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, Chapter: 12 -Problem: 6 >> Explain lapping. Describe appropriate audit procedures to perform where it is suspected.
Answer Preview: Lapping is an irregularity that results in the deliberate misappropriation of cash receipts, either …

, Chapter: 6 -Problem: 16 >> BBB auditors have been the auditor on the Wild Ride Theme Park for the past two years. They have completed both the financial audit and the audit for the Department of Sport and Leisure, stating that the business has adhered to the Theme Park Regulations. Wild Ride Theme Park has requested that BBB undertake both the financial statement audit and the compliance audit engagement for the current yea
Answer Preview: The junior auditors suggestion is not appropriate because the auditor needs to have sufficient appro…

, Chapter: 6 -Problem: 6 >> Patrizia Montani is considering the sample size needed for a selection of sales invoices relating to the test of internal controls of the Caistor Company. She is determining the acceptable risk and deviation rates, and is considering two possible scenarios as shown in table 6.7.  Required In which of the two cases should Patrizia select a larger sample size?
Answer Preview: The approach that should be taken is to project the misstatement (i e., calcula…

, Chapter: 4 -Problem: 18 >> Fellowes and Associates is a successful mid-tier accounting firm with a large range of clients across Canada. During the 2016 financial year, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: Shady Oaks Centre, a private treatment facility Gardens Nursing Home Ltd., a private nursing home Total Laser Care Limited (TLCL
Answer Preview: Staff feedback comments suggest the following issues with the new IT system: Not using a unique iden…

, Chapter: 7 -Problem: 16 >> Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2016, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: Shady Oaks Centre, a private treatment center Gardens Nursing Home Ltd., a private nursing home Total Lase
Answer Preview: The sales bonus system would impact on the control environment at HCHG because it increases the focu…

, Chapter: 7 -Problem: 11 >> Soak City Waterpark Ltd. is a family-owned business just outside of Winnipeg. The waterpark is only open for business from May to September. During the winter months, the waterpark undergoes repairs and maintenance upgrades. The capital assets for Soak City are signifi cant and the Waterpark recently completed an expansion project, where additional fencing, a restaurant, and a point-of-sale system
Answer Preview: (a) List the control strengths: the cash tills are kept in a vault compare cash sales to the amount deposited per the bank statement compare the admis…

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, Chapter: 5 -Problem: 6 >> Generally the most persuasive form of evidence is: (a) Internally generated evidence. (b) Externally generated evidence held by the client. (c) Externally generated evidence sent directly to the auditor. (d) None of the above; they are equally persuasive.
Answer Preview: (c) External…

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, Chapter: 5 -Problem: 10 >> The working papers for a client contain both a permanent and a current file. The difference between the two files is that: (a) The permanent file is kept by the audit partner in charge and cannot be altered after the first audit engagement is completed, but the current file can be updated. (b) The permanent file is provided to the client and the current file is not. (c) The permanent file includes
Answer Preview: (c) The permanent file includes documents tha…

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, Chapter: 4 -Problem: 12 >> Niagara Dairy is a boutique cheese maker based in the Niagara region of Ontario. Over the years, the business has grown by supplying local retailers and, eventually, by exporting cheese products. In addition, there is a “farm-gate” shop and café located next to the main processing plant in Niagara-on-the-Lake, which serves tourists who also visit other specialist food and wine businesses in the re
Answer Preview: (a) Factors affecting preliminary assessment of inherent risk include: Cheese is perishable, suggesting high risk of spoilage, affecting inventory val…

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, Chapter: 7 -Problem: 5 >> Auditors are interested in an entity’s information systems: (a) Because they consist of procedures and records to deal with transactions and maintain accountability for related assets, liabilities, and equity. (b) Because their quality affects management’s ability to make appropriate decisions and prepare reliable financial statements. (c) Even if they are purely manual systems. (d) All of the abo
Answer Preview: (d) …

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, Chapter: 7 -Problem: 4 >> An entity’s risk assessment process: (a) Is the entity’s process for identifying and responding to business risks and the results thereof. (b) Is established only if the entity is subject to unusually high risk. (c) Is designed to help an entity think about risk in the same way that an auditor thinks about risk. (d) Never allows management of an entity to decide to accept a risk without taking any
Answer Preview: (a) Is the entitys p…

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, Chapter: 7 -Problem: 1 >> Answer the following questions based on the information presented for Cloud 9 in Appendix B to this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Sharon Gallagher and Josh Thomas have assessed the internal controls at Cloud 9 as being effective at an entity level. This means that, at a high level, the company de
Answer Preview: (a) NARRATIVE Cloud 9 wholesale sales to cash receipts: A sales transaction begins with the receipt of the customer purchase order via the inventory management system, Swift. Swift is a custom-made so…

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, Chapter: 9 -Problem: 4 >> We can conclude that analytical procedures provide persuasive evidence: (a) Always. (b) Never. (c) If they do not provide sufficient evidence by themselves to allow us to conclude that the account is free of material errors. (d) If we are able to conclude that no further substantive tests need to be performed on the related account balance.
Answer Preview: (d) If we are able to c…

, Chapter: 4 -Problem: 8 >> For an audit, the auditor can control: (a) Inherent risk. (b) Control risk. (c) Financial risk. (d) Detection risk.
Answer Preview: (d)…

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, Chapter: 6 -Problem: 1 >> A detailed audit plan: (a) is based on the overall audit strategy. (b) contains a description of the control testing procedures. (c) lists the audit procedures to be used in substantive testing. (d) all of the above.
Answer Preview: (d) …

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, Chapter: 6 -Problem: 2 >> When testing controls the auditor: (a) Is interested in assessing the effectiveness of controls. (b) Gathers evidence about the balances of the main accounts. (c) Does not have to have any prior knowledge of the client’s inherent risks and how the controls address those risks. (d) All of the above.
Answer Preview: (a) Is inter…

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, Chapter: 8 -Problem: 16 >> ABC is a company that purchases ski equipment from a European manufacturer and then sells the equipment to stores in eastern Canada. The company’s records include pre-numbered shipping and purchasing invoices, a sales journal, a purchases journal, and sub-ledgers for both payables and receivables. All customers have a predetermined credit limit that is noted in their fi les. If a customer’s order
Answer Preview: (a) Controls over Payables Possible Test of Control The company uses sequential documents Select a s…

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, Chapter: 7 -Problem: 1 >> Internal control is a process: (a) Designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to the reliability of financial reporting, effectiveness, and efficiency of operations, and compliance with applicable laws and regulations. (b) That is the responsibility of those charged with governance. (c) That is designed and implemented to address identifie
Answer Preview: (d) …

, Chapter: 3 -Problem: 2 >> When gaining an understanding of the client’s sources of financing, the auditor: (a) Is not interested in debt covenants because all debt contracts are the same. (b) Will assess if the client is meeting interest payments when they are due. (c) Will ignore the relative reliance on debt versus equity funding because that is a management decision, not an audit issue. (d) None of the above.
Answer Preview: (b) Will assess …

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, Chapter: 13 -Problem: 17 >> For each of the following situations, indicate what type of modification/audit report is most appropriate.a. There is a scope limitation and it is material. However, the overall financial statements are still presented fairly.b. There is a departure from GAAP and it is pervasively material.c. The auditor lacks independence in fact, but not necessarily in appearance.d. The uncorrected misstatement
Answer Preview: The type of modification/audit report that would be most appropriate in each situat…

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, Chapter: 8 -Problem: 3 >> What factors influence how much and when substantive tests may be performed?
Answer Preview: The nature, timing, and extent of audit procedures is determined in response to the risk assessment …

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, Chapter: 6 -Problem: 9 >> The results of substantive testing of sales invoices at City Electronics are shown in table 6.8. The three strata correspond to different departments and the overall tolerable error is set at $40,000.  Required (a) Project the errors for each stratum and calculate the total projected error. Is the projected error material? What difference would it make if the tolerable error was set at $30,000? Ex
Answer Preview: (a) Completed table of projected errors: Stratum (1) Error found (2) Sample total value …

, Chapter: 6 -Problem: 6 >> If preliminary testing of controls reveals that the rate of deviation in controls is above the expected rate, the auditor will:(a) Reduce detection risk and increase reliance on detailed substantive testing at year end.(b) Increase detection risk and increase reliance on detailed substantive testing at year end.(c) Reduce detection risk and decrease reliance on detailed substantive testing at year
Answer Preview: (a) Reduce detecti…

, Chapter: 9 -Problem: 13 >> Your firm is the external auditor of Southwood Trading Ltd. and you are auditing the fi nancial statements for the year ended June 30, 2020. Southwood Trading has sales of $25 million and the accounts receivable at June 30, 2020, were $5.2 million.The engagement partner has asked you to consider the relative reliability of evidence from third parties and certain matters relating to an accounts re
Answer Preview: a) (i) Accounts receivable confirmations Customers are independent third parties and, providing there are suitable controls over the preparation and mailing of the confirmation requests and the replie…

, Chapter: 12 -Problem: 2 >> Explain why the balance of cash on hand and at bank is always audited, and why a substantive approach is preferred.
Answer Preview: For many entities, cash balances represent only a very small proportion of assets. However, the amou…

, Chapter: 7 -Problem: 20 >> Lise Couture is documenting the purchasing and cash payments processes at Hardies Wholesaling. Hardies Wholesaling imports garden and landscaping items, such as pots, furniture, fountains, mirrors, and sculpture, from suppliers in Southeast Asia. All items are nonperishable; are made from materials such as stone, concrete, metal, and wood; and are distributed to retailers throughout the country. P
Answer Preview: (a) (b) As indicated on the flowchart, the stores which create the requisition and receive the goods …

, Chapter: 10 -Problem: 9 >> You are the auditor of Sofasellers Ltd., which buys furniture from manufacturers for sale to the public. You have been asked to audit certain aspects of the computerized purchasing and accounts payable system.The company has a head office, a warehouse, and many stores throughout the country. Furniture from manufacturers may be delivered to the warehouse or directly to individual stores. Details o
Answer Preview: a) General There should be segregation of duties between the user, buying, goods received and accounts departments. Employees should have computer passwords identifying their separate level of authori…

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, Chapter: 8 -Problem: 17 >> Jintian Clothing Ltd. manufactures sportswear and sells it to large department stores in western Canada. The company records sales in a sales journal. When a customer orders merchandise, a sales clerk prepares a sales invoice. The credit manager must approve all sales to new customers, and a record is kept of all approved customers with their credit limit, as established by the credit manager. The
Answer Preview: Control Test of Control The credit manager must approve all sales to new customers …

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, Chapter: 9 -Problem: 15 >> James Bach is a CPA student working on the confirmations working paper from one of his clients, Dunstan Electric Co. He has so far summarized the results of his testing as shown in figure 9.6. Required Help James complete the working paper.a. Calculate any differences between the general ledger balance and the confirmed balance.b. For any balance calculated in part (a), determine what would be con
Answer Preview: Dunstan Accounts receivable confirmation Conf. no Customer 1 Applied Devices 2 Barry Manufacturing 3 …

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, Chapter: 6 -Problem: 17 >> MICA is a regional credit union with 10 branches across the province. MICA leases its premises and buys furniture, such as waiting-area chairs and back-office desks, through a central asset purchasing department. All computer assets are acquired on finance leases. The furniture in the waiting area has a life of four years and repairs are common because of constant use. Back-office furniture items
Answer Preview: Substantive testing of the furniture at MICA would include: Inspection of documents relating to purc…

, Chapter: 9 -Problem: 10 >> CAS 530 Audit Sampling distinguishes between sampling and other selective testing procedures. Explain the application of the requirements of this standard to the selection of accounts receivable confirmations. Accounts Receivable Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money o
Answer Preview: The underlying issue for the auditor is the assessed lev…

, Chapter: 13 -Problem: 13 >> Analyze the events surrounding the sale of FH’s land and buildings. Is it a subsequent event? If so, which type? Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year end, December 31, 2020. FH’s financial statements for the year ended December 31, 2020, show land an
Answer Preview: The sale of the land and buildings is a subsequent event it occurred in the month following the end …

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, Chapter: 9 -Problem: 1 >> Designing substantive procedures responds to: (a) The risk of material misstatement at the entity level. (b) The risk of material misstatement at the assertion level. (c) The risk of all types of misstatements at the assertion level. (d) The risk of all types of misstatements at the entity level.
Answer Preview: (b) The risk …

, Chapter: 11 -Problem: 3 >> You are the auditor of Fenton Electronics Ltd., which has recently installed a computerized bar code system to record goods received, sales, and inventory quantities. The company is a retailer of electrical products.1. When the goods are received, the receiving department:• Either reads the bar code on the box containing the product or inputs the bar code number manually;• Minputs the number of it
Answer Preview: a) The bar code should contain a check digit to guard against the risk the code may be incorrectly read by the scanner or incorrectly entered if done manually. The computer should match the product co…

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, Chapter: 6 -Problem: 5 >> Give an example of substantive testing where stratification would be appropriate.
Answer Preview: Stratification occurs when the auditor divides the population into …

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, Chapter: 12 -Problem: 11 >> You are performing the audit of Toledo Ltd. for the financial year ended December 31, 2020. Under the terms of a major loan contract, Toledo is required to maintain certain financial ratios. If the ratios are breached, then the loan is immediately due for repayment. This would create significant cash flow problems. To comply with the loan covenant and maintain the ratios, Toledo must continue to h
Answer Preview: a) CAS 580 Written Representations, requires the auditor to obtain certain representations from mana…

, Chapter: 7 -Problem: 17 >> Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the financial year 2016, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: Shady Oaks Centre, a private treatment centre Gardens Nursing Home Ltd., a private nursing home Total Lase
Answer Preview: The internal audit department was required to make sure the conversion worked without any problems. …

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, Chapter: 9 -Problem: 3 >> Why is the auditor likely to adopt a combined audit approach to accounts receivable wherever practicable? Why are substantive procedures more likely to be based on the accounts receivable balance than on sales, cash receipts, and sales adjustment transactions? Accounts Receivable Accounts receivables are debts owed to your company, usually from sales on credit. Accounts
Answer Preview: The principal inherent risk is that of overstatement of sales revenue and a…

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, Chapter: 8 -Problem: 3 >> Which is not a type of control? (a) Automated controls. (b) Substantive controls. (c) Manual controls. (d) IT-dependent manual controls.
Answer Preview: (b) S…

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, Chapter: 11 -Problem: 1 >> For each of the following statements, identify the audit assertion that it relates to:a. Inventories are recorded at the lower of cost and net realizable value.b. There is no inventory on consignment.c. All asset additions during the year have been recorded.d. All inventory purchases are recorded in the correct period.e. All equipment is in use at the end of the year.f. Inventories include all mat
Answer Preview: a) Inventories are recorded at the lower of cost and …

, Chapter: 3 -Problem: 5 >> a. Identify and explain any significant fraud risk factors for Featherbed.b. For each fraud risk factor you identify, explain how the risk will affect your approach to the audit of Featherbed. Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a fam
Answer Preview: a) Fraud risk factors: Justin and Sarah Morris have effective control, but not 100% ownership of the business. This creates a risk that related party …

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, Chapter: 8 -Problem: 3 >> Within the client’s IT system, supplier information is contained in a supplier master file (SMF). Each supplier has a unique supplier code. If the purchasing clerk attempts to place an order from a supplier not in the SMF, the order cannot be processed.  Required Explain what type of control the above information describes. Discuss its strengths and weaknesses.
Answer Preview: The control is a transaction control. Specifically it is an IT application control. The purpose of t…

, Chapter: 11 -Problem: 4 >> Lily Window Glass Co. (Lily) is a glass manufacturer that operates from a large production facility, where it undertakes continuous production 24 hours a day, seven days a week. Also on this site are two warehouses where the company’s raw materials and finished goods are stored. Lily’s year end is December 31.Lily is finalizing the arrangements for the year-end inventory count, which is to be unde
Answer Preview: Inventory count arrangements Deficiencies The person planning to supervise the inventory count is th…

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, Chapter: 6 -Problem: 4 >> Rahim, a first-year auditor, is asked to select a sample of invoices to audit the utility expense account. Below is the account detail. The audit program asks to select a sample of four items.  Required (a) Using systematic selection, determine which four months will be selected. (b) Using haphazard selection, determine which four months will be selected. (c) Using block selection, determine which
Answer Preview: (a) Using a random number generator in Excel or on your calculator, any number between 1…

, Chapter: 10 -Problem: 2 >> Explain the importance of segregating the personnel function from the payroll preparation.
Answer Preview: Segregating the functions of personnel and payroll reduces …

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, Chapter: 8 -Problem: 2 >> The purpose of controls is to: (a) Prevent misstatements in the financial statements. (b) Detect misstatements in the financial statements. (c) Support automated parts of a business in the functioning of the controls. (d) All of the above.
Answer Preview: (d) …

, Chapter: 8 -Problem: 1 >> Hilltop Partners is planning the audit for one of its clients. Jake Hilltop is performing the risk assessment at the assertion level for the accounts payable account to determine the nature and timing of the substantive work to be performed. Jake has assessed the inherent risk for the accounts payable account for each assertion as follows:Existence ...................................... Medium Com
Answer Preview: a) The assertion at greater risk is the Completeness assertion. Based on Jakes assessment there is a …

, Chapter: 4 -Problem: 3 >> Profitability ratios are used to assess performance and: (a) Companies will be interested in trends in the ratios. (b) Companies will try to have the same ratio in each month of operation. (c) Should be the same for all divisions of the company. (d) companies will track their revenue and expenses over time and assess any variability.
Answer Preview: (a) Compani…

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, Chapter: 4 -Problem: 3 >> Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to sales revenue. A problem with its control system means that the proper allocation of revenue between sales revenue recorded in the profit and loss and the deferred revenue account balance in the balance sheet does not always
Answer Preview: The journal entry which transfers amounts from the deferred revenue account to the rev…

, Chapter: 10 -Problem: 9 >> Cut-off procedures can be applied to receiving reports issued before the year end or to liabilities recorded after the year end. Consider the separate merits of each approach in assuring the completeness of recorded liabilities.
Answer Preview: Cut-off tests are related more to the closing balanc…

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, Chapter: 4 -Problem: 9 >> An example of an item that is material is: (a) A theft of $100. (b) An undisclosed lawsuit for $1 million. (c) An undisclosed related party. (d) All of the above.
Answer Preview: (d) …

, Chapter: 10 -Problem: 12 >> You are the audit senior for the audit of Grosse Ltd. and have been given the audit file to review. The reporting date is December 31, 2020, and the materiality for the client has been set at $200,000. You obtained the information listed below from your review of the audit file.1. The balance noted for accounts payable in the general ledger at December 31, 2020, is $158,000, which compares with a
Answer Preview: a) 1. Why did the balance in accounts payable decrease by $184 000 from 2019 to 2020? 2. The account…

, Chapter: 12 -Problem: 10 >> Describe procedures to be undertaken where group entities are audited by other auditors.
Answer Preview: In order to verify the amounts included in the consolidated financial report, the auditor must obtai…

, Chapter: 1 -Problem: 10 >> The audit expectation gap occurs when: (a) Auditors perform their duties appropriately and satisfy users’ demands. (b) User beliefs do not align with what an auditor has actually done. (c) Peer reviews of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfies users’ demands. (d) The public is well educated about auditing.
Answer Preview: (b) User beli…

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, Chapter: 4 -Problem: 20 >> AutoCare Ltd. (ACL) is a federally incorporated public company formed in 2010 to manufacture and sell specialty auto products such as paint protection and rust proofing. By 2014, ACL’s board of directors felt that the company’s products had fully matured and that it needed to diversify. ACL aggressively sought out new “concepts,” and in November 2015, it acquired the formula and patent for a new p
Answer Preview: (a) Five procedures the auditor should perform before deciding to accept ACL as a client could include: Assess independence. Contact predecessor audit…

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, Chapter: 12 -Problem: 4 >> Shiny Happy Windows Co. (SHW) is a window cleaning company. Customers’ windows are cleaned monthly and the window cleaner then posts a stamped addressed envelope for payment through the customer’s front door.SHW has a large number of receivable balances and these customers pay by cheque or cash, which is received in the stamped addressed envelopes in the post. The following procedures are applied
Answer Preview: (a) Deficiency Consequence Suggested Control The receptionist opens the post without supervision The receptionist could easily steal receipts undetect…

, Chapter: 2 -Problem: 3 >> Professional independence for auditors: (a) detracts from the ability of users to rely on the financial statements to make their decisions. (b) is the ability to act with integrity, objectivity, and professional scepticism. (c) is important when the auditor acts independently, and it does not matter what people believe about the auditor’s independence. (d) is only relevant to audits for new clien
Answer Preview: (b) Is the abili…

, Chapter: 6 -Problem: 11 >> The controls at a retail store were assessed by the lead auditor as being effective and the auditor intended to rely on the operative effectiveness of controls around payroll in determining the nature, timing, and extent of substantive procedures. There is no evidence of fraud. The control activities include controls that ensure that part-time staff are paid at the correct rate. The results of tes
Answer Preview: (a) A tolerable deviation rate (or tolerable rate of deviation) is the rate of deviation from prescr…

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, Chapter: 9 -Problem: 3 >> Analytical procedures: (a) Are used to test controls and are not substantive procedures. (b) Are substantive procedures and cannot be used at any other stage of the audit. (c) Are used at planning and substantive testing stages of the audit. (d) Can be used as substantive tests but cannot be used as primary tests of a balance.
Answer Preview: (c) Are used a…

, Chapter: 2 -Problem: 3 >> Elise Lauzière is the partner in charge of the audit of Hertenstein Ltd., a large listed public company. Elise took over the audit from Marjorie Szliske, who has recently retired from the audit firm. Marjorie was a very experienced auditor and the author of several reports into ethical standards in business, but Elise did not regard her highly for her ability to grow non-audit service fee revenue.
Answer Preview: (a) It is possible that increasing the profitability of the audit firm would increase Elises reputat…

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, Chapter: 5 -Problem: 24 >> The working paper in figure 5.11 was prepared by James Parkhill, a first year accountant. Find seven errors that James made while completing this working paper.  Figure 5.11 Transcribed Image Text: D. 1 New Millennium Ecoproducts 2 Year End: December 31, 2016 ? Cash 8 Account Rep Ann. Prelim Adj's R
Answer Preview: Title should indicate what the working paper is besides cash, i e., Cash Leadsheet Missing who …

, Chapter: 4 -Problem: 6 >> Analytical procedures: (a) Cannot be performed on interim data. (b) Are not affected by different accounting methods between the client and other members of the industry.(c) Must take into account seasonal variation in the client’s business. (d) Are only useful if the client’s variance from the budget is low.
Answer Preview: (c) Must take …

, Chapter: 5 -Problem: 10 >> Review the examples of working papers provided in the chapter. List six things that should be included in every working paper.
Answer Preview: Six things that should be included in every working …

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, Chapter: 8 -Problem: 1 >> What is the difference between entity level controls and transaction level controls?
Answer Preview: Entity level controls are the collection of the internal control components of …

, Chapter: 4 -Problem: 15 >> Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities: a backpackers’ hostel, a family hotel, and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chairman of the board of directors of both Featherbed
Answer Preview: The risk assessment is based on the audit risk formula Therefore, DR is determined by the inherent risk (IR) and control risk (CR) assessments. If IR …

, Chapter: 5 -Problem: 7 >> If an expert is engaged to assist with the audit: (a) It means the auditor does not have the requisite skill and knowledge to assess the item. (b) It means the auditor should not have taken on the audit because they are not qualified. (c) CPA Canada must be contacted and permission obtained before the expert starts work. (d) The auditor does not have to take responsibility for the fair presentatio
Answer Preview: (a) It means the a…

, Chapter: 1 -Problem: 6 >> What does reasonable assurance mean?
Answer Preview: Reasonable assurance is provided when an auditor provides a positive opinion, after ob…

, Chapter: 1 -Problem: 8 >> Agency theory explains that audits are demanded because conflicts can arise between: (a) Managers and owners. (b) Managers and agents. (c) Owners and principals. (d) Auditors and owners.
Answer Preview: (a) M…

, Chapter: 8 -Problem: 4 >> The junior auditor on the engagement has suggested that, since there were no exceptions detected in previous years, no work on internal controls is required because last year’s evidence will be sufficient. Required Explain why the junior auditor’s suggestion is not appropriate and outline what work is required. Source: Adapted from the Institute of Chartered Accountants Australia’s CA Program’s Au
Answer Preview: There are several reasons why using the work done in previous years would not be appropriate. The mo…

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, Chapter: 9 -Problem: 2 >> Key documents are used throughout the sales process and each supports an internal control function. Required For each of the following documents, describe its purpose and how it contributes to internal control over the sales cycle:a. Customer orderb. Sales orderc. Accounts receivable master fi led. Shipping documente. Sales invoicesf. Monthly customer statementg. Deposit slip
Answer Preview: For each of the following documents, describe its purpose and how it contributes to internal control over the sales cycle: a) Customer order: Orders submitted in writing or electronically on a custome…

, Chapter: 12 -Problem: 8 >> When inspecting securities on hand, what things should the auditor observe?
Answer Preview: When inspecting securities, the auditor should observe such m…

, Chapter: 3 -Problem: 9 >> When gaining an understanding of the client, the auditor will consider: (a) related party identification. (b) the appropriateness of the client’s system of internal controls to mitigate identified business risks. (c) controls over the technology used to process and store data electronically. (d) all of the above.
Answer Preview: (d) …

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, Chapter: 8 -Problem: 6 >> Examples of application controls include: (a) Edit checks. (b) Validations. (c) Calculations. (d) All of the above.
Answer Preview: (d) …

, Chapter: 10 -Problem: 10 >> Venture Volunteers for Troubled Teens is a not-for-profit entity that provides counselling services to troubled teens and adolescents. While the majority of its funding comes from the government, the group also participates in a variety of fundraising activities. To manage the fundraising activities and administer the various programs, there is an executive director, two accounting staff , and sev
Answer Preview: Strengths: 1. There is restricted access to personnel records and payroll records and access to the Paystub data entry (used to prepare the direct deposits). This prevents unauthorized employees from …

, Chapter: 2 -Problem: 10 >> If a prospective new audit client does not allow the auditor to contact its existing auditor: (a) the auditor should contact the existing auditor anyway because it is their duty. (b) the auditor should consider refusing to take on the prospective new client. (c) the existing auditor should contact the new auditor to tell them all about the client. (d) the auditor should respect the prospective cli
Answer Preview: (b) The auditor …

, Chapter: 7 -Problem: 7 >> Segregation of incompatible duties: (a) Is a guarantee that fraud cannot occur. (b) Is the same as performance review by a supervisor. (c) Means that different people are assigned responsibilities for authorizing transactions, recording transactions, and maintaining custody of assets. (d) All of the above.
Answer Preview: (c) Means that different peopl…

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, Chapter: 10 -Problem: 1 >> A generally accepted definition of earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out earnings over a number of accounting periods. Generally speaking, earnings management is used to increase income in the current year at the expense of income in future years by, for example, prematurely recognizing sales before they are complete in order to boost prof
Answer Preview: In answering this question, you would first need to explain what is meant by earnings …

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, Chapter: 7 -Problem: 10 >> A management letter: (a) Contains recommendations for improving internal control and discusses other issues discovered during the course of the audit. (b) Is written by management to the auditor at the start of the audit. (c) Lists only the significant deficiencies discovered during the audit. (d) All of the above.
Answer Preview: (a) Contains recommendatio…

, Chapter: 10 -Problem: 1 >> The following is a copy of the auditor’s working paper for auditing cash at bank balances for the client New Millennium Eco products. It shows the details of the bank confirmation requests.  Required (a) Find the list of banks from which the auditor has sought bank confirmations. How many banks are listed? (b) What information would be sought in a bank confirmation? Explain what assertion(s) are r
Answer Preview: (a) Four banks: BCC, Westpac, Canbank, AMP Banking (column bank name) (b) T the following are the in…

, Chapter: 11 -Problem: 6 >> You attended the inventory count of your client Davis Hydraulics Ltd. You observed the following during the count:1. Warehouse staff counted specific areas of the inventory as determined by the warehouse supervisor; staff members, including the warehouse supervisor, were allocated their own area to count.2. Several blank paper sheets were issued to count staff for recording inventory counted.3. St
Answer Preview: Weakness Improvement Warehouse staff used for counting - this could lead to staff covering up their …

, Chapter: 2 -Problem: 19 >> Identify and discuss any professional conduct issues in the following independent scenarios. (a) Arun Sidhu was the auditor of Red Brick Ltd. and issued a clean audit opinion despite the fact that the depreciation expense of the client was materially misstated due to a calculation error. (b) Jason Crane became a CPA in 2015. He is now glad to be finished his education as he does not plan to take a
Answer Preview: (a) Arun Sidhu was the auditor of Red Brick Ltd. and issued a clean audit opinion despite the fact t…

