed mothers who have decided that they would like to keep their child. In the past, the organization had been almost fully funded by the provincial government. However, due to recent budget cut-backs, Beltair has to raise operating funds from public donations. Because of financial constraints, there is now only one full time manager, Joan Ng. Joan has the help of several volunteers, and the residents help out with the chores and with maintenance and cleaning. Ng has been able to arrange for a local food bank to provide a large portion of the food required for meals. Door-to-door canvassers have been able to raise money to keep the House going, but Ng is concerned that this will change. Required: Identify issues that you will need to consider that affect the risk of this audit engagement.

Q: After the auditor has completed all the procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on A) generally accepted auditing standards. B) the provincial institutes' Rules of Professional Conduct. C) generally accepted accounting principles. D) the auditor's professional judgment.

Q: Tests of details of balances are specific procedures intended to A) identify the details of internal controls. B) prove that the accounts with material balances are classified correctly. C) test for monetary errors in the financial statements. D) prove that the trial balance is in balance.

Q: Where the auditor has decided to rely upon internal controls, he or she will then A) eliminate the need to gather evidence in that area. B) test the effectiveness of the controls in that area. C) proceed to expand the sample sizes in that area. D) negotiate with management to determine which controls will be tested in that area.

Q: Analytical procedures are those that A) evaluate the accuracy of the account balances. B) assess the overall reasonableness of account balances or other data. C) review the effectiveness of internal controls. D) analyze the effect of management procedures on the accounting system.

Q: Your PA firm has just obtained a new client and you have been assigned the task of preparing the knowledge of business section of the file. Which of the following best describes the process of gathering the knowledge of business for a client? A) discussing processes and business objectives with company employees B) gathering information about the industry and regulatory environment C) understanding the client's business, industry, and regulatory environment D) examining the legal expenses file for possible regulatory infractions

Q: The decision to continue doing the audit of an existing client is A) as important as deciding whether or not to accept a new client. B) less important than deciding whether or not to accept a new client. C) more important than deciding whether or not to accept a new client. D) only to be reconsidered if the client's operations or upper management has changed.

Q: At what point during the audit should the auditor conduct an independence threat analysis? A) after the audit evidence assessment and collection process B) prior to the acceptance of the engagement C) after gathering sufficient knowledge of the client's business D) prior to signing the audit report

Q: The controller who had been with Bianca Limited for six years was fired last month, allegedly for pocketing cash. Unfortunately, there was a fire in the accounting department the week before he was fired, destroying the accounting records, including the computer equipment and current backup disks. The only records available for the current year is a copy of the computer system that is a month old. There are also disks for the year ends going back three years. These were at the president's home, the place where the company kept archival records. Required: Explain how this situation might affect the audit process.

Q: Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met. During your audit planning process management informed you that they have not taken any action, but plan to start construction of the new pollution devices next month. Required: Explain the impact the above situation has upon your audit planning process.

Q: Frank has come to you because he is worried about recovering the cost of his share of a law firm partnership. His partner, Jennifer, is exercising the "shotgun" clause in their partnership agreement, and wants to buy him out. Over the last two years, Frank and Jennifer have had numerous battles over the way that Frank handles his accounts receivable. Frank is lenient with his customers, and has converted many of his accounts into long term notes extending two and three years into the future. He is confident that these amounts are collectible, because every one of his clients continues to make small monthly payments. Frank thinks that Jennifer may have been hiding profits from him and collecting some of her accounts in cash. He wants you to audit the books so that he can figure out what the 'true' profits are and how much Jennifer should pay him for his share of the partnership. Required: A) Explain to Frank what you would be able to do during the audit engagement. B) List the management assertions that may have been violated. Justify your answer.

Q: In May 2012, the firm of Chang and Crown (C&C) became the auditors of Laua Limited (LL) for the fiscal year ended December 31, 2011. LL's shareholders and Board approved the change from its previous audit firm on the recommendation of LL's senior management. One of the new board members is a bit confused about management's role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements. He was also glad that the auditors would be able to help prevent illegal acts and fraud. Required: A) Distinguish between management's responsibility and the auditor's responsibility for the financial statements under audit. B) Explain to the board member why the auditor does NOT help prevent illegal acts and fraud. What is the role of the auditor with respect to illegal acts and fraud?

