Auditing : A Practical Approach, Canadian Edition Test Bank

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CHAPTER 1
INTRODUCTION AND OVERVIEW OF AUDITING
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
Item LO Item LO Item LO Item LO Item LO Item LO Item LO
True-False Statements
1. 3 4. 2 7. 2 10. 2 13. 8
2. 4 5. 4 8. 3 11. 6
3. 2 6. 2 9. 3 12. 6
Multiple Choice Questions
14. 1 19. 3 24. 6 29. 3 34. 5 39. 6
15. 2 20. 3 25. 1 30. 3 35. 5 40. 6
16. 2 21. 4 26. 2 31. 4 36. 5 41. 6
17. 2 22. 5 27. 2 32. 4 37. 5 42. 8
18. 3 23. 5 28. 3 33. 4 38. 6 43. 8
Short Answer Questions
44. 1,2,3,4
,5
45. 2 46. 3 47. 4 48. 6 49. 8
Essay Questions
50. 2,5

1 – 2 Test Bank for Auditing: a practical approach, Canadian Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
25. MC 44. SA
Learning Objective 2
3. TF 6. TF 10. TF 16. MC 26. MC 44. SA 50. Ca
4. TF 7. TF 15. MC 17. MC 27. MC 45. SA
Learning Objective 3
1. TF 9. TF 19. MC 28. MC 30. MC 46. SA
8. TF 18. MC 20. MC 29. MC 44. SA
Learning Objective 4
2. TF 21. MC 32. MC 44. SA
5. TF 31. MC 33. MC 47. SA
Learning Objective 5
22. MC 34. MC 36. MC 44. SA
23. MC 35. MC 37. MC 50. Ca
Learning Objective 6
11. TF 24. MC 39. MC 41. MC
12. TF 38. MC 40. MC 48. SA
Learning Objective 7
Learning Objective 8
13. TF 42. MC 43. MC 49. SA
Note: TF = True-False SA = Short Answer Es = Essay
MC = Multiple Choice Ca = Case

CHAPTER STUDY OBJECTIVES
1. Define an assurance engagement.
An assurance engagement involves an assurance provider arriving at an opinion
about some information being provided by their client to a third party. A financial
statement audit is one type of assurance engagement. This engagement involves an
auditor arriving at an opinion about the fair presentation of the financial statements.
The audit report is addressed to the shareholders of the company being audited, but
other users may read the financial statements. Learning about auditing and
assurance requires an understanding of auditing and assurance terminology,
including terms such as audit risk, materiality, internal controls, listed entity, and
assertions.
2. Differentiate between types of assurance services.
Assurance services include financial statements audits, compliance audits,
performance audits, comprehensive audits, internal audits, and assurance on
corporate social responsibility (CSR) disclosures.
3. Explain the different levels of assurance.
The different levels of assurance include reasonable assurance, which is the highest
level of assurance, moderate assurance, and no assurance. Reasonable assurance
is provided on an audit of a company’s financial statements. Moderate assurance is
provided on a review of a company’s financial statements that provides negative
assurance. No assurance is provided in a compilation engagement.
4. Outline different audit opinions.
An auditor can issue an unmodified and unqualified opinion, also known as a clean
report, an unqualified opinion with an emphasis of matter opinion, or a modified and
qualified opinion, which is issued when the financial statements contain a material
(significant) misstatement (error or fraud).
5. Differentiate between the roles of the preparer and the auditor, and discuss the
different firms that provide assurance services.
It is the responsibility of a company’s governing body to ensure that their financial
statements are relevant, reliable, comparable, understandable, and true and fair. It is
the responsibility of the auditor to form an opinion on the fair presentation of the
financial statements. In doing so the auditor must maintain professional scepticism
and utilize professional judgement and due care. The firms that provide assurance
services include the Big-4 international firms, the national firms (with international
links), local and regional firms, and consulting firms that tend to specialize in
assurance of CSR and environmental disclosures.

