(Test Bank) Auditing: The Art and Science of Assurance Engagements, Canadian Edition

Arens,Elder,Beasley,Hogan, 14

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14th Edition

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Test Bank for Auditing: The Art and Science of Assurance Engagements, Canadian Edition, The downloadable file consists of 575 pages, and the total size of the file is 3.97 MB. Purchase now only for highly discounted price.

Author(s): Arens, Elder, Beasley, Hogan

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1 Copyright © 2022 Pearson Canada, Inc. Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 1 The Demand for Audit and Other Assurance Services 1.1 Define an assurance engagement. 1) What is the nature of the service provided when an auditor evaluates information using suitable criteria and issues a report that attests to the reliability of the information? A) internal audit engagement B) review engagement C) compilation engagement D) attestation engagement Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 2) The No-Name Agency conducts an independent service for a company to determine if its suppliers have complied with health and safety regulations, child labour guidelines, and other employee welfare issues. What type of service is No-Name providing? A) assurance B) attest C) review D) compilation Answer: A Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 3) Which of the following is an example of an attestation engagement? A) accounting and bookkeeping services for the accounts B) an audit of internal controls over financial reporting C) preparation of the annual financial statements with notes D) completion of provincial and federal tax returns Answer: B Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 4) When do individuals and organizations typically need assurance services? A) usually only when organizations obtain debt or other loans B) for five years from the start of an organization until debt is retired C) only when historical data, such as financial information, need to be audited D) whenever assurance is provided by a practitioner who is independent and unbiased Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 2 Copyright © 2022 Pearson Canada, Inc. 5) A major type of assurance service performed by large public accounting firms is A) auditing. B) reviewing. C) compilation. D) management consulting. Answer: A Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 6) Two types of services provided by public accounting firms are audits and reviews. Discuss the similarities and differences between these two types of services. Which type provides the most assurance? Answer: Two primary types of services are audits of historical financial statements and reviews of historical financial statements. While both services involve the accumulation and evaluation of evidence regarding assertions made by management in the company's financial statements, an audit involves a more extensive examination and provides a higher level of assurance about the client's financial statements than a review. Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 1.2 Define auditing and its purpose. 1) Which of the following illustrates the definition of auditing with respect to the evidence analysis process? A) accumulation and evaluation of evidence regarding assertions B) learning about different types of computing technology, such as mainframes C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 2) Auditing should be done by a qualified A) chartered accountant. B) certified management accountant. C) competent and independent person. D) professional accountant. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 3 Copyright © 2022 Pearson Canada, Inc. 3) Which of the following illustrates the definition of auditing with respect to the reporting process? A) accumulation and evaluation of evidence about balance sheet accounts B) reporting on the degree of correspondence between financial statements and ASPE/IFRS C) writing an operational audit report that is tailored to the client's situation D) making sure that the auditor is competent and understands evidence gathering Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 4) In the audit of historical financial statements by PA firms, the criteria used are A) generally accepted auditing standards. B) relevant accounting frameworks. C) regulations of the Canada Revenue Agency. D) regulations of the provincial securities commissions. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 5) A large PA firm has assessed evidence collected during an engagement. Criteria used to assess the financial statements were International Financial Reporting Standards (IFRS). A high level of assurance was obtained. The type of engagement conducted was A) an audit. B) a review. C) management consulting. D) a compilation. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 6) The auditor and the entities being audited should agree on the criteria to be used in the audit A) well in advance before the audit starts. B) after the audit planning has been done. C) as they progress with the audit, as they can determine which criteria are most suitable. D) at the end of the audit. Answer: A Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 4 Copyright © 2022 Pearson Canada, Inc. 7) George had a conversation with the accounting personnel and documented information about how the accounting systems function. He has also placed copies of accounting forms in his files. George is performing which task? A) accounting procedures B) evidence gathering C) tax audit D) audit report preparation Answer: B Diff: 3 Learning Objective: 1-2 Define auditing and its purpose. 8) One of the reasons that an auditor must be competent is so that they can A) understand the engagement risks and the criteria used by the client. B) explain to staff how the bookkeeping should be done. C) record the transactions properly for the underlying records. D) capture the information properly in the computer files. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 9) One of the reasons that an auditor must be competent is so that they can A) select the type and amount of evidence to accumulate. B) explain to staff how the bookkeeping should be done. C) record the transactions properly for the underlying records. D) capture the information properly in the computer files. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 10) It is important for the auditor to be independent because A) otherwise, the auditor would not charge a fair rate to the client. B) otherwise, the auditor might not be as knowledgeable of the subject matter and the criteria. C) this will prevent bias in accumulating and evaluating evidence. D) the Canadian tax authorities require that the auditor be independent. Answer: C Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 11) As an external auditor is paid a fee by a client company, he or she A) is absolutely independent and may conduct an audit. B) may still be sufficiently independent to conduct an audit. C) is never considered to be independent. D) must receive approval from the relevant provincial securities commission before conducting an audit. Answer: B Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 5 Copyright © 2022 Pearson Canada, Inc. 12) The independent auditor's report is the A) communication of the outcome of auditor's evaluation to the users. B) set of audited financial statements. C) invoice of the auditor detailing the work they have performed. D) report presented to management about the possible improvements. Answer: A Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 13) In the audit of a corporate tax return, the CRA auditor should demonstrate competence in the use of A) external databases that contain economic statistics. B) standard personal and corporate tax preparation software. C) the Income Tax Act and accompanying regulations. D) database management software for the use of client-based research. Answer: C Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 14) In the audit of an individual's tax return, the criteria used would be A) an accounting framework. B) the Income Tax Act. C) the client's policies for taxable income. D) the auditor's judgment. Answer: B Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 15) In the audit of a corporate tax return, the report provided by the Canada Revenue Agency auditor would describe A) an opinion on the likelihood of tax return error. B) the likely accounting errors that could contribute to tax errors. C) management issues with respect to accurately reporting taxes. D) that the corporate income tax return is in compliance with the Income Tax Act. Answer: D Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 6 Copyright © 2022 Pearson Canada, Inc. 16) Figure 1-2 Use your knowledge of the definition of auditing and Figure 1-2: Audit of a Corporate Tax Return to explain how an auditor would conduct a Corporate Tax Return audit. Answer: First, the concept of a competent, independent person requires that the practitioner who is conducting an assurance engagement should have "adequate proficiency," which means that the tax auditor should be competent in the fields of taxation and the fields that need to be assessed, such as accounting, information systems, data management and access and internal controls. The auditor should also use due care and have an objective state of mind. This means that the auditor should be independent of the client and do their best using their skills when conducting the audit. The second part of Figure 1-2 relates to the accumulation and evaluation of evidence using a risk-based approach. This means that the auditor would collect evidence based upon risks of violations in the tax return by the client. The next three parts are connected. The auditor determines the correspondence of the information provided by the client (which could be the financial statements, tax return and the quality of the calculations within the tax return) to established criteria (the Income Tax Act). Finally, the auditor issues a report (Notice of Assessment) to summarize the findings. Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 7 Copyright © 2022 Pearson Canada, Inc. 1.3 Explain why there is a demand for audit and other assurance services. 1) A bank manager is evaluating an application for a bank loan from a new corporate client. The bank manager decides to request audited financial statements. Which of the following likely informed this decision? A) The bank manager is seeking to lower the risk-free interest rate that applies to the corporation. B) The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk. C) The bank manager is unsure that the client will be able to continue operating successfully in the future given the economic climate. D) The bank manager believes audited financial statements will be necessary for the Canada Revenue Agency. Answer: B Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 2) What is the most appropriate method for an organization to lower information risk related to its financial statements? A) Hire a good CPA to complete its bookkeeping work. B) Use a high-quality software package to keep track of information. C) Have an independent financial statement audit conducted. D) Have an independent operational audit conducted on effectiveness. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 3) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank will make a loan to Frost Corp, a snow removal company. Further, Frederic has to decide how much they will lend to Frost and at what rate. Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest? What factors are impacted by auditing and how? Answer: Factors: 1. Risk-free interest rate: The rate the bank could earn in a risk-free investment such as Canada Treasury bills. 2. Business risk for the customer: Possibility that the customer will not be able to repay their loan because of economic or business conditions. 3. Information risk: Possibility that the information upon which the business decisions are made were inaccurate. Audits impact information risk. Having a set of audited financial statements can reduce the information risk and increase the likelihood that the bank will make the loan and even at a reduced interest rate due to the reliance it can place on the audited financial statements. Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 8 Copyright © 2022 Pearson Canada, Inc. 4) ZK3 Ltd. is a successful 20-year-old private Canadian family-owned business. The company is owned equally by four siblings who are all involved in managing the daily operations of the company. A private equity company is contemplating an investment in ZK3 and insists on audited financial statements. The following are likely explanations for the private equity company's request except A) biases and motives of ZK3 management. B) Canada Revenue Agency requirements for audited financial statements. C) reducing information risk to the private equity investor. D) remoteness of information related to ZK3's operations. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 5) Information risk can be caused through any one of the following except A) remoteness of information. B) low volume of data. C) biases and motives of the provider. D) complex exchange transactions. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 6) The underlying conditions that create demand by users for reliable financial information include the fact that A) more reliable information will allow investors to calculate the rate of return on their investment. B) governments rely on such information to create tax policies. C) there is a need for the expression of an opinion as to the fairness of financial statements. D) users are separated from accounting records by distance and time. Answer: D Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7) Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario. Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable CPA on staff in the Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala's financial statement auditors assist in addressing? A) Concerns over business risk B) Concerns over remoteness of information C) Concerns over client risk D) Concerns over assessment risk. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9 Copyright © 2022 Pearson Canada, Inc. 8) Annual financial statement audits are required for which of the following situations? A) Canadian corporations as part of their tax filings with the Canadian Revenue Agency B) American corporations as part of filing their tax returns with the IRS C) Public companies and large not-for-profit organizations D) Private companies Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9) How does a financial statement auditor help reduce information risk, and make financial statements more trustworthy and reliable? A) By bringing integrity, independence, competence, and knowledge of financial statement reporting to the audit of the financial statements. B) By ensuring the business is using its resources efficiently. C) By verifying that the company has a credible CSR plan. D) By confirming that the company is only taking reasonable business risk. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10) Information risk can be reduced through any one of the following except A) having the user verify the information. B) providing audited financial statements to users. C) having the chief financial officer certify and sign off on the financial statements. D) having the user share information risk with management. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 11) A bank manager is evaluating a loan application for Leonard & Ebelle, the private parent company with three subsidiaries in different sectors, including real estate, retail, and banking. The bank manager has received the unaudited consolidated financial statements for Leonard & Ebelle. The bank manager decides to request audited financial statements from Leonard & Ebelle as a precondition for approving the loan. The following could justify the bank manager's request, except A) audits are mandatory for large private companies. B) concerns over remoteness of information. C) concerns over voluminous data. D) concerns over complex exchange transactions. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10 Copyright © 2022 Pearson Canada, Inc. 1.4 Explain why there is a demand for audit and other assurance services. 1) Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality regulations. An auditing firm has been engaged to assess air quality and compare results to legislated requirements. What type of audit or engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 2) As part of its loan agreement, Big Bank requires that only accounts receivable less than 60 days old be used as collateral. An auditor has been engaged to provide assurance that the accounts receivable on the list provided to the bank are indeed less than 60 days old. What type of engagement is the auditor conducting? A) financial statement B) compliance C) operational D) review Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 3) A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n) A) audit of financial statements. B) compliance audit. C) operational audit. D) production audit. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 4) Which of the following is most difficult to evaluate objectively? A) efficiency and effectiveness of operations B) compliance with government regulations C) presentation of financial statements in accordance with a generally accepted accounting framework D) internal controls in use at a small company Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 11 Copyright © 2022 Pearson Canada, Inc. 5) A typical objective of an operational audit is for the auditor to A) determine whether the financial statements fairly present the entity's operations. B) evaluate the feasibility of attaining the entity's operational objectives. C) evaluate the effectiveness of an internal process. D) report on the entity's relative success in attaining profit maximization. Answer: C Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 6) Which of the following audits can be regarded as being solely "compliance" audits? A) Canada Revenue Agency's examinations of the returns of taxpayers. B) the Auditor General's evaluation of the computer operations of governmental units. C) an internal auditor's review of his employer's payroll authorization procedures. D) a public accounting firm's audit of the local school district. Answer: A Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 7) Which of the following is an example of a financial statement audit? A) determining whether ABC's financial statements overall do not violate any debt covenants B) determining whether ABC's overall financial statements are stated in conformity with IFRS C) evaluating the effectiveness and efficiency of internal controls used to create account balance D) evaluating the effectiveness and efficiency of internal controls used to record transactions Answer: B Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 8) What is the primary difference between internal and external auditors? A) the methodology used to conduct financial statement audits B) the level of competence required C) the parties to whom the auditor is responsible D) the level of objectivity required Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 9) Which of the following organizations establishes ethical standards and standards for the practice of Internal Auditing? A) Information Systems Audit and Control Association (ISACA). B) Institute of Internal Auditors (IIA). C) Society of Management Accountants of Canada (SMAC). D) Chartered Professional Accountants of Canada (CPA). Answer: B Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 12 Copyright © 2022 Pearson Canada, Inc. 10) Auditors General are responsible for auditing which types of organizations? A) public companies with shares issued to investors B) private companies that have loans outstanding to banks or other creditors C) ministries, departments, agencies that report to Government D) any organization that submits tax returns to the tax authorities Answer: C Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 11) The extent and the scope of the audits conducted by Auditors General are determined by A) legislation in the Auditor General's jurisdiction. B) audit partner planning and audit program development. C) the Auditor General and his/her staff. D) the financial statement auditors of the client. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 12) To operate effectively, an internal auditor must be independent of the A) line functions of the organization. B) entity that is being audited. C) employer-employee relationship that exists for other employees in the organization. D) outsourcing organizations used. Answer: A Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 13) The internal audit group typically reports directly to the A) board of directors. B) management of the company. C) external auditor. D) audit committee. Answer: D Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 14) An example of a forensic accounting assignment might be A) determining whether overall financial statements are stated in conformity with IFRS. B) estimating the value of inventory lost in a warehouse theft. C) evaluating the effectiveness of an internal process. D) ensuring compliance with specific legislation. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 13 Copyright © 2022 Pearson Canada, Inc. 15) In operational auditing, the auditor studies business operations and makes recommendations about all of the following except A) economic and efficient use of resources. B) the fairness of the financial statements. C) effective achievement of business objectives. D) compliance with company policies. Answer: B Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 16) We discuss four types of auditors: public accountants, government auditors, Canada Revenue Agency auditors, and internal auditors. Briefly describe the work and responsibilities of each type of auditor. Answer: Public Accountants: Primary function is the audit of financial statements of publicly traded companies and of other organizations requiring audits. The type of audit normally performed is known as an attestation engagement because they attest to the fair presentation of the financial statements. To conduct the audit of financial statements, the auditor must be a licensed public accountant. Government Auditors: Primary function is the audit of ministries, departments, and agencies that report to the government. A government auditor performs the audit function for the government. Canada Revenue Agency Auditors: Primary responsibility is the enforcement of federal tax laws. The Canada Revenue Agency auditors audit the returns of taxpayers to determine whether they have complied with the tax laws. They only perform compliance audits. Internal Auditors: Internal auditors are normally members of the IIA and work for individual companies to audit for management. The internal auditor's responsibilities can vary considerably but often include operations auditing and reporting their findings directly to the board of directors and audit committee. The internal auditor must be independent from the line function in the organization he/she is auditing. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 14 Copyright © 2022 Pearson Canada, Inc. 17) To do an audit, it is necessary to have information in a verifiable form and some criteria by which the auditor can evaluate the information. Required: A. What information and criteria would a public accounting firm use when auditing a company's financial statements? B. What information and criteria would a Canada Revenue Agency auditor use when auditing that same company's tax return? C. What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company's computerized payroll processing system is operating efficiently and effectively? Answer: A. The information used by a public accounting firm in a financial statement audit is the financial information in the company's financial statements. The criteria used are a relevant accounting framework such as IFRS or ASPE. B. The information used by a Canada Revenue Agency auditor is the financial information in the auditee's federal tax return. The criteria are the Income Tax Act and interpretations. C. The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors.