Question 1

Which of the following would be an example of a reasonable assurance engagement?
A) the review of annual financial statements
B) the audit of annual financial statements
C) the reporting of procedures performed by the auditor as agreed by the client
D) all of the above

Accepted Answer

A reasonable assurance engagement is one that provides a moderate level of assurance that the financial statements are free from material misstatement. An audit of annual financial statements provides this level of assurance. A review engagement provides limited assurance, and reporting on procedures performed as agreed by the client is an agreed-upon procedures engagement, which is not classified as a reasonable assurance engagement. Therefore, option B is the only example of a reasonable assurance engagement.

Question 2

Maggie Oh performed an audit of a client that had undergone flooding to its operations in St-Jean Sur Richelieu. The client was insured and was able to keep operating. However,
There was material damage to the client's warehouse and Maggie felt it would be appropriate
To inform the users of the financial statements of this fact in the audit report. This form of audit
Report is called
A) an adverse opinion.
B) unmodified opinion - emphasis of matter.
C) modified opinion.
D) disclaimer of opinion.

Accepted Answer

An unmodified opinion with emphasis of matter is the appropriate choice. This type of report indicates that the financial statements present fairly in all material respects, but includes a paragraph drawing attention to a matter that is relevant to the understanding of the financial statements, such as the flooding that caused material damage to the warehouse in this case.

Question 3

Jimmy Bunting, the senior auditor at Yanzhou Coal Mining and Minerals, performed the following tasks: he used analytical procedures and he had discussions with management. These activities were a basis for a conclusion on the financial information. What did Jimmy Bunting perform?
A) a qualified report
B) an unmodified opinion
C) a compilation
D) a review engagement

Accepted Answer

Jimmy Bunting performed a review engagement, as indicated by the use of analytical procedures and discussions with management, which are typical procedures in a review engagement to form a conclusion on the financial information without performing an audit.

Question 4

Michael Stiller performed work for a client in the real estate business and issued a Notice to Reader. What degree of assurance does a Notice to Reader provide to the user of the
Statements?
A) reasonable assurance
B) moderate assurance
C) no assurance
D) none of the above

Accepted Answer

A Notice to Reader provides no assurance to the user of the statements. It is the lowest level of service and involves simply compiling the financial information provided by the client without any further investigation or testing.

Question 5

While awaiting a meeting in his firm's boardroom, the senior partner, Bill Goldsworthy, read the following statement in an article in the Globe & Mail: "The greater the perceived
Quality of the information contained in the financial statements, the more likely it will be relied
Upon by the users of that information." This statement best describes
A) the expectations gap.
B) agency theory.
C) information hypothesis.
D) insurance hypothesis.

Accepted Answer

The statement quoted in the article refers to the information hypothesis, which states that the perceived quality of financial information will lead to its increased use and reliance by users. The expectations gap refers to the difference between what the public perceives the role of auditors to be and what they actually do. Agency theory involves the relationship between principals (shareholders) and agents (management) and their conflicting interests. The insurance hypothesis suggests that the purpose of an audit is to provide insurance against financial misstatements.

Question 6

An example of an unmodified audit opinion is
A) qualified audit opinion.
B) adverse audit opinion.
C) unqualified audit opinion with an emphasis of matter.
D) none of the above

Accepted Answer

An unmodified audit opinion is also known as a clean or standard opinion, where the auditor concludes that the financial statements are free from material misstatements and fairly represent the company's financial position. An unqualified audit opinion with an emphasis of matter refers to a situation where the auditor adds an additional paragraph to draw the reader's attention to a specific matter, such as a significant event, uncertainty or a change in accounting principle, but does not affect the overall opinion of the financial statements. Therefore, option C is the correct answer. Option A is incorrect because a qualified opinion indicates that the financial statements contain material misstatements, but not to the extent that it requires an adverse opinion. Option B is incorrect because an adverse opinion signifies that the financial statements are materially misstated and do not accurately represent the company's financial position. And option D is incorrect because there has to be at least one correct option.