, Chapter: 4 -Problem: 2 >> Cheap-as-Chips stocks thousands of items in inventory that range in value from $1 to $100. The inventory on hand represents a material portion of current assets. The merchandise items change according to the season and the promotional theme adopted by the stores’ management for the year. Merchandise is ordered up to four months in advance from Chinese and Korean suppliers. These special orders req
Answer Preview: The following are the explanations of inherent risks for Cheap-as-Chips inventory given the circumstances of Cheap-as-Chips: The material portion of i…

, Chapter: 10 -Problem: 3 >> Describe programmed application controls you would expect to find in a computerized payroll system. Explain the audit procedures for testing those controls.
Answer Preview: Programmed application controls are those controls that apply to the processing of …

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, Chapter: 9 -Problem: 8 >> The primary advantage of selecting the largest transactions within a balance to test is: (a) It is an example of random sampling. (b) It is more interesting for the auditor because they see the most important transactions in detail. (c) That the auditor is able to draw a conclusion about the entire balance based on the conclusions they reached by testing the largest transactions. (d) All of the ab
Answer Preview: (c) That the auditor is able t…

, Chapter: 11 -Problem: 1 >> A key difference between auditing balance sheet accounts and income statement accounts is that: (a) Balance sheet accounts always have larger totals. (b) Balance sheet accounts are always more significant accounts. (c) Income statement accounts reflect the entire 12 months of transactions. (d) Income statement accounts rely on audit techniques such as confirmations. Balance
Answer Preview: (c) Income stat…

, Chapter: 10 -Problem: 15 >> Blake Co. assembles specialist motor vehicles such as freight trucks, buses, and delivery trucks. The company owns four assembly plants where parts are delivered and assembled into the motor vehicles.The motor vehicles are assembled using a mix of robot and manual production lines. The assembly-line workers normally work a standard eight-hour day, although this is supplemented by overtime on a reg
Answer Preview: a) Control Objectives payroll system Ensure that the entity has: Paid employees only for work completed Correctly calculated gross pay Authorized gross pay Correctly calculated net pay Accurately reco…

, Chapter: 13 -Problem: 15 >> a. Explain your responsibilities with respect to the Shady Oaks cafeteria fire.b. How will this event be handled in the HCHG financial statements and the audit report? Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2020, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns
Answer Preview: a) The cafeteria fire took place last week. As todays date is July 13, the date of the fire must hav…

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, Chapter: 8 -Problem: 4 >> Detective controls do not include: (a) Management level reviews. (b) Performance indicators. (c) Account coding. (d) Reconciliations.
Answer Preview: (c) …

, Chapter: 11 -Problem: 4 >> The important assertion(s) for revenue is (are): (a) Occurrence, because testing needs to ensure that recorded sales are genuine. (b) Never completeness, because a company would never want to understate its revenue. (c) Completeness when there could be pressure to defer sales recognition to give the company a head start on meeting the next year’s target. (d) Both (a) and (c).
Answer Preview: (d) …

, Chapter: 12 -Problem: 1 >> The audit of short-term investments can be a high-risk area for auditors. A case in Australia (AWA Ltd v. Daniels t/a Deloitte Haskins & Sells & Ors (1992) 10 ACLC 933) found the auditors negligent for failing to report weaknesses in the foreign exchange trading to an adequate level of management. The collapse of Barings Bank in Singapore also focused questions on whether adequate attention was pa
Answer Preview: a) AWA A brief summary is outlined in the text. However, there are numerous other professi…

, Chapter: 2 -Problem: 4 >> A self-interest threat arises when: (a) the auditor owns shares in the client’s business. (b) an assurance team member has recently been a director of the client. (c) the auditor encourages others to buy shares in the client’s business. (d) the client threatens to use a different auditor next year.
Answer Preview: (a) The au…

, Chapter: 5 -Problem: 2 >> The quantity of evidence that an auditor will gather: (a) Varies with audit risk. (b) Is the same for all audits because it has to be appropriate. (c) Depends on the size of the audit team. (d) All of the above.
Answer Preview: (a) V…

, Chapter: 9 -Problem: 2 >> Boris Shonkoff suggests the following audit procedure should be included in the audit program to gather evidence on the cut-off assertion for the revenue account: Select a sample of sales from the sales journal and agree the dates on the invoices to the dates on the delivery documents signed by the customer. Required Explain how the procedure addresses the assertion. What does it mean if (a) the d
Answer Preview: Selecting a sample from the sales journal from around the year-end to agree the dates on the invoice…

, Chapter: 10 -Problem: 13 >> You are reviewing the audit work for Online Ltd., a large Canadian company. Online uses a service bureau to process all wages. Time sheets are authorized by the appropriate supervisor, batched, and sent to the service bureau for processing. Detailed payroll reports, as well as the time sheets, are returned to the accountant, who reviews the reports for reasonableness and initials them as evidence
Answer Preview: a) What were your expectations with respect to monthly trends of payroll? Were you …

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, Chapter: 4 -Problem: 17 >> Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized and Securimax only does bus
Answer Preview: Preliminary materiality assessment is based on user needs. 1. …

, Chapter: 9 -Problem: 4 >> Seb Lee and Boris Shonkoff are discussing the audit program for the revenue account. Seb and Boris disagree about whether they should use procedure A or B below to test the occurrence assertion for the revenue account: A. Select a sample of sales from the sales journal and agree the details in the journal to the sales invoices, delivery slips, and customer orders. B. Select a sample of sales invoi
Answer Preview: The occurrence assertion is tested by selecting a sample of items in the accounting …

, Chapter: 10 -Problem: 7 >> It is increasingly common for companies to program their computer information system to print and distribute cheques without further authorization. As an auditor, describe controls you would expect to find in place over such a system.
Answer Preview: Examples of controls would include: Use of, and accounting for, pre-n…

, Chapter: 4 -Problem: 5 >> An auditor is interested in the client’s inventory turnover ratio because it helps the auditor understand: (a) If the industry is the same as another industry. (b) If the client is as competitive and has as high a turnover as the industry average. (c) If the client’s accounts receivable customers are paying their accounts on time. (d) If the client is in the right industry. In
Answer Preview: (b) If the client …

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, Chapter: 4 -Problem: 16 >> Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized and Securimax only does bus
Answer Preview: Industry level: Defence - high sensitivity of product information, customer information Risk of sell…

, Chapter: 12 -Problem: 7 >> Mathias Co. sells cars, car parts, and gasoline from 25 different locations in one country. Each branch has up to 20 staff working there, although most of the accounting systems are designed and implemented from the company’s head office. All accounting systems, apart from petty cash, are computerized, with the internal audit department frequently advising and implementing controls within those sy
Answer Preview: Internal control weaknesses petty cash Weakness The amount in the petty cash balance is too high- it …

, Chapter: 4 -Problem: 2 >> A combined audit strategy: (a) Is appropriate when internal controls are minimal. (b) Means that the auditor will gain the minimum necessary knowledge of the client’s system of internal controls. (c) Requires the auditor to conduct extensive control testing. (d) Means that the auditor will conduct extensive testing of year-end account balances.
Answer Preview: (c) Requires …

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, Chapter: 5 -Problem: 25 >> IndaCar Inc. (IC) operates a high-end car rental agency that specializes in the rental of unique vehicles and is located next to Lester B. Pearson International Airport in Toronto. IC is a private Canadian company that is wholly owned by Jake Bouvier. Daytona Lemans LLP, Chartered Professional Accountants (DL), has reviewed IC’s annual financial statements since IC was founded five years ago and
Answer Preview: (a) The costs and benefits of upgrading from a review engagement to an audit engagement would include: More assurance is provided with and audit than a review, which requires more evidence on the part …

, Chapter: 11 -Problem: 4 >> The following is a copy of the auditor’s working paper relating to the roll forward procedures for accounts receivable for the client New Millennium Ecoproducts.  Required (a) When are roll forward procedures used? Why are they useful in testing accounts receivable and revenue? (b) The details of the test show that credit note 2648 was highlighted as an unusual transaction. The credit note was u
Answer Preview: (a) Roll forward procedures are used when acceptable levels of detection risk are high or assessed levels of controls risk are low. This means that th…

, Chapter: 9 -Problem: 9 >> Explain what is meant by “cut-off ” and why it is important to auditors in establishing the fairness of the financial statements.
Answer Preview: 'Cut-off' tests are performed on sales and cash receipts as part of the year-end work, to ver…

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, Chapter: 5 -Problem: 10 >> Yellow Aviation is an existing client of PPP Partners. The auditors are aware that the impact of the global financial crisis on airlines has been severe, with predictions of a prolonged downturn. Also, as a result of the crisis along with the entry of new competitors in the domestic and international markets, airlines have been heavily discounting flights. The client’s policies include the followi
Answer Preview: Financial pressure on the airlines could encourage management to understate expenses to overstate profits. Capitalizing expenditure on maintenance tha…

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, Chapter: 12 -Problem: 1 >> At the conclusion of the audit, the wrap-up process involves: (a) Review of proper and complete execution of planned audit procedures. (b) The determination that all necessary matters have been appropriately considered. (c) Revisiting open review notes, to-do items, and open audit procedures. (d) All of the above.
Answer Preview: (d) …

, Chapter: 11 -Problem: 5 >> Discuss the cut-off implications of the inventory count being before or after the year end and closing inventory being determined by adjusting the count by reference to purchases and sales records in the intervening period.
Answer Preview: The cut-off of inventory at balance date needs to be carefully recorde…

, Chapter: 1 -Problem: 1 >> The parties relevant to an assurance engagement are: (a) Assurance practitioner, users, responsible party. (b) Assurance practitioner, responsible party, subject matter. (c) Assurance practitioner, users, criteria. (d) Assurance practitioner, subject matter, criteria
Answer Preview: (a) Assura…

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, Chapter: 5 -Problem: 9 >> Analytical procedures are used to gather evidence: (a) At the planning stage to gain an understanding of a client. (b) At the execution stage to evaluate information included in the fi nancial statements. (c) At the fi nal review stage to assess whether the fi nancial statements refl ect the auditor’s understanding of their client. (d) All of the above.
Answer Preview: (d) …

, Chapter: 4 -Problem: 1 >> Executive remuneration Listed companies are required to make certain disclosures in their annual reports about the compensation paid to their top executives. One reason for this is to help interested stakeholders assess the performance of executives. It also helps executives and companies set appropriate compensation levels based on what other companies in the same industry and/or of the same size
Answer Preview: 1. The executives are paid by using both the salary and bonuses. The salary is fixed while bonuses a…

, Chapter: 10 -Problem: 8 >> Explain why an unexpected change in the gross profit ratio leads the auditor to suspect a wide range of possible misstatements in recorded transactions and balances.
Answer Preview: An adverse change could indicate rising costs and the possi…

, Chapter: 3 -Problem: 3 >> Featherbed Surf & Leisure Holidays Ltd. (Featherbed) is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris own the majority of the shares in the Morris Group, which controls Featherbed. Justin is the chairman of the board of directors of bot
Answer Preview: The information could be used to calculate ratios and trends (i e., analytical procedures). The audi…

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, Chapter: 3 -Problem: 4 >> You have access to the following information for Featherbed: • prior period financial statements • anticipated results for the current year • industry comparisons RequiredExplain how you would use this information to understand your new client.
Answer Preview: The information could be used to calculate ratios and trends (i e., analytical procedures). The audi…