Q: A financial statement audit typically consists of three sections. Identify each of the three sections of an audit and discuss the major activities performed by the auditor in each section.

Q: What is one of the first things that an auditor would do upon discovering an illegal act at an audit client? A) resign from the audit B) inform the Board of Directors C) consult with a lawyer D) call the police

Q: Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of A) environmental protection laws for the production facility. B) insider securities trading regulations by senior management. C) employment equity laws for a large group of non-unionized employees. D) income tax laws and incorrect calculation of income taxes payable.

Q: Auditing standards regarding the detection of illegal acts clearly state that the auditor provides A) no assurance that they will be detected. B) the same reasonable assurance provided for other items. C) assurance that they will be detected, if material. D) assurance that they will be detected, if highly material.

Q: What is the auditor's role in the detection of computer fraud? A) use computer assisted audit techniques to make sure that the computer programs do not have any unauthorized processing B) use test data to make sure that the computer programs are functioning as described by the client C) investigate unusual relationships or patterns, conduct the audit properly, and report to management D) only detect fraud if it has been ongoing for a long period of time and leaves many different types of evidence

Q: The auditor's evaluation of the likelihood of material employee fraud is normally done initially as a part of A) the assessment of whether to accept the audit engagement. B) understanding the entity's internal controls. C) the tests of controls. D) the tests of transactions.

Q: When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility A) more on discovering errors than employee fraud. B) more on discovering employee fraud than errors. C) equally on discovering either one. D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Q: If the auditor were responsible for making certain that all the assertions of management in the statements were correct, A) bankruptcies could no longer occur. B) bankruptcies would be reduced to a very small number. C) audits would be much easier to complete. D) audits would not be economically feasible.

Q: In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is greater for A) employee fraud because of the larger number of employees in the organization. B) employee fraud because of the higher crime rate among blue collar workers. C) management fraud because of management's ability to override existing internal controls. D) management fraud because managers are inherently smarter than employees.

Q: Which of the following is an example of fraudulent financial reporting (management fraud)? A) intentional overstatement of sales to increase reported earnings B) managers or others taking bribes from accounts payable suppliers C) the purchasing manager submitting travel expenses twice (i.e. duplicate payment) D) a clerk taking cash at the time a sale is made and not recording the sale

Q: The factor which distinguishes an error from fraud and other irregularity is A) materiality. B) intent. C) whether it is a dollar amount or a process. D) whether it is a caused by the auditor or the client.

Q: The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to A) be an insurer of the fairness in the statements. B) be a guarantor of the fairness in the statements. C) be equally responsible with management for the preparation of the financial statements. D) provide reasonable assurance that material misstatements will be detected.

Q: The requirement for an attitude of skepticism means that the auditor should A) not be blind to evidence that suggests the documents, books or records have been altered or are incorrect. B) plan and conduct the audit with an attitude of distrust in management. C) perform additional tests of controls to increase the probability of discovering fraud or errors. D) not consider management's explanation as evidence on any subject.

Q: Professional skepticism during the financial statement audit requires an appropriate state of mind, being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind? A) not having any ownership in the client's shares or being a debt-holder B) carefully assessing documents and not being the company's advocate C) matching documents to make sure that they are accurate and fair D) being aware that there could be material misstatements in the financial statements

Q: The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to A) the auditor. B) management. C) both management and the auditor equally. D) management for the statements and the auditor for the notes.

Q: There are three phases in the risk response category of the audit process (design further audit procedures, tests of control, substantive tests). When will the auditor conduct tests of controls? A) when there are poor internal controls B) if the auditor plans to rely upon them C) when a substantive audit approach is selected D) when there are low risks of material error

Q: The audit process has three categories of audit phases: risk assessment, risk response and reporting. Which of the following are the phases that are part of the risk assessment process? A) preplanning, design further audit procedures, tests of control B) client risk profile, plan the audit, design further audit procedures C) preplanning, client risk profile, plan the audit D) preplanning, plan the audit, design further audit procedures

Q: The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests A) with management. B) with the auditor. C) equally with management and the auditor. D) with the internal audit department.

Q: The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead A) a prudent user. B) management. C) the reader. D) investors.

