Solution Manual for Auditing Canadian 7th Edition

Smieliauskas Bewley 1259259870 9781259259876

Full download link at:
Solution manual: https://testbankpack.com/p/solution-manual-for-auditing-canadian-7th-edition-
smieliauskas-bewley-1259259870-9781259259876/
Test bank: https://testbankpack.com/p/test-bank-for-auditing-canadian-7th-edition-smieliauskas-
bewley-1259259870-9781259259876/

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) The auditor's primary purpose for evaluating internal control is to .

A) help judge how much control is necessary
B) help determine much business risk is acceptable
C) help management design internal control systems
D) help design of the final audit plan
Answer: D

2) One of the auditor's primary concerns with regard to internal controls is .

A) the degree to which the internal controls are working as designed
B) the impact the controls have on the accuracy of the accounting records
C) the amount of substantive work to be saved by testing controls instead
D) the possibility of an inherent risk that has to be controlled
Answer: B

3) Which of the following is true regarding the financial assertions?

A) Some assertions can be proved using only an evaluation of control effectiveness.
B) The evaluation of control effectiveness is only used because it is more efficient than using only
substantive procedures.
C) All assertions can be proved using only substantive procedures, but it would be too costly.
D) Some assertions are virtually impossible to prove without some evaluation of control
effectiveness.
Answer: D

4) At the planning stage, the auditor's goal is to .

A) maximize audit fees
B) minimize field work at remote locations
C) select the most effective set of evidence-gathering techniques
D) select the most cost-effective set of evidence-gathering techniques
Answer: D

5) Validity refers to .
A) ensuring that all recorded transactions have been approved before recording
B) ensuring that transactions are not omitted from accounting records
C) ensuring that all recorded transactions have been recorded at the right dollar amount

1
 D) ensuring that recorded transactions should have been recorded
Answer: D

6) The internal control objective of ensuring that all sales on credit are recorded in accordance with
GAAP is _.
A) accuracy B) classification C) proper period D) accounting
Answer: D

2
7) The internal control objective of accuracy is related to the financial statement assertion of
.
A) presentation B) completeness C) valuation D) occurrence
Answer: C

8) Key controls are those .

A) over physical access
B) on which the auditor intends to rely
C) over significant risks
D) designed by the audit committee to prevent management fraud
Answer: C

9) Which of the following statements is true?

A) There is a point where further testing of controls becomes more expensive than performing
substantive tests.
B) As the work of testing of controls increases, the cost of substantive work increases.
C) Substantive testing is the most cost-efficient way of designing each audit.
D) Testing of controls is the most cost-efficient way of designing each audit.
Answer: A

10) Anyone who designs a processing system should .

A) not do the documentation
B) not do the technical programming work
C) be independent of management
D) have access to the data so they can make the system more efficient
Answer: B

11) What are the most cost-effective types of controls over data?
A) Input controls. B) Monitoring controls.
C) Batch controls. D) Design controls.
Answer: A

12) What is a "walk through" test?

A) A test of physical security over access to computer rooms.
B) A computer-assisted technique for processing client data on a different system.
C) An audit procedure carried out at the planning stage of an audit.
D) A means of ensuring that transactions are processed as described in the control system
flowchart.
Answer: D

3
13) An auditor does not need to test .
A) control weaknesses because they are known to be weak
B) control strengths because they are known to be strengths
C) control strengths because they offset weaknesses
D) control weaknesses because they are offset by strengths
Answer: A

14) One control benefit of an IT system is that it .

A) reduces the risk of controls being overridden
B) is efficient at processing large, unusual, or non-recurring transactions
C) adjusts rapidly to changing business processes
D) can monitor the effectiveness of automated controls
Answer: A

15) Before concluding on the effectiveness of a control, an auditor must determine .

