Questions and Answers of Auditing Risk Based Approach

Classification is an important assertion for expenses because: (a) There is often an incentive to overstate expenses. (b) Some expenses are subject to specific disclosure
The important assertion(s) for revenue is (are): (a) Occurrence, because testing needs to ensure that recorded sales are genuine. (b) Never completeness, because a company would never want
Delivery documentation for the sale of goods: (a) Is important because it provides evidence supporting the date of sale. (b) Is not important to audit because the invoice date is always the
Sales revenue is a significant account for an entity: (a) Because of the high volume of transactions that flow through the account. (b) Because of the overall inherent risk associated with
A key difference between auditing balance sheet accounts and income statement accounts is that: (a) Balance sheet accounts always have larger totals. (b) Balance sheet accounts are
You are an auditor employed at B & B Accountants. On November 20, 2016, the partner in your firm sends you the following e-mail: Our firm has been reappointed auditors of Floral Impressions Ltd.
Your firm is the auditor of Newtown Ltd., and you have been asked to suggest audit work you will carry out in verifying accounts payable and accruals at the company’s year end of December 31,
Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax
Juanita Rosa’s auditing firm is conducting an external audit of TYY Inc.’s financial statements (for the period ended December 31, 2016). The audit manager has assigned Juanita to analyze the
You have been assigned to audit the sales and accounts receivable balances of Coppero Engineering Ltd. for the year ended September 30, 2016. Coppero Engineering is a major manufacturer of steel
The following is a copy of the auditor’s working paper for auditing accounts payable for the client New Millennium Ecoproducts. Required (a) Explain the nature of the test being
The following is a copy of the auditor’s working paper for auditing additions and disposals relevant to the balance of property, plant, and equipment (PPE) for the client New Millennium
The following is a copy of the auditor’s working paper for auditing inventory balances for the client New Millennium Ecoproducts. It shows the details of the net realizable value (NRV)
The following is a copy of the auditor’s working paper for auditing accounts receivable balances for the client New Millennium Ecoproducts. It shows the details of the cut-off
The following is a copy of the auditor’s working paper for auditing cash at bank balances for the client New Millennium Eco products. It shows the details of the bank confirmation
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During 2016, Fellowes and Associates gained a new client, Health
The following items are documented in the audit working papers: 1. Sales transaction included in the year ended December 31, 2016, but evidence from the cut-off procedure suggests that the sale
Analysis is a substantive audit procedure that auditors use when they are performing financial statement audits. Required (a) Distinguish between analysis and analytical procedures. (b)
Review your answers to the previous questions. Comment on the persuasiveness of evidence from each test. Explain any factors that would affect your assessment.
Inventory of various medical supplies and drugs is a material account on the Shady Oaks Centre audit engagement. You are planning to adopt a combined audit approach for existence of inventory and
Anna Mourani has the task of designing the audit program for the payroll area. There have been no recent changes to the payroll system, or its interface with the general ledger. Among other tests,
Seb Lee and Boris Shonkoff are discussing the audit program for the revenue account. Seb and Boris disagree about whether they should use procedure A or B below to test the occurrence assertion for
Boris Shonkoff has another suggestion for the audit program for the revenue account. This time he suggests: Select a sample of sales from the sales journal and agree the details in the journal to the
Boris Shonkoff suggests the following audit procedure should be included in the audit program to gather evidence on the cut-off assertion for the revenue account: Select a sample of sales from the
Misstatements: (a) Are documented in the audit working papers. (b) Can be categorized as errors or judgemental misstatements. (c) Must be considered for their effect on the financial
Roll-forward procedures: (a) Need to be responsive to the control risk assessment. (b) Are procedures done during the month after year end. (c) Have no effect on audit
The primary advantage of selecting the largest transactions within a balance to test is: (a) It is an example of random sampling. (b) It is more interesting for the auditor because they see
Vouching is: (a) Not a useful audit procedure. (b) Agreeing a balance or transaction to supporting documentation. (c) The main audit procedure used to gather evidence on the
The reliability of data used for analytical procedures: (a) Affects the persuasiveness of the evidence from analytical procedures. (b) Is more useful on a consolidated basis than an
The following conditions make absolute data comparisons relatively less useful: (a) Multiple years of financial data available. (b) Single-location clients. (c) Changes in production
We can conclude that analytical procedures provide persuasive evidence: (a) Always. (b) Never. (c) If they do not provide sufficient evidence by themselves to allow us to conclude that
Analytical procedures: (a) Are used to test controls and are not substantive procedures. (b) Are substantive procedures and cannot be used at any other stage of the audit. (c) Are used
The following factor(s) influences how much and when substantive procedures are performed: (a) The nature of the test. (b) The level of assurance necessary. (c) The type of evidence
Designing substantive procedures responds to: (a) The risk of material misstatement at the entity level. (b) The risk of material misstatement at the assertion level. (c) The risk of
The lead auditor was reviewing the results of testing controls in the employee expense area. The documentation for the testing showed that there was one instance of a part-time staff member being
The audit senior on the audit of Frankel Factors is preparing the audit plan for the year ended June 30, 2016. The following notes relate to the payroll application system that went live on January
Jintian Clothing Ltd. manufactures sportswear and sells it to large department stores in western Canada. The company records sales in a sales journal. When a customer orders merchandise, a sales
ABC is a company that purchases ski equipment from a European manufacturer and then sells the equipment to stores in eastern Canada. The company’s records include pre-numbered shipping and
The following procedures are used for EGO Company: EGO’s purchasing manager approves all purchases above $250. This allows the administrative staff to use the petty cash system to purchase
The junior auditor on the engagement has suggested that, since there were no exceptions detected in previous years, no work on internal controls is required because last year’s evidence will be
Within the client’s IT system, supplier information is contained in a supplier master file (SMF). Each supplier has a unique supplier code. If the purchasing clerk attempts to place an order from a
The client company assigns each new employee a user profile and password for the computer system. The first time the new employee logs onto a company desktop computer, they are automatically forced
What is the difference between entity level controls and transaction level controls?
Working papers: (a) Document the purpose of the test of the control identified and the results of the test, including a specific conclusion about whether the test results supported the overall
A major change in the accounting system has taken place during the year. The effect on control testing is that: (a) The auditor should ensure controls testing is performed for periods both
Which of the following would require the auditor to increase the level of control testing for a particular control? (a) The control is performed monthly instead of daily.(b) There are several
Inspection of physical evidence is a control test used by auditors. It: (a) Relies on questioning skills. (b) Is subject to a limitation because employees may be more diligent when they
Examples of application controls include: (a) Edit checks. (b) Validations. (c) Calculations. (d) All of the above.
ITGCs are important because they: (a) Prevent authorized personnel from having access to data and applications. (b) Impact the effectiveness of both application controls and IT-dependent
Detective controls do not include: (a) Management level reviews. (b) Performance indicators. (c) Account coding. (d) Reconciliations.
Which is not a type of control? (a) Automated controls. (b) Substantive controls. (c) Manual controls. (d) IT-dependent manual controls.
The purpose of controls is to: (a) Prevent misstatements in the financial statements. (b) Detect misstatements in the financial statements. (c) Support automated parts of a business in
The auditor decides which controls to test by considering: (a) The type of control. (b) The frequency of the control being performed. (c) The level of assurance the auditor wishes to
Answer the following questions based on the information presented for Cloud 9 in Appendix B to this book and in the current and earlier chapters. You should also consider your answers to the case
Lise Couture is documenting the purchasing and cash payments processes at Hardies Wholesaling. Hardies Wholesaling imports garden and landscaping items, such as pots, furniture, fountains, mirrors,
The following is the documentation of the payroll cycle at McQuarrie Enterprises, a ladies clothing wholesaler. There are approximately 50 staff members at McQuarrie Enterprises. Every employee has a
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2016, Fellowes and Associates gained a
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2016, Fellowes and Associates gained a
The following is a summary of the purchase process at McQuarrie Enterprises, a wholesaler of ladies clothing. Purchases are authorized and made by departmental managers. Sequential purchase orders
Soak City Waterpark Ltd. is a family-owned business just outside of Winnipeg. The waterpark is only open for business from May to September. During the winter months, the waterpark undergoes repairs
Required For each of the following statements of possible things that can go wrong, identify the audit objective and an internal control that should be implemented to prevent the WCGW. (a) Sales
A management letter: (a) Contains recommendations for improving internal control and discusses other issues discovered during the course of the audit. (b) Is written by management to the
Documenting internal controls: (a) Is always handled through the use of checklists and preformatted questionnaires. (b) Is done after internal controls are tested so that the results can be
Internal control in small entities: (a) Is always stronger because the owner-manager can supervise every activity. (b) Is likely to be less formal than in a larger entity. (c) Does not
Segregation of incompatible duties: (a) Is a guarantee that fraud cannot occur. (b) Is the same as performance review by a supervisor. (c) Means that different people are assigned
Performance reviews: (a) Are not relevant to internal controls. (b) Are applicable only to the chief executive officer in an organization. (c) Are part of control activities. (d)
Auditors are interested in an entity’s information systems: (a) Because they consist of procedures and records to deal with transactions and maintain accountability for related assets,
An entity’s risk assessment process: (a) Is the entity’s process for identifying and responding to business risks and the results thereof. (b) Is established only if the entity is
The control environment: (a) Is the economic environment in which the organization operates. (b) Is the combination of the culture, structure, and discipline of an organization. (c)
The objectives of internal controls include: (a) That fictitious transaction is not included in the organization’s records. (b) That correct amounts are assigned to transactions. (c)
Internal control is a process: (a) Designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to the reliability of financial reporting,
MICA is a regional credit union with 10 branches across the province. MICA leases its premises and buys furniture, such as waiting-area chairs and back-office desks, through a central asset
BBB auditors have been the auditor on the Wild Ride Theme Park for the past two years. They have completed both the financial audit and the audit for the Department of Sport and Leisure, stating that
The controls at a retail store were assessed by the lead auditor as being effective and the auditor intended to rely on the operative effectiveness of controls around payroll in determining the
The results of substantive testing of sales invoices at City Electronics are shown in table 6.8. The three strata correspond to different departments and the overall tolerable error is set at
Patrizia Montani is considering the sample size needed for a selection of sales invoices relating to the test of internal controls of the Caistor Company. She is determining the acceptable risk and
Rahim, a first-year auditor, is asked to select a sample of invoices to audit the utility expense account. Below is the account detail. The audit program asks to select a sample of four
Give an example of substantive testing where stratification would be appropriate.
The auditor has discovered errors when conducting substantive testing on a sample of invoices. If the total error discovered is $3,442, the dollar value of the sample is $25,136, and the population
Tolerable error:(a) is the maximum error an auditor is willing to accept within the population.(b) is positively related to sample size.(c) relates only to control testing.(d) is an amount prescribed
Non-sampling risk:(a) Occurs only if you test every member of the population.(b) Applies only to samples taken for the purposes of control testing.(c) Is the risk that an auditor arrives at an
Sampling risk:(a) Is the risk that the results of the test will be misinterpreted by the auditor.(b) Is the risk that the sample chosen by the auditor is not representative of the population of
If preliminary testing of controls reveals that the rate of deviation in controls is above the expected rate, the auditor will:(a) Reduce detection risk and increase reliance on detailed substantive
The relationship between audit risk, reliance on substantive testing, and evidence persuasiveness is:(a) High audit risk, low reliance on substantive testing, low evidence persuasiveness required.(b)
Analytical procedures:(a) Are less efficient than substantive testing of details.(b) Place less reliance on the client’s accounting records than substantive testing of details.(c) Are relied on to
Deviations: (a) Are errors that affect account balances by a material amount. (b) Occur when controls do not operate as intended. (c) Are relevant only when they occur consistently
When testing controls the auditor:(a) Is interested in assessing the effectiveness of controls.(b) Gathers evidence about the balances of the main accounts.(c) Does not have to have any prior
A detailed audit plan:(a) is based on the overall audit strategy.(b) contains a description of the control testing procedures.(c) lists the audit procedures to be used in substantive testing.(d) all
IndaCar Inc. (IC) operates a high-end car rental agency that specializes in the rental of unique vehicles and is located next to Lester B. Pearson International Airport in Toronto. IC is a private
The working paper in figure 5.11 was prepared by James Parkhill, a first year accountant. Find seven errors that James made while completing this working paper. Figure 5.11 D. 1 New Millennium
For each of the following documents, state whether it would be located in the auditors’ permanent file or the current file.(a) Articles of incorporation(b) Bank confirmation for the current year(c)
Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2016, Fellowes and Associates gained a new client, Health Care
Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfi ng, diving, and other leisure activities; a backpackers’ hostel; a
The audit program for the Revenue account for a client has been drafted. The following item appears: Required (a) Does the procedure address the stated assertion? Explain. (b) If your
The audit program for the Revenue account for a client has been drafted. The following item appears: Required (a) Does the procedure address the stated assertion? Explain. (b) If your
The audit program for the Revenue account for a client has been drafted. The following item appears: Required (a) Does the procedure address the stated assertion? Explain. (b) If your
Yellow Aviation is an existing client of PPP Partners. The auditors are aware that the impact of the global financial crisis on airlines has been severe, with predictions of a prolonged downturn.
The auditor is planning for the audit of a specialty retail store. Inventory is material, and items range in value from $1 to over $500. The nature of the store means that the type of merchandise
A client has a material balance in property, plant, and equipment. The discussions with management indicate that there is a risk the client will capitalize all repair costs to minimize the impact on
Tropical Cruises is a new client of MMM Partners. Tropical Cruises is a low-cost cruise ship operator, travelling between Canada and the United States. The planning for the first audit is underway.

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