Question 1

Juniper Berry is a private company in the Niagara region that operates in the fruit and vegetable industry. In its main St. Catharines plant, it receives picked berries and sorts and packages them. It also makes some related products such as jams, cookies, and pies. Your firm has recently been hired as the auditor of Juniper Berry. The partner in charge of the audit has asked you to write a memo explaining why it is important to gain understanding of the business operations and processes of Juniper Berry and also to list some suggested procedures to be performed in the process of understanding the business operations and processes.
To assist you with your memo, the partner provided you with some notes she took at a recent meeting with the management of Juniper Berry:
- Juniper Berry (JB) sells and manufactures a wide range of products, including fresh and frozen berries, jam, cookies, and pies. Fresh and frozen berries make up most of JB's revenues.
- JB sells mostly to grocery stores directly. However, its frozen berries are packaged with the Mondo Grocers logo as they have an exclusive contract to sell all of their frozen berry production to Mondo.
- In 2011, JB installed a new scale system to weigh berries when they are delivered from various farms. The amount to be paid to the farmer is then calculated and recorded immediately. The system automatically records the inventory and issues an electronic payment for the amount calculated by the scale. JB is proud to be technologically advanced, as it has allowed the company to cut some jobs and be more cost efficient.
- Given that most of the packaging and processing of berries into derived products is automated, capital assets represent a significant portion of the balance sheet and also required JB to obtain a large bank loan in 2011 when the plant upgrade took place.

Accepted Answer

The answer of Juniper Berry is a private company in...

Question 2

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing the gross margin with prior years and looking for large fluctuations?
A) to understand the client's industry and business
B) to assess going concern
C) to identify possible misstatements
D) to reduce detailed tests

Accepted Answer

Comparing the gross margin with prior years and looking for large fluctuations is done to identify possible misstatements. This analytical procedure helps the auditor to identify unusual fluctuations in revenue or cost of goods sold, which may indicate errors or fraud. By doing so, the auditor can better plan their audit procedures and allocate resources accordingly.

Question 3

Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "opportunities" risk factor?
A) The company has lost a major account and income is falling.
B) Two major competitors have gone bankrupt as margins decline in the industry.
C) The Chief Executive Officer owns forty percent of the outstanding share capital.
D) New accounting standards provide three different methods for valuing financial instruments.

Accepted Answer

Opportunities for fraud increase when there are complex or new accounting standards that can be manipulated. Choice D, which mentions new accounting standards providing different methods for valuing financial instruments, represents an opportunity for management to manipulate financial results, thus increasing the risk of fraud.

Question 4

Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are
A) opportunities and a desire to meet debt repayment obligations.
B) opportunities and attitudes or rationalizations.
C) attitudes or rationalizations and the need to maintain stock prices.
D) the need to maintain stock prices and the need to meet debt repayment obligations.

Accepted Answer

The other two sides of the fraud triangle are opportunities and attitudes or rationalizations. Incentives or pressures refer to the motivation that can drive an individual to commit fraud, while opportunities refer to the chance an individual has to carry out the fraudulent act. Attitudes or rationalizations involve justifying the fraudulent behavior to oneself, such as believing that the organization owes them or that they are not truly harming anyone.

Question 5

During discussion and inquiry with management, the auditor determined that the company has started a new line of business that requires a substantial investment in manufacturing equipment. The company has also implemented wireless scanning for its warehouse and inventory. Which of the following techniques will the auditor likely use to corroborate these statements?
A) further inquiry of the accounting personnel
B) inspection of recent sales invoices for types of sales
C) use of analytical procedures, comparing last year to this year
D) observation during the plant tour

Accepted Answer

The best technique to corroborate the management's statement about the new line of business and investment in manufacturing equipment as well as implementation of wireless scanning is observation during the plant tour. By physically observing the manufacturing equipment and wireless scanning devices in the warehouse during the plant tour, the auditor can gather evidence to confirm management's statements. Other techniques such as further inquiry and inspection of sales invoices may not provide sufficient evidence to corroborate these specific statements. Analytical procedures may be useful in identifying unusual activity or trends in financial statements but would not provide direct evidence of the new line of business or investments made.

Question 6

Frontenac Construction, your audit client, is a construction company. In the initial planning phase of the audit, you identified that it has many contracts with severe non-performance clauses if any of the current constructions are not completed on the dates set in the contracts over the next three years. As the auditor, you would set the inherent risk for sales and penalties as
A) high.
B) moderate.
C) low.
D) unknown: this cannot be determined until more procedures are performed.