, Chapter: 6 -Problem: 10 >> The auditor has discovered errors when conducting substantive testing on a sample of invoices. If the total error discovered is $3,442, the dollar value of the sample is $25,136, and the population dollar value is $64,912, then the projected error is:(a) $3,442. (b) $8,889.(c) $1,885. (d) $1,369.
Answer Preview: (b…

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, Chapter: 9 -Problem: 13 >> Review your answers to the previous questions. Comment on the persuasiveness of evidence from each test. Explain any factors that would affect your assessment.
Answer Preview: In general, the analytical procedures would provide less persuasive evidence than the tes…

, Chapter: 11 -Problem: 11 >> Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized, and Securimax does busines
Answer Preview: a) Securimax is a manufacturer so it would hold inventory in the form of raw materials (RM), work-in-process (WIP), and finished goods (FG). Depending on the nature of waste and damage to vehicles in …

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, Chapter: 7 -Problem: 3 >> The control environment: (a) Is the economic environment in which the organization operates. (b) Is the combination of the culture, structure, and discipline of an organization. (c) Applies only to listed companies. (d) All of the above.
Answer Preview: (b) Is the combi…

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, Chapter: 10 -Problem: 5 >> Explain why the assessment of control risk for the occurrence of payment transactions affects the assessed level of control risk for the completeness of the accounts payable balance. Accounts Payable Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally app
Answer Preview: The effect of payment transactions is to reduce the accounts payable balance. …

, Chapter: 3 -Problem: 8 >> The planning stage of an audit does not include: (a) gaining an understanding of the client. (b) identifying factors that may affect the risk of a material misstatement in the fi nancial statements. (c) developing an audit strategy and a risk and materiality assessment. (d) executing and reporting on an audit.
Answer Preview: (d) Exec…

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, Chapter: 6 -Problem: 3 >> Deviations: (a) Are errors that affect account balances by a material amount. (b) Occur when controls do not operate as intended. (c) Are relevant only when they occur consistently throughout the accounting period. (d) Are caused by auditors choosing incorrect audit procedures.
Answer Preview: (b) Occur …

, Chapter: 9 -Problem: 9 >> Roll-forward procedures: (a) Need to be responsive to the control risk assessment. (b) Are procedures done during the month after year end. (c) Have no effect on audit efficiency. (d) None of the above.
Answer Preview: (a) Need to …

, Chapter: 12 -Problem: 5 >> Your firm is the auditor of Thai Textiles Ltd. and you are auditing the financial statements for the year ended June 30, 2020. The company has sales of $2.5 million and a before-tax profit of $150,000. The company has supplied you with the following bank reconciliation at year end. You have entered the “date cleared” on the bank statement (the date on which the cheques and deposits appeared on Ju
Answer Preview: a) Matters of concern The delay in banking of cash sales of about a week which could indicate a lapp…

, Chapter: 11 -Problem: 1 >> Consider the following statement:The audit of inventory is one of the riskiest areas of the audit. Management can manipulate the value of inventory through a variety of methods, such as through varying the provision for obsolescence or the method of valuation. It is therefore an area that can be “massaged” by management to achieve its required profit level. Requireda. Evaluate the statement and il
Answer Preview: a) In the first instance, students need to research thoroughly the Harris Scarfe case a…

, Chapter: 3 -Problem: 5 >> An attitude of professional scepticism means: (a) The auditor can rely on past experience to determine current risk of fraud. (b) Any indicator of fraud is properly investigated. (c) The auditor can rely on management assertions. (d) All of the above.
Answer Preview: (b) Any in…

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, Chapter: 5 -Problem: 22 >> Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. In 2016, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities: Shady Oaks Centre, a private treatment centre Gardens Nursing Home Ltd., a private nursing home Total Laser Care Limited (TLCL),
Answer Preview: CAS 230 Audit Documentation requires that the auditor prepares documentation of the audit on a timel…

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, Chapter: 11 -Problem: 15 >> Your firm is the auditor of Daybrook Insurance Brokers Ltd., which operates from a number of branches and provides insurance for the general public and businesses. The company obtains insurance from large insurance companies and takes a commission for its services. You have been asked to audit certain aspects of the company’s property, plant, and equipment for the year ended December 31, 2020.The
Answer Preview: a) Determining ownership is performed by the following: 1. For all additions, vouch to supporting do…

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, Chapter: 5 -Problem: 3 >> Tropical Cruises is a new client of MMM Partners. Tropical Cruises is a low-cost cruise ship operator, travelling between Canada and the United States. The planning for the first audit is underway. The auditors have become aware that police in two countries are investigating several Tropical Cruises employees for stealing food and other supplies from the ships’ kitchens and selling it at local mar
Answer Preview: Various supplies and asset accounts (food, alcohol, table linen, …

, Chapter: 10 -Problem: 2 >> Key documents are used throughout the purchases, payables, and payroll process, and each supports an internal control function. Required For each of the following documents, describe its purpose and how it contributes to internal control over the purchases, payables, and payroll cycle.a. purchase orderb. receiving reportc. accounts payable master fi led. packing slipe. suppliers’ invoicesf. perso
Answer Preview: For each of the following documents, describe its purpose and how it contributes to internal control over the purchases, payables, and payroll cycle. a) Purchase order: A form showing the description …

, Chapter: 1 -Problem: 9 >> The insurance hypothesis means: (a) Managers must take insurance. (b) Owners must take insurance. (c) An audit acts as insurance. (d) None of the above
Answer Preview: (c) An …

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, Chapter: 6 -Problem: 1 >> Why do auditors use sampling? Explain the advantages and disadvantages of using sampling instead of testing every item in a population.
Answer Preview: Auditors use sampling because they are able to gain almost the same degree of assurance by testing a …

, Chapter: 8 -Problem: 1 >> The auditor decides which controls to test by considering: (a) The type of control. (b) The frequency of the control being performed. (c) The level of assurance the a

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