Question 7

Agency theory can be described as the theory of
A) hiring an agency to review the work of the management, in this case it is the auditor.
B) when the finance function is outsourced to an outside party, and the auditor is required to audit the outside party's work.
C) the relationship between the owner and the management of the business when the owner is not the manager of the business.
D) none of the above

Accepted Answer

Agency theory is primarily concerned with the relationship between the principal (owner) and agent (management) of a business, where the agent is tasked with making decisions on behalf of the principal, but may have different interests and goals. This can result in agency costs, such as information asymmetry, moral hazard, and adverse selection, which can affect the performance and efficiency of the business. The auditor may be involved in evaluating the effectiveness of the agency relationship and the controls in place to mitigate these risks. Choices A and B do not accurately describe agency theory.

Question 8

In a review engagement, which of the following is least likely to occur during the engagement?
A) analytical procedures
B) enquiries with management and other personnel
C) substantive audit procedures
D) review of the internal controls of the entity.

Accepted Answer

Substantive audit procedures are not required in a review engagement. Review engagements primarily involve performing analytical procedures and enquiries with management and other personnel. Review of the internal controls of the entity may also be performed as necessary, but will not be as comprehensive as in an audit engagement.

Question 9

Insurance hypothesis tells us that
A) investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.
B) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail.
C) investors cannot insure themselves against loss when investing in an entity.
D) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements.

Accepted Answer

The insurance hypothesis suggests that investors seek audited financial statements as a form of protection or "insurance" against potential losses due to inaccuracies or misrepresentations, thereby reducing their investment risk.

Question 10

The wording of a limited assurance engagement expresses a conclusion that generally states
A) there is nothing wrong with the subject matter.
B) there is something wrong with the subject matter.
C) there is nothing that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.
D) there is something that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair.

Accepted Answer

The wording of a limited assurance engagement expresses a conclusion that there is nothing that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair. It does not express a conclusion that there is nothing wrong with the subject matter. Therefore, option A is incorrect. It also does not express a conclusion that there is something wrong with the subject matter. Therefore, option B is incorrect. Lastly, it does not express a conclusion that there is something that has come to the attention of the auditors that would lead them to believe that the information being assured is not true and fair. Therefore, option D is incorrect.

Question 11

Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because
A) it is the basis for the calculation of taxes owed to the government.
B) it can determine whether certain regulations have been complied with.
C) to gain a better understanding of the entity's activities.
D) governments need to assess the entity so that they can provide the entity with grants that will benefit society.

Accepted Answer

General purpose financial statements are primarily used by stakeholders to make economic decisions rather than for calculating taxes owed to the government. Taxes are typically calculated based on tax returns and other specific financial information provided to tax authorities, not on general purpose financial statements.

Question 12

Ming Yao reviewed the operations of a basketball academy. His objectives were to determine how effectively the academy delivered its many programs. What kind of an audit
Did he perform?
A) operational
B) compliance
C) financial
D) comprehensive

Accepted Answer

Ming Yao's objective of assessing the effectiveness of the academy's programs suggests that he performed an operational audit, which evaluates whether an organization is achieving its goals and objectives efficiently and effectively. Compliance audits test adherence to legal or regulatory requirements, financial audits assess financial statements, and comprehensive audits cover all aspects of an organization's operations.

Question 13

Theodore Heinrich prepared a set of financial statements based on information provided to him. He checked mathematical accuracy of the data, and the client complimented him on
The reasonable cost of the work he performed. Theodore performed
A) a compilation.
B) a review.
C) an audit.
D) none of the above

Accepted Answer

Theodore performed a compilation, which involves taking information provided by the client and presenting it in financial statement form. A compilation does not provide any assurance on the financial statements and is the least extensive form of financial statement service that a CPA can provide.

Question 14

According to the agency theory, demand for audit is due to conflicts between
A) managers and owners.
B) managers and agents.
C) owners and principals.
D) auditors and owners.

Accepted Answer

The agency theory suggests that conflicts arise between managers (agents) and owners (principals) due to differences in their interests, which can result in managers making decisions that are not in the best interest of the owners. Audits are demanded to provide objective and independent assurance over the financial statements prepared by the management, thereby reducing the information asymmetry and conflict of interest between managers and owners, who are the primary users of financial statements. Therefore, the demand for audit is mainly driven by conflicts between managers and owners.

Question 15

As users of the financial statements, suppliers would least consider which of the following aspects of the financial statements?
A) solvency of the entity
B) profitability of the entity
C) return on investment of the entity
D) corporate social responsibility of the entity

Accepted Answer

The answer of As users of the financial statements, suppliers...

