Instant Download with all chapters and Answers
Sample Chapters
*you will get test bank in PDF in best viewable format after buy*
02
Student: ___________________________________________________________________________
1. According to GAAS, the overall objective of a financial statement audit is ________.
A. to enable the auditor to express an opinion as to whether the financial statements are prepared in accordance
with generally accepted accounting principles
B. to reduce audit risk to an acceptably low level
C. to determine whether the financial principles adopted by management in preparing the financial statements
are acceptable
D. to obtain reasonable assurance that the financial statements taken as a whole are free from misstatement,
whether due to fraud or error
2. Which of the following is the first task that the auditor must accomplish to demonstrate proficiency in
auditing?
A. Identify the evidence relevant for the audit of assertions that are made by management in its unaudited
financial statements and notes.
B. Design an audit program to obtain sufficient appropriate evidence about assertions management makes in
financial statements and notes.
C. Recognize the underlying assertions made by management in the financial statements and notes.
D. Evaluate the evidence gathered in the performance of the audit program and decide whether management’s
assertions conform to generally accepted accounting principles and reality.
3. Auditors try to achieve independence in appearance in order to ________.
A. maintain public confidence in the profession
B. become independent in appearance and in fact
C. comply with the generally accepted auditing standards
D. maintain an unbiased mental attitude
4. Control risk is ________.
A. the probability that a material misstatement could occur and not be prevented or detected by the company’s
internal control policies and procedures
B. the probability that a material misstatement could occur and not be detected by the auditor’s audit procedures
C. the risk that the auditor will not be able to complete the audit on a timely basis
D. the risk that the auditor will not properly control the staff on the audit engagement
5. The primary purpose of obtaining an understanding of the company’s internal controls in the financial
statement audit is ________.
A. to help the auditors develop the audit program
B. to make suggestions to management to improve internal controls
C. to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the
financial statements
D. to determine whether the company has changed any accounting principles
6. An external auditor is conducting an audit of the financial statements of Camden Corporation. The external
auditor is expected to ________.
A. certify the correctness of Camden’s financial statements
B. make a 100% examination of Camden’s records
C. give an opinion on whether Camden’s financial statements are fairly presented in all material respects
D. give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and
legality of its business decisions
7. Which of the following statements best explains an unmodified report opinion?
A. The financial statements contain a departure from GAAP.
B. The auditor was unable to complete the work necessary to form a complete opinion.
C. The auditor was not aware of any reasons not to believe the statements are correct.
D. Based on the evidence obtained, the auditor believes the statements are free of material error.
8. A standard unmodified audit report should be dated ________.
A. no later than the date when the auditor obtained sufficient appropriate audit evidence supporting the auditor’s
opinion
B. no earlier than the date when the auditor obtained sufficient appropriate audit evidence supporting the
auditor’s opinion
C. as at the end of the year being reported on
D. as at the end of the year the audit work was done
9. Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting
principle. Which of the following should the auditor consider to be the most authoritative?
A. CICA Handbook.
B. CICA Exposure Drafts.
C. Industry practice.
D. Federal legislation.
10. The reporting standards require that the auditor explicitly report on whether the financial statements
________.
A. contain adequate disclosure of all material matters
B. are in accordance with GAAP
C. used principles that are appropriate for the circumstances
D. were prepared on a consistent basis with the comparative year
11. Because of the risk of material misstatement, an audit of financial statements in accordance with generally
accepted auditing standards should be planned and performed with an attitude of ________.
A. objective judgment
B. independent integrity
C. professional skepticism
D. impartial conservatism
12. Three-Party Accountability includes all of the following parties except ________.
A. users
B. practitioners
C. Audit Committee
D. management
13. Key features of SOX include all of the following except ________.
A. increased penalties for corporate wrongdoers
B. more timely and extensive financial disclosures
C. fewer options of recourse for aggrieved shareholders
D. increased oversight of auditors
14. Which of the following has been established to oversee the auditors of public companies?
A. Canadian Coalition for Good Governance.
B. Canadian Public Accountability Board.
C. The SOX Board.
D. The Canadian Securities Commission.
15. An assurance engagement is one in which a CA is engaged to ________.
A. issue a written communication expressing a conclusion concerning a subject matter for which an accountable
party is responsible
B. provide tax advice or prepare a tax return based on financial information the CA has not audited or reviewed
C. testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts
D. assemble prospective financial statements based on the assumptions of the entity’s management without
expressing any assurance
16. All of the following are examples of assurance engagements except ________.
A. tax planning
B. financial statements audit
C. internal controls statement
D. financial statements review
17. The GAAS general standard relating to the audit of financial statements focuses on all of the following
except ________.
