(Test Bank) Auditing A Practical Approach

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Business

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Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. CHAPTER 1 INTRODUCTION AND OVERVIEW OF AUDIT AND ASSURANCE CHAPTER LEARNING OBJECTIVES 1. Define an assurance engagement. An assurance engagement involves an assurance provider arriving at an opinion about some information being provided by their client to a third party. A financial statement audit is one type of assurance engagement. This engagement involves an auditor arriving at an opinion about the fair presentation of the financial statements. The audit report is addressed to the shareholders of the company being audited, but other users may read the financial statements. Learning about auditing and assurance requires an understanding of auditing and assurance terminology, including terms such as audit risk, materiality, internal controls, listed entity, and assertions. 2. Explain why there is a demand for audit and assurance services. Financial statement users include investors (shareholders), suppliers, customers, lenders, employees, governments, and the general public. These groups of users demand audited financial statements because of their remoteness from the entity, accounting complexity, their incentives competing with those of the entity’s managers, and their need for reliable information on which to base decisions. The theories used to describe the demand for audit and assurance services are agency theory, the information hypothesis, and the insurance hypothesis. 3. Differentiate between types of assurance services. Assurance services include financial statement audits, compliance audits, performance audits, comprehensive audits, internal audits, and assurance on corporate social responsibility (CSR) disclosures. 4. Explain the different levels of assurance. The different levels of assurance include reasonable assurance, which is the highest level of assurance, limited assurance, and no assurance. Reasonable assurance is provided on an audit of a company’s financial statements. Limited assurance is provided in a review of a company’s financial statements. No assurance is provided in a compilation engagement. 5. Outline different audit opinions An auditor can issue an unmodified opinion, also known as a clean report, or an unmodified opinion with an emphasis of matter paragraph. Alternatively, a modified opinion may be issued as a qualified, an adverse, or a disclaimer of opinion. 6. Differentiate between the roles of the preparer and the auditor, and discuss the different firms that provide assurance services. It is the responsibility of a company’s governing body to ensure that its financial statements are relevant, reliable, comparable, understandable, and true and fair. It is the responsibility of the auditor to form an opinion on the fair presentation of the financial statements. In doing, Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 2 so the auditor must maintain professional scepticism and utilize professional judgement and due care. The firms that provide assurance services include the Big-4 international firms, the national firms (with international links), local and regional firms, and consulting firms that tend to specialize in assurance of CSR and environmental disclosures. 7. Identify the different regulators, legislation, and regulations surrounding the assurance process. Regulators of the assurance process include the Auditing and Assurance Standards Board (AASB), Canadian Securities Administrators (CSA) and the various provincial securities commissions, and the Canadian Public Accountability Board (CPAB). Relevant legislation includes the Canada Business Corporations Act (CBCA). CPA Canada is the professional accounting body in Canada, responsible for the Chartered Professional Accountant (CPA) designation. 8. Describe the audit expectation gap. The audit expectation gap occurs when there is a difference between the expectations of assurance providers and financial statement or other users. The gap occurs when user beliefs do not align with what an auditor has actually done. Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 3 TRUE-FALSE STATEMENTS 1. Only current investors (not potential investors) are considered to be users of the financial statements. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 2. Insurance hypothesis is a means whereby the investor can guarantee the success of their investment. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 3. A compliance audit involves gathering evidence to ascertain whether the person or entity under review has followed the rules, policies, procedures, laws, and regulations with which they must conform. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 4. An operational audit is an example of a compliance audit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 4 5. The most common types of assurance engagements are financial statement audits, confirmation audits, performance audits, comprehensive audits, and assurance on corporate social responsibility (CSR) disclosures. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 6. The nature of audit procedures refers to the reliance on evidence provided by the client and its management. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 7. It is the auditor’s responsibility to prepare the financial statements. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 8. An auditor can provide a reasonable level of assurance on information other than historical financial information. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 9. A reasonable level of assurance is the highest level of assurance that an auditor can provide. Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 5 Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 10. A no assurance engagement is of little use as no assurance is given to the client. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 11. The Compilation Engagement Report explicitly states that no assurance is being provided. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA: Audit and Assurance CPA: Audit and Assurance AACSB: Analytic 12. When conducting a review engagement, a practitioner must obtain an understanding of the entity and test the effectiveness of the entity’s internal controls. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA: Audit and Assurance AACSB: Analytic 13. A negative expression of opinion is only given when there is a disagreement with management and the auditor. Answer: False Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 6 Bloomcode: Knowledge Difficulty: Easy Learning Objective: Outline different audit opinions. Section Reference: 1.5 Different audit opinions CPA Competency: Audit and Assurance AACSB: Analytic 14. All modified audit reports are qualified audit opinions. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Outline different audit opinions. Section Reference: 1.5 Different audit opinions CPA Competency: Audit and Assurance AACSB: Analytic 15. The expectation gap is caused by unrealistic user expectations such as the auditor providing complete assurance. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the audit expectation gap. Section Reference: 1.8 The audit expectation gap CPA Competency: Audit and Assurance AACSB: Analytic Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 7 MULTIPLE CHOICE QUESTIONS 16. Martha Minnati was reviewing the previous year’s audited financial statements of a clothing manufacturer. Her manager explained to her that for a financial statement audit, the clothing company was the accountable party, its shareholders were the users, and the subject matter was the financial statements. What kind of audit engagement was her manager describing? a) consulting engagement b) assurance engagement c) review engagement d) compliance engagement Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Define an assurance engagement. Section Reference: 1.1 Auditing and assurance defined CPA Competency: Audit and Assurance AACSB: Analytic 17. An engagement performed by an auditor or practitioner to enhance the reliability of the subject matter can best be described as a(n) a) compilation engagement. b) review engagement. c) consultancy engagement. d) assurance engagement. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Define an assurance engagement. Section Reference: 1.1 Auditing and assurance defined CPA Competency: Audit and Assurance AACSB: Analytic 18. An example of the three parties in an assurance engagement would be: a) audit client, employee, customer. b) audit client, supplier, auditor. c) auditor, shareholder, general public. d) auditor, general public, employees. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Define an assurance engagement. Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 8 Section Reference: 1.1 Auditing and assurance defined CPA Competency: Audit and Assurance AACSB: Analytic 19. A limitation of an audit is caused by a) the nature of financial reporting. b) the nature of audit procedures. c) the need for the audit to be conducted within a reasonable period of time and at a reasonable cost. d) all of these answers are correct Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Define an assurance engagement. Section Reference: 1.1 Auditing and assurance defined CPA Competency: Audit and Assurance AACSB: Analytic 20. Which of the following groups would be considered users of the financial statements? a) governments b) current shareholders c) general public d) all of these answers are correct Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 21. The causes of information risk do not include a) independence. b) complexity. c) reliability. d) competing incentives. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 9 22. An audit is one way for investors to insure against at least part of their loss should the company they invest in fail – this is an example of a) agency theory. b) information hypothesis. c) insurance hypothesis. d) competing incentives. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 23. According to the agency theory, demand for audit is due to conflicts between a) managers and owners. b) managers and agents. c) owners and principals. d) auditors and owners. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 24. While awaiting a meeting in his firm’s boardroom, the senior partner, Bill Goldsworthy, read the following statement in an article in The Globe & Mail: “The greater the perceived quality of the information contained in the financial statements, the more likely it will be relied upon by the users of that information.” This statement best describes a) the expectations gap. b) agency theory. c) information hypothesis. d) insurance hypothesis. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 10 AACSB: Analytic 25. As users of the financial statements, suppliers would least consider which of the following aspects of the financial statements? a) solvency of the entity b) profitability of the entity c) return on investment of the entity d) corporate social responsibility of the entity Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 26. Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because a) it is the sole basis for the calculation of taxes owed to the government. b) it can determine whether certain regulations have been complied with. c) it can gain a better understanding of the entity’s activities. d) governments need to assess the entity so that they can provide the entity with grants that will benefit society. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 27. Agency theory can be described as the theory of a) hiring an agency to review the work of the management, in this case it is the auditor. b) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party’s work. c) the relationship between the owner and the management of the business when the owner is not the manager of the business. d) the relationship between the auditor and the management of the business. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 11 AACSB: Analytic 28. Insurance hypothesis tells us that a) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail. b) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail. c) investors cannot insure themselves against loss when investing in an entity. d) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain why there is a demand for audit and assurance services. Section Reference: 1.2 Demand for audit and assurance services CPA Competency: Audit and Assurance AACSB: Analytic 29. Vera Sobczyk spent a week at a client’s wholesale operation determining whether the client’s remittances to the tax authorities were in accordance with tax regulations. This is an example of a(n) a) taxes payable mandate. b) financial audit. c) operational audit. d) compliance audit. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 30. Ming Yao reviewed the operations of a basketball academy. His objectives were to determine how effectively the academy delivered its many programs. What kind of an audit did he perform? a) operational b) compliance c) financial d) comprehensive Answer: a Bloomcode: Comprehension Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 12 Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 31. Matt Fuller reports to the board and evaluates how the company can improve risk management practices, internal control procedures, and certain governance issues. Who is he? a) President b) Controller c) Treasurer d) Internal Auditor Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 32. Which of the following is not true about Corporate Social Responsibility assurance? a) reporting is voluntary and is becoming more widespread b) includes both financial and non-financial information c) is required to be performed by an auditor d) disclosures include environmental, employee, and social reporting Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Differentiate between types of assurance services. Section Reference: 1.3 Different assurance services CPA Competency: Audit and Assurance AACSB: Analytic 33. Which of the following is a component of the “Other Information” section of the auditor’s report? a) auditor’s responsibilities with respect to the audited financial statements b) management’s responsibility for internal controls as they relate to the financial statements c) responsibility of those charged with governance to oversee the financial reporting process d) management’s responsibility for other information Answer: d Bloomcode: Knowledge Difficulty: Easy Introduction and Overview of Audit and Assurance Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 13 Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA: Audit and Assurance AACSB: Analytic 34. Which of the following is not a component of the Review Engagement Report? a) practitioner’s responsibility for the financial statements b) management’s responsibility for the financial statements c) practitioner’s opinion over the reasonableness of the financial statements d) procedures applied to the review engagement and how they differ from an audit engagement Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA: Audit and Assurance AACSB: Analytic 35. Michael Stiller performed work for a client in the real estate business and issued a Compilation Engagement Report. What degree of assurance does a compilation engagement provide to the user of the statements? a) reasonable assurance b) moderate assurance c) no assurance d) complete assurance Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 36. Theodore Heinrich prepared a set of financial statements based on information provided to him. He checked mathematical accuracy of the data, and the client complimented him on the reasonable cost of the work he performed. Theodore performed a) a compilation engagement. b) a review engagement. c) an audit engagement. d) an operational audit engagement Answer: a Bloomcode: Comprehension Auditing: A Practical Approach, Fourth Canadian Edition Copyright © 2021 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 1 - 14 Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 37. Jimmy Bunting, the practitioner at Yanzhou Coal Mining and Minerals, performed the following tasks: he used analytical procedures and he had discussions with management. These activities were a basis for a conclusion on the financial information. What did Jimmy Bunting perform? a) a qualified report b) an unmodified opinion c) a compilation engagement d) a review engagement Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 38. Which of the following would be an example of a reasonable assurance engagement? a) the review of annual financial statements b) the audit of annual financial statements c) the reporting of procedures performed by the auditor as agreed by the client d) the compilation of annual financial statements Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different levels of assurance. Section Reference: 1.4 Different levels of assurance CPA Competency: Audit and Assurance AACSB: Analytic 39. The wording of a limited assurance engagement expresses a conclusion that generally states a) there is nothing wrong with the subject matter. b) there is something wrong with the subject matter. c) there is nothing that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair. d) there is something that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.