Question 16

Vera Sobczyk spent a week at a client's wholesale operation determining whether the client's remittances to the tax authorities were in accordance with tax regulations. This is an
Example of a(n)
A) taxes payable mandate.
B) financial audit.
C) operational audit.
D) none of the above

Accepted Answer

The answer of Vera Sobczyk spent a week at a...

Question 17

Which of the following is not true about Corporate Social Responsibility assurance?
A) reporting is voluntary and is becoming more widespread
B) includes both financial and non-financial information
C) is required to be performed by an auditor
D) disclosures include environmental, employee and social reporting

Accepted Answer

Corporate Social Responsibility assurance is not required to be performed by an auditor. While some companies choose to have their CSR reports audited by external parties, it is not a legal requirement.

Question 18

An unqualified opinion is also known as a(n)
A) clean opinion.
B) adverse opinion.
C) unmodified opinion.
D) both a and c

Accepted Answer

An unqualified opinion and a clean opinion are the same thing, and both refer to an opinion where the financial statements are presented fairly in accordance with the applicable accounting framework. An adverse opinion, on the other hand, means the financial statements are not presented fairly, and an unmodified opinion is the term used in auditing standards for an unqualified opinion. Therefore, choices A and C are both correct descriptions for an unqualified opinion.

Question 19

Matt Fuller reports to the board and evaluates how the company can improve risk management practices, internal control procedures, and certain governance issues. Who is
He?
A) President
B) Controller
C) Treasurer
D) Internal Auditor

Accepted Answer

Matt Fuller is an Internal Auditor. The responsibilities of an Internal Auditor typically involve evaluating and improving risk management practices, internal control procedures, and governance issues within a company.

Question 20

Based on the evidence gathered, if an auditor concludes all noted misstatements in the financial statements to be immaterial, individually and collectively, then the auditor would
A) resign from the engagement.
B) emphasize the errors in the audit report.
C) issue an unqualified opinion.
D) issue a qualified opinion.

Accepted Answer

If the auditor concludes that all noted misstatements are immaterial, individually and collectively, it means that the financial statements are fairly presented. Therefore, the auditor can issue an unqualified opinion which indicates that the financial statements are presented fairly in all material respects. Resigning from the engagement or emphasizing the errors in the audit report are not necessary in this case. Issuing a qualified opinion would only be necessary if there were material misstatements that have not been corrected.

Quiz 1: Introduction and Review of Audit and Assurance

Which of the following would be an example of a reasonable assurance engagement?

Jimmy Bunting, the senior auditor at Yanzhou Coal Mining and Minerals, performed the following tasks: he used analytical procedures and he had discussions with management. These activities were a basis for a conclusion on the financial information. What did Jimmy Bunting perform?

Michael Stiller performed work for a client in the real estate business and issued a Notice to Reader. What degree of assurance does a Notice to Reader provide to the user of the Statements?

An example of an unmodified audit opinion is

Agency theory can be described as the theory of

In a review engagement, which of the following is least likely to occur during the engagement?

Insurance hypothesis tells us that

The wording of a limited assurance engagement expresses a conclusion that generally states

Which of the following is incorrect? A government can be considered to be a user of the general purpose financial statements because

Ming Yao reviewed the operations of a basketball academy. His objectives were to determine how effectively the academy delivered its many programs. What kind of an audit Did he perform?

Theodore Heinrich prepared a set of financial statements based on information provided to him. He checked mathematical accuracy of the data, and the client complimented him on The reasonable cost of the work he performed. Theodore performed

According to the agency theory, demand for audit is due to conflicts between

As users of the financial statements, suppliers would least consider which of the following aspects of the financial statements?

Vera Sobczyk spent a week at a client's wholesale operation determining whether the client's remittances to the tax authorities were in accordance with tax regulations. This is an Example of a(n)

Which of the following is not true about Corporate Social Responsibility assurance?

An unqualified opinion is also known as a(n)

Matt Fuller reports to the board and evaluates how the company can improve risk management practices, internal control procedures, and certain governance issues. Who is He?

Based on the evidence gathered, if an auditor concludes all noted misstatements in the financial statements to be immaterial, individually and collectively, then the auditor would