A. competence
B. independence
C. due professional care
D. planning
18. According to IFAC, which of the following is not one of the elements of quality control?
A. Independence.
B. Supervision.
C. Acceptance and continuance of clients.
D. Due professional care.
19. In establishing a quality control system, which area should be of a secondary nature?
A. Creating an independence and objectivity checklist.
B. Creating a program for continuing professional education.
C. Creating an internal review process.
D. Controlling access to client files.
20. Williams & Co., a large international CA firm, will be subject to an external peer review. The peer review
will most likely be performed by ________.
A. employees and partners of Williams & Co. who are not associated with the particular audits being reviewed
B. employees and partners of another CA firm
C. peer review staff of the Ontario Securities Commission
D. peer review staff of the CICA
21. A report giving conclusions about a firm’s compliance with quality control standards is typical of which of
the following?
A. Practice inspection.
B. Quality inspection.
C. Peer review.
D. Quality review.
22. Practice standards are a general set of standards intended to guide the audits of financial statements.
True False
23. The CICA Handbook recommendations are a step-by-step list of procedures auditors have to complete for
each engagement.
True False
24. The general standard of GAAS relates primarily to the personal integrity and professional qualifications of
auditors.
True False
25. Control risk is the risk that an accounting firm’s quality control standards will not be adequate.
True False
26. The fourth reporting standard requires the audit report to comment on the consistency of the accounting
principles used in preparing the financial statements.
True False
27. Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements
are materially misstated.
True False
28. Reliance on self-regulation of the accounting profession has changed as a result of its perceived failure to
detect the problems leading to the corporate scandals of 2002/2003.
True False
29. Appropriate audit evidence, to be reliable and relevant, must be quantitative, objective, and absolutely
compelling.
True False
30. A prospectus is the information, usually including financial information, about a firm that accompanies any
new issuance of shares in a regulated securities market.
True False
31. The assessment of materiality has a pervasive impact on the audit.
True False
32. Audit committees monitor management’s financial reporting responsibilities.
True False
33. Practice inspection is something a new auditor does as part of his or her training program.
True False
34. Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit
because of his experience with other grocery clients. Mellow Markets has a small, but growing chain of natural
food stores. This is the first year Mellow Markets has been audited. Because of its growth, Mellow needs
additional capital. Mellow intends to take its audited financial statements to a bank to secure a loan.
Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first audit as a senior,
he intends to bring the job in on budget. To save time, he gave the assistants the audit program for Happy Time
Food Stores. He told his staff that this would make things go more quickly. He also told them that he could not
spend much time with them at the client’s place of business because “my time is billed out at such a high rate,
we’ll go right over budget.” He did call them once a day from another audit on which he was working. The
assistants told Alan that the audit program did not always match up with what they found at Mellow Markets.
Alan responded, “Just cross out whatever is not relevant in the audit program and don’t add anything—it will
only make us go over the budget.”
When Alan came out near the end of fieldwork, one assistant communicated her concern that they had not
attended the inventory counts at any of the out-of-town locations of Mellow Markets. The audit program had
stipulated that inventory should be observed for in-town stores only. Happy Time had only one store not in
town while Mellow Markets had three of their five stores in other cities. Alan told the assistant to get inventory
sheets from the client for the other stores. He added, “Make sure that the inventory balance in the general ledger
agrees with the total for all the inventory sheets.” The next day, Alan reviewed all work papers and submitted
the job for review by the manager.
Required:
A. Describe three GAAS examination standards.
B. Do you believe that the Mellow Markets audit is in compliance with these standards? Explain.
35. What is the difference between audit procedures and audit standards?
36. What is a quality inspection?
02 Key
1. (p. 34) According to GAAS, the overall objective of a financial statement audit is ________.
A. to enable the auditor to express an opinion as to whether the financial statements are prepared in accordance
with generally accepted accounting principles
B. to reduce audit risk to an acceptably low level
C. to determine whether the financial principles adopted by management in preparing the financial statements
are acceptable
D. to obtain reasonable assurance that the financial statements taken as a whole are free from misstatement,
whether due to fraud or error
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #1
2. (p. 35) Which of the following is the first task that the auditor must accomplish to demonstrate proficiency in
auditing?
A. Identify the evidence relevant for the audit of assertions that are made by management in its unaudited
financial statements and notes.
B. Design an audit program to obtain sufficient appropriate evidence about assertions management makes in
financial statements and notes.
C. Recognize the underlying assertions made by management in the financial statements and notes.
D. Evaluate the evidence gathered in the performance of the audit program and decide whether management’s
assertions conform to generally accepted accounting principles and reality.
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #2
3. (p. 35) Auditors try to achieve independence in appearance in order to ________.
A. maintain public confidence in the profession
B. become independent in appearance and in fact
C. comply with the generally accepted auditing standards
D. maintain an unbiased mental attitude
Blooms Taxonomy: Comprehension
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #3
4. (p. 38) Control risk is ________.
A. the probability that a material misstatement could occur and not be prevented or detected by the company’s
internal control policies and procedures
B. the probability that a material misstatement could occur and not be detected by the auditor’s audit procedures
C. the risk that the auditor will not be able to complete the audit on a timely basis
D. the risk that the auditor will not properly control the staff on the audit engagement
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #4
5. (p. 38) The primary purpose of obtaining an understanding of the company’s internal controls in the financial
statement audit is ________.
A. to help the auditors develop the audit program
B. to make suggestions to management to improve internal controls
C. to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the
financial statements
D. to determine whether the company has changed any accounting principles
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #5
6. (p. 40) An external auditor is conducting an audit of the financial statements of Camden Corporation. The
external auditor is expected to ________.
A. certify the correctness of Camden’s financial statements
B. make a 100% examination of Camden’s records
C. give an opinion on whether Camden’s financial statements are fairly presented in all material respects
D. give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and
legality of its business decisions
Blooms Taxonomy: Comprehension
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #6
7. (p. 39) Which of the following statements best explains an unmodified report opinion?
A. The financial statements contain a departure from GAAP.
B. The auditor was unable to complete the work necessary to form a complete opinion.
C. The auditor was not aware of any reasons not to believe the statements are correct.
D. Based on the evidence obtained, the auditor believes the statements are free of material error.
Blooms Taxonomy: Comprehension
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #7
8. (p. 40) A standard unmodified audit report should be dated ________.
A. no later than the date when the auditor obtained sufficient appropriate audit evidence supporting the auditor’s
opinion
B. no earlier than the date when the auditor obtained sufficient appropriate audit evidence supporting the
auditor’s opinion
C. as at the end of the year being reported on
D. as at the end of the year the audit work was done
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #8
9. (p. 41) Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting
principle. Which of the following should the auditor consider to be the most authoritative?
A. CICA Handbook.
B. CICA Exposure Drafts.
C. Industry practice.
D. Federal legislation.
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #9
10. (p. 34) The reporting standards require that the auditor explicitly report on whether the financial statements
________.
A. contain adequate disclosure of all material matters
B. are in accordance with GAAP
C. used principles that are appropriate for the circumstances
D. were prepared on a consistent basis with the comparative year
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #10
11. (p. 34) Because of the risk of material misstatement, an audit of financial statements in accordance with
generally accepted auditing standards should be planned and performed with an attitude of ________.
A. objective judgment
B. independent integrity
C. professional skepticism
D. impartial conservatism
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #11
12. (p. 44) Three-Party Accountability includes all of the following parties except ________.
A. users
B. practitioners
C. Audit Committee
D. management
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-04 Explain the importance of general assurance standards; using examples of assurance matters.
Smieliauskas – Chapter 02 #12
13. (p. 27) Key features of SOX include all of the following except ________.
A. increased penalties for corporate wrongdoers
B. more timely and extensive financial disclosures
C. fewer options of recourse for aggrieved shareholders
D. increased oversight of auditors
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public accountants in
Canada.
Smieliauskas – Chapter 02 #13
14. (p. 28) Which of the following has been established to oversee the auditors of public companies?
A. Canadian Coalition for Good Governance.
B. Canadian Public Accountability Board.
C. The SOX Board.
D. The Canadian Securities Commission.
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public accountants in
Canada.
Smieliauskas – Chapter 02 #14
15. (p. 43) An assurance engagement is one in which a CA is engaged to ________.
A. issue a written communication expressing a conclusion concerning a subject matter for which an accountable
party is responsible
B. provide tax advice or prepare a tax return based on financial information the CA has not audited or reviewed
C. testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts
D. assemble prospective financial statements based on the assumptions of the entity’s management without
expressing any assurance
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-04 Explain the importance of general assurance standards; using examples of assurance matters.
Smieliauskas – Chapter 02 #15
16. (p. 44) All of the following are examples of assurance engagements except ________.
A. tax planning
B. financial statements audit
C. internal controls statement
D. financial statements review
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-04 Explain the importance of general assurance standards; using examples of assurance matters.
Smieliauskas – Chapter 02 #16
17. (p. 35) The GAAS general standard relating to the audit of financial statements focuses on all of the following
except ________.
A. competence
B. independence
C. due professional care
D. planning
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #17
18. (p. 47) According to IFAC, which of the following is not one of the elements of quality control?
A. Independence.
B. Supervision.
C. Acceptance and continuance of clients.
D. Due professional care.
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #18
19. (p. 47) In establishing a quality control system, which area should be of a secondary nature?
A. Creating an independence and objectivity checklist.
B. Creating a program for continuing professional education.
C. Creating an internal review process.
D. Controlling access to client files.
Blooms Taxonomy: Comprehension
Difficulty: Hard
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #19
20. (p. 49) Williams & Co., a large international CA firm, will be subject to an external peer review. The peer
review will most likely be performed by ________.
A. employees and partners of Williams & Co. who are not associated with the particular audits being reviewed
B. employees and partners of another CA firm
C. peer review staff of the Ontario Securities Commission
D. peer review staff of the CICA
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #20
21. (p. 49) A report giving conclusions about a firm’s compliance with quality control standards is typical of which
of the following?
A. Practice inspection.
B. Quality inspection.
C. Peer review.
D. Quality review.
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #21
22. (p. 33) Practice standards are a general set of standards intended to guide the audits of financial statements.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-02 List the various practice standards for independent audits of financial statements.
Smieliauskas – Chapter 02 #22
23. (p. 41) The CICA Handbook recommendations are a step-by-step list of procedures auditors have to complete
for each engagement.
FALSE
Blooms Taxonomy: Comprehension
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #23
24. (p. 35) The general standard of GAAS relates primarily to the personal integrity and professional
qualifications of auditors.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #24
25. (p. 38) Control risk is the risk that an accounting firm’s quality control standards will not be adequate.
FALSE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #25
26. (p. 34) The fourth reporting standard requires the audit report to comment on the consistency of the accounting
principles used in preparing the financial statements.
FALSE
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #26
27. (p. 37) Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #27
28. (p. 27) Reliance on self-regulation of the accounting profession has changed as a result of its perceived failure
to detect the problems leading to the corporate scandals of 2002/2003.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public accountants in
Canada.
Smieliauskas – Chapter 02 #28
29. (p. 38) Appropriate audit evidence, to be reliable and relevant, must be quantitative, objective, and absolutely
compelling.
FALSE
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #29
30. (p. 30) A prospectus is the information, usually including financial information, about a firm that accompanies
any new issuance of shares in a regulated securities market.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public accountants in
Canada.
Smieliauskas – Chapter 02 #30
31. (p. 37) The assessment of materiality has a pervasive impact on the audit.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Easy
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #31
32. (p. 28) Audit committees monitor management’s financial reporting responsibilities.
TRUE
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public accountants in
Canada.
Smieliauskas – Chapter 02 #32
33. (p. 48) Practice inspection is something a new auditor does as part of his or her training program.
FALSE
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #33
34. (p. 36) Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets
audit because of his experience with other grocery clients. Mellow Markets has a small, but growing chain of
natural food stores. This is the first year Mellow Markets has been audited. Because of its growth, Mellow
needs additional capital. Mellow intends to take its audited financial statements to a bank to secure a loan.
Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first audit as a senior,
he intends to bring the job in on budget. To save time, he gave the assistants the audit program for Happy Time
Food Stores. He told his staff that this would make things go more quickly. He also told them that he could not
spend much time with them at the client’s place of business because “my time is billed out at such a high rate,
we’ll go right over budget.” He did call them once a day from another audit on which he was working. The
assistants told Alan that the audit program did not always match up with what they found at Mellow Markets.
Alan responded, “Just cross out whatever is not relevant in the audit program and don’t add anything—it will
only make us go over the budget.”
When Alan came out near the end of fieldwork, one assistant communicated her concern that they had not
attended the inventory counts at any of the out-of-town locations of Mellow Markets. The audit program had
stipulated that inventory should be observed for in-town stores only. Happy Time had only one store not in
town while Mellow Markets had three of their five stores in other cities. Alan told the assistant to get inventory
sheets from the client for the other stores. He added, “Make sure that the inventory balance in the general ledger
agrees with the total for all the inventory sheets.” The next day, Alan reviewed all work papers and submitted
the job for review by the manager.
Required:
A. Describe three GAAS examination standards.
B. Do you believe that the Mellow Markets audit is in compliance with these standards? Explain.
A. The examination standards are outlined below.
1. The work should be adequately planned and properly executed using sufficient knowledge of the entity’s
business as a basis. If assistants are employed, they should be properly supervised.
2. A sufficient understanding of internal control should be obtained to plan the audit. When control risk is
assessed below maximum, sufficient appropriate audit evidence should be obtained through tests of controls to
support the assessment.
3. Sufficient appropriate audit evidence should be obtained, by such means as inspection, observation, enquiry,
confirmation, computation, and analysis, to afford a reasonable basis to support the content of the report.
B.
1. The Mellow Markets audit is not in compliance with these standards. A proper audit program was not
prepared. This, along with the emphasis on cutting time, means that it is also doubtful that a meaningful
knowledge of the client’s business was obtained. It appears that the planning portion of the first examination
standard was clearly violated. The lack of time and attention the inexperienced staff received from Alan Fallon
is indicative of a violation of the supervision part of the first examination standard.
2. There is no indication of any steps taken to understand, evaluate, or test the internal control of Mellow
Markets. This is a violation of the second examination standard.
3. The third examination standard also seems to have been violated. First, the deficiencies in meeting the first
two examination standards suggest that the auditors could not have obtained sufficient appropriate evidence. In
addition, the failure to observe any of the inventory counts in other cities is an additional deficiency—
particularly since Mellow is a new client. Finally, ensuring that the inventory sheets agree with the balance in
the general ledger account is merely a first step in the audit of inventory. By itself it is not sufficient appropriate
evidence.
Blooms Taxonomy: Analysis
Difficulty: Hard
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #34
35. (p. 34) What is the difference between audit procedures and audit standards?
Audit standards are audit-quality recommendations that remain the same over time for all audits. Audit
procedures, on the other hand, are quite different and include the particular specialized actions auditors take to
obtain evidence in a specific audit engagement.
Blooms Taxonomy: Comprehension
Difficulty: Medium
Learning Objective: 02-03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in the
CICAs Canadian Auditing Standards (CAS).
Smieliauskas – Chapter 02 #35
36. (p. 49) What is a quality inspection?
A quality inspection is an examination and evaluation of the quality of the overall practice. It is thus aimed at
the firm level rather than at individuals. It involves extensive study of a firm’s quality control document and
includes interviews with audit personnel as well as a detailed study of the quality of work, adherence to GAAS,
and quality control standards on a selection of audit engagements.
Blooms Taxonomy: Knowledge recall
Difficulty: Medium
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms.
Smieliauskas – Chapter 02 #36
02 Summary
Category # of Ques
tions
Blooms Taxonomy: Analysis 1
Blooms Taxonomy: Comprehension 11
Blooms Taxonomy: Knowledge recall 24
Difficulty: Easy 19
Difficulty: Hard 2
Difficulty: Medium 15
Learning Objective: 02-
01 Describe the current audit environment; including developments in regulatory oversight and provincial regulation of public account
ants in Canada.
5
Learning Objective: 02-02 List the various practice standards for independent audits of financial statements. 1
Learning Objective: 02-
03 Outline the ethical; examination; and reporting standards that make up generally accepted auditing standards (GAAS) as set out in t
he CICAs Canadian Auditing Standards (CAS).
21
Learning Objective: 02-04 Explain the importance of general assurance standards; using examples of assurance matters. 3
Learning Objective: 02-05 Explain how requirements of quality control standards are monitored for PA firms. 6
Smieliauskas – Chapter 02 36
