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Practice Multiple Choice Questions 1. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
A) It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor.
B) It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
C) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
D) It is a customary courtesy that all shareholders of a company receive an independent report on management's stewardship in managing the affairs of the business.
2. Which of the following arguments best describes why deliberately underbidding to obtain an audit engagement may create independence problems for an auditor?
A) It is a violation of professional ethics.
B) Having cut fees below cost in the initial year, the auditor has a greater incentive to try and retain the client than if the fees had not been discounted.
C) By agreeing to a fee below cost to please a client, the auditor has already compromised independence.
D) By underbidding, the auditor shows that his or her major interests are economic rather than serving the public interest.
3. An agreement between the auditor and the client which specifies the services that will be conducted as part of the audit is referred to as:
A) Independence letter
B) Representation letter
C) Engagement letter
D) Audit letter
4. An example of a violation of independence standard as a result of self-review is:
A) The auditor writes up the bookkeeping records and performs the audit.
B) The auditor has a financial interest in the client.
C) The auditor is under high levels of pressure to meet constraints that is unrealistic for the job.
D) The same partner has been performing the review of the working paper file for 15 years without rotation.
5. A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because
A) Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
B) An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud.
C) The factors considered in assessing control risk indicated an increased risk of intentional misstatement but only a low risk of unintentional errors in the financial statements.
D) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
6. Which of the following relatively small misstatements is most likely to have a material effect on an entity's financial statements?
A) A petty cash fund disbursement that was not properly authorized.
B) A piece of obsolete office equipment that was not retired.
C) An illegal payment to a foreign official that was not recorded.
D) An uncollectible account receivable that was not written off.
Which of the following audit tests is not an example of analytical procedure?
Comparing the planned budget results to actual year-end results
Calculating a provision for the write-down of inventory based on reviewing sales that occurred subsequent to year-end
Analyzing industry data on sales of an industry to develop an expectation of the client's year-end sales
Calculating the current ratio and assessing whether or not it is in compliance with the bank agreement
The following are significant factors to consider when assessing the inherent risk of a client, except:
Client's bias to misstate financial statements
Segregation of duties
Nature of the client's business
Which party is not a potential user of a company's financial statements?
All of the above are potential users
Auditors are required to audit with an objective state of mind and must ensure they have adequate technical training to perform the job. Which broad guideline of Generally Accepted Auditing Standards (GAAS) regulations are being referred to?
Sally is a senior manager at the accounting firm SSS & Partners and has recently been assigned to a new audit engagement, Grover Inc. Sally is really excited about the opportunity to serve Grover Inc.; however, it came to light during the planning stages that her father owns a significant number of shares of Grover Inc. Sally was taken off the engagement as a precaution to avoid violating what professional conduct facet/rule associated with independence:
It was determined that an incorrect audit opinion was given by a firm. The audit was conducted in accordance with GAAS and is fully supported by the auditor's working paper file. What defence can the auditor use in this case to limit the extent of the liability to the firm?
Absence of misstatement
Lack of duty to perform
Absence of negligent performance
Absence of causal connection
Why were Canadian Auditing Standards ("CASs") established as a replacement of GAAS that we know today?
The standards were out of date leading to confusion in the marketplace resulting in misunderstanding of the auditor's role.
Because businesses are operating in a global economy, it was determined that auditors around the world should adopt International Standards. CASs is Canada's version of adopting the global standards.
As a result of the global economic crisis, securities (stock market) regulators required enhancements to specifically detect fraudulent activities that are more common today.
A new director at the Canadian Institute decided to change the name of the standards for patriotic reasons