Question 1

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 2

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 and can significantly impact the client's risk profile. Therefore, understanding these factors is critical in developing an accurate risk profile.

Question 3

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 4

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 5

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 6

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 may feel pressure to manipulate financial results if they are incentivized based on financial performance, such as meeting sales targets or revenue goals. In this case, the lower than expected customer demand may create pressure for management to find ways to boost sales or revenue in order to meet their targets. The other answer choices do not relate to management incentives or pressures.

Question 7

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 used to identify possible misstatements in the financial statements. This procedure can help the auditor identify significant variances that may indicate errors or fraud, and allow them to investigate further to determine the cause of the fluctuations.

Question 8

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

The low days to collect accounts receivable ratio compared to industry averages suggests an increased risk of misstatement in accounts receivable. This could potentially be caused by improper valuation, improper classification, or poor collection practices. However, it does not necessarily indicate that the accounts receivable balance is wrong or that the integrity of management is questionable. Additionally, it does not necessarily mean that internal controls for accounts receivable are unreliable for audit purposes, as this would need to be evaluated separately.

Question 9

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 presence of severe non-performance clauses in contracts indicates a higher likelihood of material misstatements in sales and penalties. Therefore, the inherent risk should be set as high.

Question 10

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 fraud triangle consists of three elements: incentives or pressures, opportunities, and attitudes or rationalizations. Choice A is incorrect because while the desire to meet debt repayment obligations may be a pressure or incentive, it is not one of the three sides of the fraud triangle. Choice C is incorrect because maintaining stock prices may be a pressure or incentive, but it is also not one of the three sides of the fraud triangle. Choice D is incorrect because it combines two pressures or incentives rather than identifying the other element of the fraud triangle.

Question 11

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 12

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 13

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. This certification helps to ensure that financial statements are accurate and reliable.

Question 14

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 may also be a factor, but it is not specified in the question if these estimates are being manipulated for fraudulent purposes. Management's practice of making overly achievable forecasts may create pressure to meet unrealistic expectations, but it is not inherently a factor related to fraudulent financial reporting. High turnover of accounting, internal audit, and information technology staff can increase the risk of fraud, but it is not directly related to incentives or pressures.

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 help identify possible misstatements in the financial statements, such as errors or fraud. The auditor can look for unusual fluctuations or inconsistencies from the prior year, which may indicate errors or intentional misstatements.

Question 16

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

Steve taking a private tour with the owner will help him understand the client's business and operations better, which will ultimately help him in conducting a more effective audit. However, he needs to ensure that his independence is not compromised by the tour.

Question 17

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

Observation during the plant tour will allow the auditor to physically see the new manufacturing equipment and the wireless scanning system in use, providing direct evidence to corroborate management's statements. Further inquiry of the accounting personnel could provide additional information, but it may not provide as strong of evidence as direct observation. Inspection of recent sales invoices using analytical procedures may not provide any relevant information regarding the company's new line of business and investment in manufacturing equipment.

Question 18

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 19

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 20

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

Calculating key ratios for the client's business and comparing them with industry averages helps the auditor understand the client's industry and business. This information can be used to assess the client's business risk and plan the audit accordingly. It also helps to identify areas where the client may be underperforming or outperforming compared to industry averages, which may warrant further investigation. However, it does not directly assess going concern or indicate possible misstatements, and it is not intended to reduce detailed tests.

Quiz 6: Client Acceptance and Planning the Audit

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

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 "attitudes or rationalization" to commit fraudulent financial reporting?

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?

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 the gross margin with prior years and looking for large fluctuations?

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

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

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?

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

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

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?

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?

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?