Question 1

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.

Accepted Answer

•The above situation seems to indicate that management does not take the letter from the provincial government seriously.
•This could affect the ability of the company to continue as a going concern, and as a minimum would require disclosure in the financial statements, possibly with a qualification.
•The audit planning process would need to include gathering knowledge about other companies in this sector-have they also received such letters and have they complied? Have there been charges laid by the provinces where compliance did not occur? The answers to these questions will help assess the potential impact upon the client.
•The auditor should also look at any proposals that the company has received about implementing the anti-pollution equipment to see how quickly it can be implemented.
•The negative attitude about the anti-pollution equipment may also apply to other areas of the business.
•The auditor will need to assess the quality of corporate governance and of management integrity and assess the effect upon the engagement. Why has management really decided to wait so long?

Question 2

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.

Accepted Answer

A)•The purpose of an audit is to provide reasonable assurance that the financial statements are free of material error or fraud.
•The financial statements may not be 100% accurate.
•Since management fraud is difficult to detect, it would be impossible for you to quantify the amount of money that Jennifer has taken, if any.
•Frank might not be happy with the audit results because one of the things that you would have to do would be to assess the collectability of the accounts receivable.
B)Existence: Some accounts receivable may not be recorded if Jennifer took funds.
Completeness: Some sales may not have been recorded if Jennifer took the funds.
Valuation: Accounts receivable may be overvalued for Frank's receivables if they are not collectible.

Question 3

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

Accepted Answer

A)   with management.
B)   with the auditor.
C)   equally with management and the auditor.
D)   with the internal audit department. A

Question 4

Which of the following statements is true regarding a difference between general audit objectives and specific audit objectives for an account balance?

Accepted Answer

A)   The general audit objectives are applicable to every account balance on the financial statements.
B)   The specific audit objectives are applicable to every account balance on the financial statements.
C)   For any given account, usually only one audit objective must be met to conclude the transactions are properly accounted.
D)   The general audit objectives are stated in terms tailored to the engagement.

Question 5

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is greater for

Accepted Answer

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.

Question 6

The factor that distinguishes an error from fraud or other irregularities is

Accepted Answer

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.

Question 7

Analytical procedures are those that

Accepted Answer

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.

Question 8

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

Accepted Answer

A)   generally accepted auditing standards.
B)   the provincial institutes' Rules of Professional Conduct.
C)   generally accepted accounting principles.
D)   the auditor's professional judgment.

Question 9

The sole shareholder of Jade Company had a contractor pave the parking lot at the company building as well as the driveway of his home. Both paving jobs were billed to the company on a single invoice. The general balance-related audit objective affected by this activity is

Accepted Answer

A)   existence.
B)   allocation.
C)   completeness.
D)   rights and obligation.

Question 10

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility

Accepted Answer

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.

Question 11

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?

Accepted Answer

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

Question 12

The objective of the audit of financial statements by the auditor is the expression of an opinion on

Accepted Answer

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.

Question 13

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

Accepted Answer

A)   Canadian generally accepted accounting principles (GAAP)  only.
B)   an applicable financial reporting framework.
C)   management's assertions.
D)   rules of professional conduct.

Question 14

Often, numerous classes of transactions affect the ending balance of a particular general ledger account. This is handled during the audit engagement by

Accepted Answer

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.

Question 15

Which of the following is an example of fraudulent financial reporting (management fraud)?

Accepted Answer

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

Question 16

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

Accepted Answer

A)   a prudent user.
B)   management.
C)   the reader.
D)   investors.

Question 17

Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed "select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers." Camilla is concerned that some of the inventory in the store might be on consignment. The account-balance-related objective that Camilla is concerned about is

Accepted Answer

A)   rights and obligation (ownership) .
B)   accuracy.
C)   valuation.
D)   existence.

Question 18

Management assertions are

Accepted Answer

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.

Question 19

Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of

Accepted Answer

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.

Question 20

Prior to looking at the specific cycles, the auditor will first

Accepted Answer

A)   enquire about 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.

Exam 5: Audit Responsibilities and Objectives