Accepted Answer

The severe non-performance clauses in the contracts indicate a high inherent risk for sales and penalties. This means that there is a high likelihood that the company may not meet the deadlines set in the contracts and face significant penalties. Therefore, the inherent risk for sales and penalties should be set as high.

Question 7

Anna performed a trend analysis of accounts receivable (AR) balances and computed the days to collect AR ratio. When she compared the results of her analysis with industry averages, she found the results were unusually low compared to the industry norm. Anna can conclude that
A) the accounts receivable balance is wrong.
B) the accounts receivable has an increased risk of misstatement.
C) the integrity of the company's management is questionable.
D) she will not be able to rely on internal controls for accounts receivable for audit purposes.

Accepted Answer

Anna's finding that the days to collect AR ratio is unusually low compared to industry norms suggests that there may be a higher risk of misstatement in the accounts receivable balance. This does not necessarily mean that the balance is incorrect or that the company's management is questionable, but it does indicate that there may be weaknesses in the internal controls related to accounts receivable. Therefore, Anna will need to further investigate the accounts receivable balance and related internal controls during the audit.

Question 8

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of calculating key ratios for the client's business and comparing them with industry averages?
A) to understand the client's industry and business
B) to assess going concern
C) to indicate possible misstatements
D) to reduce detailed tests

Accepted Answer

The purpose of calculating key ratios for the client's business and comparing them with industry averages is to understand the client's industry and business. This helps the auditor gain a better understanding of the client's financial position and performance compared to its peers in the same industry.

Question 9

A) One step in the planning phase of an audit is to obtain information about the client's legal obligations. Identify the types of legal documents and records that auditors examine to obtain this information.
B) Discuss the audit-relevant information contained in each of these three types of documents that an auditor should be aware of early in the audit.

Accepted Answer

The answer of A) One step in the planning phase...

Question 10

The Sarbanes-Oxley Act requires management to certify that it has informed the auditor and audit committee of any
A) related party transactions.
B) significant deficiencies in business practices.
C) significant deficiencies in internal controls.
D) specific business or industry risk.

Accepted Answer

The Sarbanes-Oxley Act requires management to certify that it has informed the auditor and audit committee of any significant deficiencies in internal controls. While related party transactions and business risks are important to disclose, the act specifically requires disclosure of internal control deficiencies to ensure accurate and reliable financial reporting.

Question 11

White Top Telephones is the largest telephone distributor in the province, distributing wired and cordless phones as well as cell phones. Management always seems to be in a rush and is difficult to approach. Unfortunately, this attitude has permeated down to all of the staff. Everyone seems to be hurrying about, doing what needs to be done. Sometimes it seems as if they don't even have time for their customers. Yet, everything seems to get done. The company's website has a lengthy privacy policy statement indicating that customers are number one and that all data is kept secure.
Required:
Explain the importance of the control environment and corporate governance structure. During what phases of the risk assessment and planning process would the control environment and corporate governance structure be documented and assessed?

Accepted Answer

The answer of White Top Telephones is the largest telephone...

Question 12

Mario, the owner of Clayton's ice cream, is giving Steve, the manager of the audit, a private tour of the production facilities. By doing the tour, Steve will
A) be better able to identify control risks.
B) understand the client's business and operations better.
C) be able to gather audit evidence on operational efficiencies.
D) Steve should not be taking a tour alone with the owner as this could compromise his independence.

Accepted Answer

By taking a private tour of the production facilities, Steve will be able to understand the client's business and operations better. This will help him to plan the audit, identify potential risks and challenges, and develop effective audit procedures to gather sufficient and appropriate audit evidence. However, it is important to note that Steve should maintain his independence as an auditor and not compromise his objectivity or integrity.

Question 13

Organizations with a good control environment are able to document their positive "tone at the top" with a clear code of ethics. How would the auditor include the presence of such a code of ethics in the risk assessment process?
A) increase inherent risks associated with violations of laws and regulations
B) lower inherent risks associated with violations of laws and regulations
C) increase control risks associated with violations of laws and regulations
D) lower control risks associated with violations of laws and regulations

Accepted Answer

The answer of Organizations with a good control environment are...

Question 14

Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "incentives or pressures" risk factor?
A) Customer demand for a new product line was significantly less than expected.
B) Management and the auditors disagree on how to value a large contract in progress.
C) There is only one board member who understands financial statements and she has suffered a heart attack.
D) There has been significant turnover in the accounting department in the last year.