Q: The reason auditors accumulate evidence is to A) defend themselves in the event of a lawsuit. B) justify the conclusions they have otherwise reached. C) satisfy the requirements of the relevant provincial securities regulations. D) enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report.

Q: CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements. This opinion is an assessment of whether the financial statements are presented fairly using A) Canadian generally accepted accounting principles (GAAP) only. B) an applicable financial reporting framework. C) Management's assertions. D) Rules of professional conduct.

Q: The objective of the audit of financial statements by the auditor is the expression of an opinion on A) the accuracy of the financial statements. B) the balance sheet and income statement. C) the fairness of the financial statements. D) the annual report.

Q: 5.1 Describe the objective of conducting an audit of financial statements

Q: Enron and Equity Funding are companies that suffered from large frauds by corporate management. One important lesson with respect to such cases is that A) when a company does really well financially it is important to suspect that such results are always inflated. B) an investigation of the integrity of management is an important part of deciding upon the extent of audit work. C) securities and exchange commissions expect auditors to be perfect in their assessment of management. D) partners and staff should cooperate in preparing working papers that prove the accuracy of the financial statements.

Q: In the case of Enron, Andersen was ultimately convicted on the count of A) obstruction of justice for altering a memo. B) obstruction of justice for shredding documents relating to the audit of Enron. C) failing to discover the fraud. D) refusing to testify in court against their client.

Q: The Sarbanes-Oxley Act of 2002 made it a felony to A) destroy or create documents to impede a federal investigation. B) have internal control weaknesses. C) have a significant internal control weakness. D) engage in transactions with related parties.

Q: Pierre, a CA, was convicted of stealing money from his clients and for deliberately preparing personal tax returns that were false. In addition, Pierre will likely A) need to take additional training courses to upgrade his tax skills. B) need to defend himself to prove non-negligent performance. C) be charged with misconduct by his professional institute (or ordre). D) have lack of privity with the federal and provincial tax authorities.

Q: In third party suits, when there is a misstatement in the financial statements, which of the auditor's defences usually means non-reliance on the financial statements by the user? A) lack of duty B) non-negligent performance C) contributory negligence D) absence of causal connections

Q: What rights do secondary investors (i.e. those who purchase shares after an initial offering) have to sue an auditor? A) since they are third-party claimants, they would be part of a limited class of known users B) they could claim contributory negligence, since they had prior information of company results C) they can sue under provincial legislation without the need to prove reliance D) since there is absence of causal connection, they would not be able to sue the auditors

Q: Which of the following lawsuits resulted in a decision that shareholders could not sue the auditors for the loss in the value of their shares? A) Haig V. Bamford et al (1976) B) Hercules Management Ltd. V. Ernst & Young (1997) C) Ultramers Corporation V. Touche (1931) D) United States V. Anderson (2002)

Q: The Ultramares doctrine is that ordinary negligence is insufficient for liability of auditors to third parties because of the lack of privity of contract between the third party and the auditor. What type of behaviour on the part of an auditor would result in liability to more general third parties according to this doctrine? A) conducting an audit engagement when a review engagement had been contracted B) completing work in accordance with a contract that was signed with the client C) deliberate misstatement of the financial statements by management remaining undetected D) fraud or constructive fraud with respect to the working papers

Q: The leading precedent-setting case in third-party liability was a 1931 U.S. case, Ultramares v. Touche. What is the key aspect of this case? A) to succeed, claimants must be foreseebale users of the audited financial statements that are part of the claim process B) ordinary negligence is insufficient for liability to third parties because of lack of privity of contract C) the auditor must have actual knowledge of the users of the financial statements to establish privity D) there is no general auditor liability to shareholders, since the loss of equity was suffered by the company

Q: An investor suing an auditor for not discovering that the financial statements of a company are materially misstated is an example of A) criminal liability. B) fiduciary duty. C) third party liability. D) liability to client under common law.