1 – 4 Test Bank for Auditing: a practical approach, Canadian Edition
6. Explain why there is a demand for audit and assurance services.
Financial statement users include investors (shareholders), suppliers, customers,
lenders, employees, governments, and the general public. These groups of users
demand audited financial statements because of their remoteness from the entity,
accounting complexity, their incentives competing with those of the entity’s
managers, and their need for reliable information on which to base decisions. The
theories used to describe the demand for audit and assurance services are agency
theory, the information hypothesis, and the insurance hypothesis.
7. Identify the different regulators, legislation, and regulations surrounding the
assurance process.
Regulators of the assurance process include the Auditing and Assurance Standards
Oversight Council (AASOC), the Auditing and Assurance Standards Board (AASB),
the Canadian Business Corporations Act (CBCA), Canadian Securities
Administrators (CSA) and the various provincial securities commissions, and the
Canadian Public Accountability Board (CPAB). Relevant legislation includes the
Canadian Business Corporations Act (CBCA). The three organizations responsible
for accounting designations in Canada are the Canadian Institute of Chartered
Accountants (CICA), the Certified General Accountants of Canada (CGA-Canada),
and the Society of Management Accountants of Canada (CMA Canada).
8. Describe the audit expectation gap.
The audit expectation gap occurs when there is a difference between the
expectations of assurance providers and financial statement or other users. The gap
occurs when user beliefs do not align with what an auditor has actually done.

TRUE-FALSE STATEMENTS
1. An auditor can provide a reasonable level of assurance on information other than
historical financial information.
2. A negative expression of opinion is only given when there is a disagreement with
management and the auditor.
3. A compliance audit involves gathering evidence to ascertain whether the person or entity
under review has followed the rules, policies, procedures, laws and regulations with which
they must conform
4. An operational audit is an example of a compliance audit.
5. All modified audit reports are qualified audit opinions.
6. The most common types of assurance engagements are financial statement audits,
confirmation audits, performance audits, comprehensive audits and assurance on corporate
social responsibility (CSR) disclosures.
7. The nature of audit procedures refers to the reliance on evidence provided by the client
and its management.
8. A reasonable level of assurance is the highest level of assurance that an auditor can
provide.
9. A no assurance engagement is of little use as no assurance is given to the client.
10. It is the auditor’s responsibility to prepare the financial statements.
11. Only current investors (not potential investors) are considered to be users of the financial
statements.
12. Insurance hypothesis is a means whereby the investor can guarantee the success of
their investment.

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1 – 8 Test Bank for Auditing: a practical approach, Canadian Edition
MULTIPLE CHOICE QUESTIONS
14. Mary Moras was reviewing the previous year’s audited financial statements of a
clothing manufacturer. Her manager explained to her that for a financial statement
audit, the clothing company was the accountable party, its shareholders were the
users, and the subject matter was the financial statements. What kind of audit
engagement was her manager describing?
a. consulting engagement
b. assurance engagement
c. review engagement
d. compliance engagement
15. 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 these
16. 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
17. 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
18. Matt Stairs 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

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d. none of the above
19. 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
20. James Brown, 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 negative form of opinion. What did
James Brown perform?
a. a qualified report
b. an unmodified opinion
c. a compilation
d. a review engagement
21. 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
22. Mary Logan was careful to undertake her audits in a most responsible manner. Her
audit manager complimented her on her diligence and how well she documented her
work at the different stages of the audit process. Which element of responsibility did
she display?
a. due care
b. professional judgment
c. professional scepticism
d. none of these
23. Larry Dibitonto is a partner in his firm and runs management consulting, mergers and
acquisitions, insolvency, tax, and accounting services. How are these services
referred to collectively?
a. audit

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1 – 10 Test Bank for Auditing: a practical approach, Canadian Edition
b. non-assurance services
c. reviews
d. none of the above
24. 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
25. An example of the three parties in an assurance engagement would be:
a. audit client, employee, customer
b. audit client, supplier, auditor
c. auditor, shareholder, general public
d. auditor, general public, employees.
26. A limitation of an audit is caused by:
a. the nature of financial reporting
b. the nature of audit procedures
c. the need for the audit to be conducted within a reasonable period of time
and at a reasonable cost
d. all of the above.
27. 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.
28. 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.
29. The wording of a negative expression of opinion generally states that:

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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.
30. 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.
31. 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.
32. Which of the following is not a type of opinion?
a. qualified opinion
b. modified opinion
c. adverse opinion
d. disclaimer of opinion
33. The following can be said about an emphasis of matter:
a. it is included when the auditor’s opinion has changed and the auditor wants
to bring the users’ attention to a particular matter.
b. it is only used in unqualified audit opinions.
c. it is included when the auditor’s opinion has not changed and the auditor
wants to bring the users’ attention to a particular matter.
d. it can not be used when expressing audit opinion that has pervasive
misstatements.
34. In addition to the preparation of financial statements, it is also the responsibility of
those charged with governance to:
a. identify the financial reporting framework to be used in the preparation and
presentation of their financial statements.
b. establish and maintain internal controls that are effective in preventing and
detecting material misstatements
c. selecting and applying appropriate accounting policies and making
reasonable accounting estimates

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1 – 12 Test Bank for Auditing: a practical approach, Canadian Edition
d. all of the above.
35. Which of the following is not true in relation to comparability:
a. able to identify trends, that may influence their perception of how well the
entity is doing.
b. able to assess performance of the entity over time and with other entities
c. able to evaluate
d. all of the above are correct.
36. Professional scepticism does not involve:
a. the professional requirement that all management representations be
substantiated with supporting documentation.
b. seeking independent evidence to corroborate information provided by their
client
c. being suspicious when evidence contradicts documents held by their client
or enquiries made of client personnel
d. none of the above.
37. The largest accounting firms in Canada are known collectively as the
a. ‘Big-3’
b. ‘Big-4’
c. ‘Big-5’
d. ‘Big-6’
38. 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
39. 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.
40. Agency theory can be described as the theory of:

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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.
41. 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.
42. The expectation gap is caused by:
a. realistic auditor expectations
b. unrealistic user expectations
c. realistic user expectations
d. unrealistic auditor expectations
43. The expectation gap can be reduced by:
a. auditors performing their duties properly
b. enhanced reporting to explain what processes have been followed in arriving
at an audit or a review opinion
c. assurance providers reporting accurately the level of assurance being
provided
d. all of the above.

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SHORT ANSWER QUESTIONS
S-A 44
Indicate whether you agree or disagree with the following statements and explain your
reasoning.
a) Rejean Tremblay feels that an internal auditor that reports to the chief financial officer of
the company can be as independent as an auditor that reports to the audit committee.
b) Angela Pelletier discovered a very material overstatement in the financial statements of
McKenzie Growth. She felt that the misstatement would have an impact on the decisions of
users of the financial statements, and indicated to her audit senior that she would be
including it as an “emphasis of matter” paragraph in the audit report.
c) An auditor is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards, and for such
internal control as is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
d) An assurance engagement involves evaluation or measurement of subject matter against
criteria.
Solution:
a) Disagree. The internal auditor’s independence is protected best when they report to the
highest level of governance, usually the Audit Committee of the Board or to the President of
the company.
b) Disagree. The pervasiveness of the material misstatement will require an adverse opinion.
In this case, the misstatements affect the financial statements materially and will require
disclosures that are vital to a user’s understanding of the financial statements. When
statements are pervasively and materially misstated, an adverse opinion is appropriate.
c) Disagree. The above statement describes management’s responsibilities. An auditor has
the responsibility to express an opinion on financial statements based on an audit.
d) Agree. An assurance engagement is an engagement where a practitioner issues a written
report and concludes on a subject matter for which the accountable party is responsible.
Therefore, a prerequisite for an assurance engagement is the existence of an accountability
relationship, where one party is answerable to another for the subject matter.
S-A 45
The main assurance service the general public are familiar with are financial statement
audits. Briefly describe the other services that an auditor can provide.
Solution:
A compliance audit involves gathering evidence to ascertain whether the person or entity
under review has followed the rules, policies, procedures, laws and regulations with which
they must conform.
Performance audits are concerned with the economy, efficiency and effectiveness of an
organization’s activities.

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