Accepted Answer

Management "incentives or pressures" risk factors refer to situations where the management has a strong incentive or pressure to manipulate financial statements or commit fraud. In this case, the customer demand for a new product line being significantly less than expected can create pressure on management to inflate financial results to meet expectations or bonuses. The other options are not related to management incentives or pressures for fraud.

Question 15

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing prepaid expenses and related expense accounts with those of prior years?
A) to understand the client's industry and business
B) to assess going concern
C) to identify possible misstatements
D) to reduce tests of controls

Accepted Answer

Comparing prepaid expenses and related expense accounts with those of prior years can identify possible misstatements, such as understated or overstated expenses. This can help the auditor determine the risk of material misstatement and plan appropriate audit procedures.

Question 16

During the course of an audit engagement an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to
A) aid the auditor in adequately planning the work.
B) provide a point of reference for future audit engagements.
C) support the underlying concepts included in the preparation of the basic financial statements.
D) support the auditor's report.

Accepted Answer

The answer of During the course of an audit engagement...

Question 17

Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt covenant requirements
C) management's practice of making overly achievable forecasts
D) high turnover of accounting, internal audit, and information technology staff

Accepted Answer

Excessive pressure for management to meet debt covenant requirements can create incentives or pressures to commit fraudulent financial reporting. Significant accounting estimates involving subjective judgments and management's practice of making overly achievable forecasts can also contribute to fraud, but they do not necessarily involve external pressures or incentives. High turnover of accounting, internal audit, and information technology staff can increase the risk of fraud but is not necessarily tied to incentives or pressures.

Question 18

Which of the following is a factor that relates to "attitudes or rationalization" to commit fraudulent financial reporting?
A) significant accounting estimates involving subjective judgments
B) excessive pressure for management to meet debt repayment requirements
C) management's practice of making overly aggressive forecasts
D) high turnover of accounting, internal audit, and information technology staff

Accepted Answer

The answer of Which of the following is a factor...

Question 19

In order to assess if a company is a going concern, the auditor can calculate which of the following ratios during the audit planning and compare with previous years and successful companies in the industry?
A) debt to equity ratio
B) accounts receivable turnover ratio
C) percent of interest expense to sales
D) inventory turnover ratio

Accepted Answer

The answer of In order to assess if a company...

Question 20

It is important that the policies, procedures, and key decisions of senior management, the board of directors, and the audit committee be considered when developing a client risk profile because
A) they have a pervasive effect on the company.
B) they influence the most important decisions for the company.
C) it is required by accounting and auditing standards.
D) they have the effect of increasing client business risks.

Accepted Answer

The policies, procedures, and key decisions of senior management, the board of directors, and the audit committee have a pervasive effect on the company, including its risk profile. Therefore, they must be considered in developing a client risk profile.

Quiz 6: Client Acceptance and Planning the Audit

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing the gross margin with prior years and looking for large fluctuations?

Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "opportunities" risk factor?

Three conditions for fraud are referred to as the "fraud triangle." One of the sides of this triangle is incentives or pressures. The other two sides are

Anna performed a trend analysis of accounts receivable (AR) balances and computed the days to collect AR ratio. When she compared the results of her analysis with industry averages, she found the results were unusually low compared to the industry norm. Anna can conclude that

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of calculating key ratios for the client's business and comparing them with industry averages?

The Sarbanes-Oxley Act requires management to certify that it has informed the auditor and audit committee of any

Mario, the owner of Clayton's ice cream, is giving Steve, the manager of the audit, a private tour of the production facilities. By doing the tour, Steve will

Organizations with a good control environment are able to document their positive "tone at the top" with a clear code of ethics. How would the auditor include the presence of such a code of ethics in the risk assessment process?

Fraud risk factors are examples of factors that increase the risk of fraud. Which of the following is an example of a management "incentives or pressures" risk factor?

There are many types of analytical procedures that the auditor can conduct during the planning stage of the financial statement audit. What is the purpose of comparing prepaid expenses and related expense accounts with those of prior years?

During the course of an audit engagement an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to

Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?

Which of the following is a factor that relates to "attitudes or rationalization" to commit fraudulent financial reporting?

In order to assess if a company is a going concern, the auditor can calculate which of the following ratios during the audit planning and compare with previous years and successful companies in the industry?

It is important that the policies, procedures, and key decisions of senior management, the board of directors, and the audit committee be considered when developing a client risk profile because