Q: Musical Productions Limited has had declining sales as more and more media are being presented online rather than on CD or DVD. It diversified its business by moving into backup systems, but are still having trouble boosting income. The audit team was led by Theresa Sanford, who obtained her CA last year. Theresa had two assistants, Marv and Uhta, who did the work in the accounts receivable and inventory area. Theresa felt that they did not require supervision, as they had been with the firm for two years, and were expected to do well on their professional exams this year. Marv found that the accounts receivable had many old accounts, and customers were tough to get hold of. Accordingly, he decided to accept management's representations with respect to the balances. Similarly, Uhta noted that there were still many CDs in inventory that had been there for over three years. Management insisted on recording these at cost. Uhta accepted managements' valuation. Two months after the audit report was issued, Musical Productions Limited went bankrupt. It was found that many accounts receivable were for fictitious customers, and the receiver was only able to obtain five cents on the dollar for the inventory, which was sold as scrap. The bank is suing the auditors to recover its bank loan, which had been renegotiated based upon the results of the financial statements. Required: Will the bank be successful in its suit? Why or why not?

Q: Your firm has been the auditor of Chappello Design and Construction Limited for several years. During the current year, a consultant on staff at your firm assisted Chappello in the selection and implementation of a new computer system. The audit staff were not involved in this process. The new system was an enterprise wide system that was to be implemented without modification using the direct cut-over approach (the old system was discontinued and the new one continued the next day). Unfortunately, staff had extreme difficulty using the system, and discontinued it after two months. During that time, Chappello was unable to document and bill its work for progress billings, and borrowed heavily to continue to pay its employees while work continued. The company reverted to its old system and claims that it has lost several hundreds of thousands of dollars in revenues as it was unable to issue quotes and bids on new contracts. Chappello has sued your firm for negligence with respect to the implementation of the computer system. Required: Which defences should the firm use? Support your answer with reasons.

Q: You are the auditor of Jehello Incorporated, a public company with a December year end. Your firm has audited Jehello for the past three years. The following issues were documented in the working paper files for the prior year audit: ∙ The company had incurred expenditures of $400,000 related to the development of a new music format for electronic media. The large majority of the costs were related to development of software, hardware, and presentation of the results to customers who participated in focus groups. Management had been optimistic that the new sound system would work well, even though focus group results had been poor. These costs had been fully capitalized. ∙ About 40% of the company's revenues were from one customer. That contract had been due for renewal on May 15, ten days after the audit report had been issued. Documents on file indicated that the customer seemed likely to renew the contract, although quality control disputes were escalating. On May 14, Jehello was informed that the contract would not be renewed. Jehello has defaulted on its bank loans and the bank is suing you, saying that the financial statements presented last year were false and misleading. Required: A) Which defences should the auditor use? B) Do you believe that the auditor will lose the suit? Why or why not?

Q: A) What are the different business organization structures that an accountant may use? What are the advantages of these structures? B) What is the difference between auditors and lawyers with respect to privileged information?

Q: A) List the four items which a defendant must prove in an action for negligence against a public accountant. B) Describe each of the six defences a public accounting firm can normally use when facing legal claims by clients. C) Discuss what is meant by the term "expectation gap."

Q: A client is suing a PA firm claiming that they are responsible for the losses suffered from a fraud in the payroll department that was not uncovered during the year end testing done by the auditor. The auditors did indicate to management that controls over payroll calculations and payments were weak as there was improper segregation of duties. The auditor's best defence is A) contributory negligence. B) absence of negligence. C) absence of causal connection. D) no damages.

Q: The court ruled that Jones did not rely on the financial statements in his decision to purchase shares of Manumite Limited. Instead, Jones relied upon his discussions with the owners and with financial analysts. This result illustrates A) absence of negligence. B) lack of privity. C) contributory negligence. D) absence of causal connection.

Q: To succeed in an action against the auditor, the client must be able to show that A) the auditor was grossly negligent. B) the auditor was fraudulent. C) there is a close causal connection between the auditor's breach of the standard of due care and the damages suffered by the client. D) there was a written contract.

Q: In connection with the examination of financial statements, an auditor could be responsible for failure to detect a material fraud if A) statistical sampling techniques were not used on the audit engagement. B) the auditor planned the work in a hasty and ineffective manner. C) accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. D) the fraud was perpetrated by one client employee, who circumvented the existing internal controls.

