Auditing Multiple-Choice Questions Review
Chapter 1
The parties relevant to an assurance engagement are:
● assurance practitioner, users, responsible party.
Agency theory explains that audits are demanded because conflicts can arise between:
● managers and owners.
The insurance hypothesis means:
● an audit acts as insurance.
Performance audits are useful because:
● they are concerned with the economy, efficiency, and effectiveness of an organization's
activities
The function of internal audit is determined by:
● those charged with governance and management.
Reasonable assurance means:
● the auditor has gathered sufficient and appropriate evidence to form a positive
expression of opinion regarding the financial statements.
An auditor disclaims responsibility when:
● the auditor is unable to obtain sufficient evidence about a potentially material and
pervasive matter.
Those charged with governance have a responsibility to ensure that the information in financial
statements is:
● relevant and reliable
● comparable and understandable
● fairly presented
● ALL OF THE ABOVE
The purpose of the Auditing and Assurance Standards Board is:
● to set high-quality auditing and assurance standards.
The audit expectation gap occurs when:
● user beliefs do not align with what an auditor has actually done.
Chapter 2
Professional behaviour means that members of the professional body must:
● uphold the reputation of the profession
Due care means that members of a profession must:
● act diligently.
Professional independence for auditors:
● is the ability to act with integrity, objectivity, and professional scepticism.
A self-interest threat arises when:
● the auditor owns shares in the client's business.
A self-review threat arises when:
● the auditor performs services for the client that are then assured.
Safeguards to independence:
● minimize the risk that a threat to independence will surface.
● deal with a threat when one becomes apparent.
● are developed by the accounting profession, legislators, regulators, clients, and
accounting firms.
● ALL OF THE ABOVE
Audit committees for listed entities per the CSA:
● should have a formal charter.
Generally, the auditor could be legally liable:
, ● under contract law and under the tort of negligence to the client.
A client engagement letter should include all of the following except:
● the results of previous audits.
If a prospective new audit client does not allow the auditor to contact its existing auditor:
● the auditor should consider refusing to take on the prospective new client.
Chapter 3
When gaining an understanding of the client, the auditor will identify the geographic location of
the client because:
● more spread-out clients are harder to control.
● the auditor will need to visit the various locations to assess processes and procedures
at each site.
● the auditor will plan to use staff from affiliated offices to visit overseas locations.
● ALL OF THE ABOVE
An auditor will perform all of the following to gain an understanding of the entity, except:
● perform detailed testing on key balance sheet accounts.
When gaining an understanding of the client's operations, the auditor:
● will note the number of operations the client has.
● Will consider if the client is geographically dispersed.
● Will note where the client operates
● ALL OF THE ABOVE
When gaining an understanding of the client at the industry level, the auditor:
● will not ignore information about the client's industry.
The CSA's Corporate Governance Guidelines are designed to help companies:
● improve their corporate structure.
● improve performance.
● enhance their accountability to shareholders and other interested third parties.
● ALL OF THE ABOVE
An attitude of professional scepticism means:
● any indicator of fraud is properly investigated.
An example of an opportunity that increases the risk of fraud is:
● there is a high volume of transaction close to year end.
The auditor must consider whether it is appropriate to assume that the client will remain as a
going concern:
● because this means that assets are valued on the basis that they will continue to be
used for the purposes of conducting a business.
When gaining an understanding of the client, the auditor will consider:
● related party identification.
● the appropriateness of the client's system of internal controls to mitigate identified
business risks.
● controls over the technology used to process and store data electronically.
● ALL OF THE ABOVE
Client closing procedures:
● are the responsibility of those charged with governance who must ensure that
transactions are recorded in the correct accounting period.
Chapter 4
Inherent risk is:
, ● the risk the financial statements are materially misstated without any consideration of
controls.
For an audit, the auditor can control:
● detection risk.
A combined audit strategy:
● requires the auditor to conduct extensive control testing.
Testing controls means that:
● the auditor can plan to reduce their reliance on detailed substantive testing of
transactions and account balances.
An example of an item that is material is:
● a theft of $100.
● an undisclosed lawsuit for $1 million.
● an undisclosed related party.
● ALL OF THE ABOVE
An auditor will identify accounts and related assertions at risk of material misstatement:
● in order to plan the audit to focus on those accounts.
Profitability ratios are used to assess performance and:
● companies will be interested in trends in the ratios.
Common uses of analytical procedures include:
● risk identification during the risk assessment phase.
● estimation of account balances during the risk response phase.
● overall assessment of the financial statements at the reporting phase.
● ALL OF THE ABOVE
An auditor is interested in the client's inventory turnover ratio because it helps the auditor
understand:
● if the client is as competitive and has as high a turnover as the industry average.
Analytical procedures:
● must take into account seasonal variation in the client's business.
Chapter 5
The assertion of cut-off:
● reflects that all events have been recorded in the correct accounting period.
The quantity of evidence that an auditor will gather:
● varies with audit risk.
An external confirmation sent to a customer:
● provides evidence for the existence assertion.
When an auditor gathers documentary evidence or physical evidence to support an entry in the
client's records, the auditor is gathering evidence to support the:
● completeness assertion.
When an auditor inspects tangible assets on hand and traces the details to the details recorded
in the client's records, the auditor is gathering evidence to support the:
● completeness assertion.
● existence assertion.
● BOTH
Generally the most persuasive form of evidence is:
● externally generated evidence sent directly to the auditor.
If an expert is engaged to assist with the audit:
● it means the auditor does not have the requisite skill and knowledge to assess the item.
Inspecting documents, such as an invoice for the purchase of fixed assets, provides the auditor
with evidence relevant to the:
Chapter 1
The parties relevant to an assurance engagement are:
● assurance practitioner, users, responsible party.
Agency theory explains that audits are demanded because conflicts can arise between:
● managers and owners.
The insurance hypothesis means:
● an audit acts as insurance.
Performance audits are useful because:
● they are concerned with the economy, efficiency, and effectiveness of an organization's
activities
The function of internal audit is determined by:
● those charged with governance and management.
Reasonable assurance means:
● the auditor has gathered sufficient and appropriate evidence to form a positive
expression of opinion regarding the financial statements.
An auditor disclaims responsibility when:
● the auditor is unable to obtain sufficient evidence about a potentially material and
pervasive matter.
Those charged with governance have a responsibility to ensure that the information in financial
statements is:
● relevant and reliable
● comparable and understandable
● fairly presented
● ALL OF THE ABOVE
The purpose of the Auditing and Assurance Standards Board is:
● to set high-quality auditing and assurance standards.
The audit expectation gap occurs when:
● user beliefs do not align with what an auditor has actually done.
Chapter 2
Professional behaviour means that members of the professional body must:
● uphold the reputation of the profession
Due care means that members of a profession must:
● act diligently.
Professional independence for auditors:
● is the ability to act with integrity, objectivity, and professional scepticism.
A self-interest threat arises when:
● the auditor owns shares in the client's business.
A self-review threat arises when:
● the auditor performs services for the client that are then assured.
Safeguards to independence:
● minimize the risk that a threat to independence will surface.
● deal with a threat when one becomes apparent.
● are developed by the accounting profession, legislators, regulators, clients, and
accounting firms.
● ALL OF THE ABOVE
Audit committees for listed entities per the CSA:
● should have a formal charter.
Generally, the auditor could be legally liable:
, ● under contract law and under the tort of negligence to the client.
A client engagement letter should include all of the following except:
● the results of previous audits.
If a prospective new audit client does not allow the auditor to contact its existing auditor:
● the auditor should consider refusing to take on the prospective new client.
Chapter 3
When gaining an understanding of the client, the auditor will identify the geographic location of
the client because:
● more spread-out clients are harder to control.
● the auditor will need to visit the various locations to assess processes and procedures
at each site.
● the auditor will plan to use staff from affiliated offices to visit overseas locations.
● ALL OF THE ABOVE
An auditor will perform all of the following to gain an understanding of the entity, except:
● perform detailed testing on key balance sheet accounts.
When gaining an understanding of the client's operations, the auditor:
● will note the number of operations the client has.
● Will consider if the client is geographically dispersed.
● Will note where the client operates
● ALL OF THE ABOVE
When gaining an understanding of the client at the industry level, the auditor:
● will not ignore information about the client's industry.
The CSA's Corporate Governance Guidelines are designed to help companies:
● improve their corporate structure.
● improve performance.
● enhance their accountability to shareholders and other interested third parties.
● ALL OF THE ABOVE
An attitude of professional scepticism means:
● any indicator of fraud is properly investigated.
An example of an opportunity that increases the risk of fraud is:
● there is a high volume of transaction close to year end.
The auditor must consider whether it is appropriate to assume that the client will remain as a
going concern:
● because this means that assets are valued on the basis that they will continue to be
used for the purposes of conducting a business.
When gaining an understanding of the client, the auditor will consider:
● related party identification.
● the appropriateness of the client's system of internal controls to mitigate identified
business risks.
● controls over the technology used to process and store data electronically.
● ALL OF THE ABOVE
Client closing procedures:
● are the responsibility of those charged with governance who must ensure that
transactions are recorded in the correct accounting period.
Chapter 4
Inherent risk is:
, ● the risk the financial statements are materially misstated without any consideration of
controls.
For an audit, the auditor can control:
● detection risk.
A combined audit strategy:
● requires the auditor to conduct extensive control testing.
Testing controls means that:
● the auditor can plan to reduce their reliance on detailed substantive testing of
transactions and account balances.
An example of an item that is material is:
● a theft of $100.
● an undisclosed lawsuit for $1 million.
● an undisclosed related party.
● ALL OF THE ABOVE
An auditor will identify accounts and related assertions at risk of material misstatement:
● in order to plan the audit to focus on those accounts.
Profitability ratios are used to assess performance and:
● companies will be interested in trends in the ratios.
Common uses of analytical procedures include:
● risk identification during the risk assessment phase.
● estimation of account balances during the risk response phase.
● overall assessment of the financial statements at the reporting phase.
● ALL OF THE ABOVE
An auditor is interested in the client's inventory turnover ratio because it helps the auditor
understand:
● if the client is as competitive and has as high a turnover as the industry average.
Analytical procedures:
● must take into account seasonal variation in the client's business.
Chapter 5
The assertion of cut-off:
● reflects that all events have been recorded in the correct accounting period.
The quantity of evidence that an auditor will gather:
● varies with audit risk.
An external confirmation sent to a customer:
● provides evidence for the existence assertion.
When an auditor gathers documentary evidence or physical evidence to support an entry in the
client's records, the auditor is gathering evidence to support the:
● completeness assertion.
When an auditor inspects tangible assets on hand and traces the details to the details recorded
in the client's records, the auditor is gathering evidence to support the:
● completeness assertion.
● existence assertion.
● BOTH
Generally the most persuasive form of evidence is:
● externally generated evidence sent directly to the auditor.
If an expert is engaged to assist with the audit:
● it means the auditor does not have the requisite skill and knowledge to assess the item.
Inspecting documents, such as an invoice for the purchase of fixed assets, provides the auditor
with evidence relevant to the:
