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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) According to generally accepted auditing standards (GAAS), the overall objective of a
financial statement audit is ________.
A) to reduce audit risk to an acceptably low level
B) to determine whether the financial principles adopted by management in preparing
the financial statements are acceptable
C) to enable the auditor to express an opinion as to whether the financial statements are
prepared in accordance with generally accepted accounting principles
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) 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.
B) Identify the evidence relevant for the audit of assertions that are made by
management in its unaudited financial statements and notes.
C) Recognize the underlying assertions made by management in the financial
statements and notes.
D) Design an audit program to obtain sufficient appropriate evidence about assertions
management makes in financial statements and notes.
3) Auditors try to achieve independence in appearance in order to ________. 3) _______
A) become independent in appearance and in fact
B) comply with the generally accepted auditing standards
C) maintain an unbiased mental attitude
D) maintain public confidence in the profession
4) Control risk is ________. 4) _______
A) the risk that the auditor will not be able to complete the audit on a timely basis
B) the risk that the auditor will not properly control the staff on the audit engagement
C) the probability that a material misstatement could occur and not be prevented or
detected by the company’s internal control policies and procedures
D) the probability that a material misstatement could occur and not be detected by the
auditor’s audit procedures
5) The primary purpose of obtaining an understanding of the company’s internal controls in
the financial statement audit is ________.
A) to determine whether the company has changed any accounting principles
B) to obtain direct sufficient appropriate audit evidence to afford a reasonable basis for
an opinion on the financial statements
C) to help the auditors develop the audit program
D) to make suggestions to management to improve internal controls
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) give an opinion on whether Camden’s financial statements are fairly presented in all
C) give an opinion on the attractiveness of Camden for investment purposes and
critique the wisdom and legality of its business decisions
D) make a 100% examination of Camden’s records
7) Which of the following statements best explains an unmodified report opinion? 7) _______
A) The auditor was not aware of any reasons not to believe the statements are correct.
B) Based on the evidence obtained, the auditor believes the statements are free of
C) The financial statements contain a departure from GAAP.
D) The auditor was unable to complete the work necessary to form a complete opinion.
8) A standard unmodified audit report should be dated ________. 8) _______
A) as at the end of the year the audit work was done
B) no earlier than the date when the auditor obtained sufficient appropriate audit
evidence supporting the auditor’s opinion
C) no later than the date when the auditor obtained sufficient appropriate audit
evidence supporting the auditor’s opinion
D) as at the end of the year being reported on
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
A) Federal legislation. B) Industry practice.
C) CPA Canada Exposure Drafts. D) CPA Canada Handbook.
10) The reporting standards require that the auditor explicitly report on whether the financial
A) used principles that are appropriate for the circumstances
B) are in accordance with GAAP
C) were prepared on a consistent basis with the comparative year
D) contain adequate disclosure of all material matters
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) professional skepticism B) objective judgment
C) independent integrity D) impartial conservatism
12) Three-Party Accountability includes all of the following parties except ________. 12) ______
A) Audit Committee B) users
C) practitioners D) management
13) Key features of SOX include all of the following except ________. 13) ______
A) increased penalties for corporate wrongdoers
B) more timely and extensive financial disclosures
C) increased oversight of auditors
D) fewer options of recourse for aggrieved shareholders
14) Which of the following has been established to oversee the auditors of public co mpani
es? 14) ___
A) Canadian Public Accountability Board.
B) Canadian Coalition for Good Governance.
C) The SOX Board.
D) The Canadian Securities Commission.
15) An assurance engagement is one in which a CPA is engaged to ________. 15) ______
A) provide tax advice or prepare a tax return based on financial information the CPA
has not audited or reviewed
B) assemble prospective financial statements based on the assumptions of the entity’s
management without expressing any assurance
C) issue a written communication expressing a conclusion concerning a subject matter
for which an accountable party is responsible
D) testify as an expert witness in accounting, auditing, or tax matters, given certain
16) All of the following are examples of assurance engagements except ________. 16) ______
A) financial statements review B) tax planning
C) internal controls statement D) financial statements audit
17) The GAAS general standard relating to the audit of financial statements focuses on all of
the following except ________.
A) due professional care B) independence
C) planning D) competence
18) According to IFAC, which of the following is not one of the elements of quality control? 18) ______
B) Due professional care.
C) Acceptance and continuance of clients.
19) In establishing a quality control system, which area should be of a secondary nature? 19) ______
A) Creating an internal review process.
B) Controlling access to client files.
C) Creating an independence and objectivity checklist.
D) Creating a program for continuing professional education.
20) Williams & Co., a large international CPA firm, will be subject to an external peer
review. The peer review will most likely be performed by ________.
A) peer review staff of the Ontario Securities Commission
B) employees and partners of another CPA firm
C) employees and partners of Williams & Co. who are not associated with the
particular audits being reviewed
D) peer review staff of CPA Canada
21) A report giving conclusions about a firm’s compliance with quality control standards is
typical of which of the following?
A) Quality review. B) Quality inspection.
C) Peer review. D) Practice inspection.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
22) Practice standards are a general set of standards intended to guide the audits of financial
23) The CPA Canada Handbook recommendations are a step-by-step list of procedures
auditors have to complete for each engagement.
24) The general standard of GAAS relates primarily to the personal integrity and
professional qualifications of auditors.
25) Control risk is the risk that an accounting firm’s quality control standards will not be
26) The fourth reporting standard requires the audit report to comment on the consistency of
the accounting principles used in preparing the financial statements.
27) Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
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.
29) Appropriate audit evidence, to be reliable and relevant, must be quantitative, objective,
and absolutely compelling.
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.
31) The assessment of materiality has a pervasive impact on the audit. 31) ______
32) Audit committees monitor management’s financial reporting responsibilities. 32) ______
33) Practice inspection is something a new auditor does as part of his or her training
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
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
l only make us
go over the
came out near
the end of
that they had
counts at any
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.
A. Describe three GAAS examination standards.
B. Do you believe that the Mellow Markets audit is in compliance with these
35) What is the difference between audit procedures and audit standards? 35) _____________
36) What is a quality inspection? 36) _____________
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
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
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.
35) 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.
36) 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.