Q: The King Surety Company wrote a general fidelity bond covering defalcations by the employees of Wilson, Inc. Thereafter, Cooney, an employee of Wilson, embezzled $17,200 of company funds. When the activities were discovered, King paid Wilson the full amount in accordance with the terms of the fidelity bond, and then sought recovery against Wilson's auditors, Lynch & Merritt, public accountants. Which of the following would be Lynch & Merritt's best defence? A) King is not in privity of contract. B) The shortages were the result of clever forgeries and collusive fraud which would not be detected by an examination made in accordance with generally accepted auditing standards. C) Lynch & Merritt were not guilty either of negligence or fraud. D) Lynch & Merritt were not aware of the King-Wilson surety relationship.

Q: Winston Chang, PA conducted the audit of Manra Manufacturing Ltd., a small company that produces a variety of machined parts for the automotive and computer industry. The audit showed that the company produced a small profit after paying the owners of the company a high salary. Manra was purchased by a competitor, Cheblay. Cheblay had hoped to produce efficiencies by combining the two companies and was unable to do so. Cheblay sued Chang because it relied upon the financial statements when purchasing the company's shares, claiming that the machines, which were about fifteen years old, had been overvalued. The machines were recorded at cost, which was below net realizable value. What is the auditor's best defence? A) contributory negligence B) absence of negligence C) duty of care D) absence of liability

Q: According to the CICA Handbook, the auditor's responsibility for failure to detect fraud arises A) when such failure clearly results from failure to comply with generally accepted auditing standards. B) whenever the amounts involved are material. C) only when the examination was specifically designed to detect fraud. D) only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor.

Q: Fabio recently sold his restaurant for $650,000, the value of the net assets as reported on the balance sheet. After the sale, Fabio realized that he could've sold the restaurant for as much as $950,000 as the fair value of the assets was $300,000 higher than what was reported on the balance sheet. Fabio is suing the auditors for his loss. The auditor's best defence is A) absence of a misstatement. B) lack of duty. C) no damages. D) absence of causal connection.

Q: Joan talked to the owners of Fancy Clothing Limited before investing. She obtained a copy of their financial statements and saw that profits were low, even considering the fact that the owners did not take any money for themselves in the current year. However, she decided to invest in the company because she believed her superior knowledge of the clothing industry would turn the business around, resulting in enough profits for all owners. Unfortunately, this did not occur and the company went bankrupt. Joan is suing the auditors because she relied upon the financial statements during her investment decision. What is the auditor's best defence? A) absence of misstatement B) contributory negligence C) non-negligent performance D) duty of care

Q: PA was engaged by Microcomputer Distributor Limited (MDL) to conduct a review engagement. The financial statements are used primarily by the shareholders, management, and by the bank. Recently, an employee was fired for stealing computer parts, primarily chips and boards that could easily be placed in a pocket. MDL is suing PA because they believed that audit procedures, such as counting inventory, would have detected this fraud. What is PA's best defence? A) absence of causal connection B) lack of negligence C) contributory negligence D) lack of duty to perform

Q: A common way for a public accounting firm to demonstrate its defence of a lack of duty to perform is by use of a(n) A) engagement letter. B) letter of representation. C) confirmation letter. D) expert witness.

Q: Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm A) has failed to follow generally accepted auditing standards (GAAS). B) deserves to lose the lawsuit. C) should be asked to defend the quality of the audit. D) should not be held responsible for the financial loss suffered by others.

Q: In the auditing environment, failure to meet generally accepted auditing standards is often A) an accepted practice. B) a suggestion of negligence. C) strong evidence of negligence. D) tantamount to criminal behaviour.

Q: The principal issue to be resolved in cases involving alleged negligence is usually A) the amount of the damages suffered by the plaintiff. B) whether to impose punitive damages on the defendant. C) the level of care required to be exercised. D) whether the defendant was involved in fraud.

Q: Small Town Lumberyard Limited (STLL) needed an additional loan from its bank to finance its operations. To make its financial statements look better, the company overstated its inventory and overstated its accounts payable. The auditors did not detect this deliberate misstatement because they conducted limited tests of inventory and did not confirm accounts payable. Other auditors agreed that the procedures conducted during this audit were inadequate. The auditors of STLL would likely be considered to be A) guilty of fraud. B) negligent. C) contributorily negligent with STLL. D) guilty of constructive fraud.

Q: The assessment against a defendant of that portion of the damage caused by the defendant's negligence is called A) separate and proportionate liability. B) joint and several liability. C) shared liability. D) unitary liability.