A) the actual degree of company compliance with control procedures
B) the maximum possible dollar amount that would not affect a user's decision based on the
financial statements
C) the required degree of company compliance with control procedures
D) the nature, extent, and timing of planned substantive procedures
Answer: C

16) Control tests should be applied to samples of transactions and control procedures .
A) that occurred during the interim audit so that they provide direct auditor's knowledge
B) throughout the period being audited
C) that occur primarily close to reporting period ends such as year-end or quarter-end
D) selected by management as being representative of all transactions processed
Answer: B

17) If there have been no changes to a control that a previous audit has found to be working effectively,
.
A) an auditor must still test the controls but not to the same extent as the prior year's testing
B) an auditor can rely on the prior year's work but should test the controls every few years
C) an auditor must still test the controls and not place reliance on the prior year's testing
D) an auditor can rely on the prior year's work and not test controls in the current year
Answer: B

18) The CPA Canada Handbook section "CAS 265: Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management" requires that .
A) all nontrivial misstatements are communicated to management in writing
B) all serious control risks uncovered are communicated to management in writing
C) only frauds and illegal acts are communicated to management
D) all nontrivial misstatements and possible illegal acts are communicated to management
Answer: D

4
 19) An auditor has uncovered suspicious expense reimbursements paid to the chief executive officer of
its audit client. What should the auditor do?
A) Discuss the matter with the chief executive officer.
B) Report the matter in writing to the audit committee.
C) Report the matter in writing to the chief financial officer.
D) Report the matter in writing to the federal government.
Answer: B

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is
false.

20) Internal controls are put in place to keep the company on course toward achieving its goals.
Answer: True False

21) Controls such as those to protect inventory should be put in place no matter what the cost.
Answer: True False

22) The primary reason to evaluate internal control is to formulate constructive suggestions for
improvement.
Answer: True False

23) A clean audit is normally associated with weak controls.

Answer: True False

24) The auditor's control risk assessment will affect the procedures to be included in the audit.
Answer: True False

25) The objective of control procedures is to process transactions correctly.

Answer: True False

26) Classification refers to ensuring that the accounting for transactions is in the period they occur.
Answer: True False

27) General controls, like environmental controls, are primarily preventive in nature.
Answer: True False

28) The most important feature of control is the documentation of the policies and procedures.
Answer: True False

29) An advantage of using a pre-printed audit questionnaire is that the auditor is less likely to forget to
ask some important question.
Answer: True False

30) All audit engagements require some minimal reliance on internal controls.
Answer: True False

5
 31) Control activities are often designed to speed processing of transactions.
Answer: True False

32) Control tests and substantive tests of balances are easily distinguishable.
Answer: True False

33) Intent is something that the auditor can observe and use in deciding whether a misstatement is an
error or a fraud.
Answer: True False

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

34) Identify three general categories of misstatements and give an example of each.
Answer: Any three of the following:

i. Invalid transactions are recorded. An example would be if fictitious sales to non-existent cus
are recorded.
ii. Valid transactions are omitted from the accounts. For example, if shipments to customers ar
recorded.
iii. Unauthorized transactions are executed and recorded. An example would be if a credit is no
approved for a customer order but the goods are shipped and invoiced anyway.
iv. Transaction amounts are not recorded accurately. An item is recorded as sold but the quanti
shipped is entered incorrectly on the invoice.
v. Transaction amounts recorded in the wrong account. For example, direct labour is recorded
salary expense rather than as a cost of production.
vi. Transactions are recorded in the wrong period. For example, products shipped after year-en
recorded as a sale during the year.

6
35) An auditor is required to obtain a sufficient understanding of internal control to plan the audit. This r
encompasses obtaining an understanding of the control environment, the accounting system, and the
policies and procedures.

Required:

A) What are some of the reasons for obtaining an understanding of an audit client's internal control?
B) What audit work is required for an auditor to be able to assess control risk below maximum?
C) Should an auditor always try to obtain enough evidence to be able to assess control risk below ma
Explain.
Answer: A) Reasons for obtaining an understanding of internal control.

i. To assist the auditor in determining the nature, timing, and extent of substantive procedures.
ii. To obtain information about control weaknesses that should be reported to management, and
board of directors.
iii. To identify areas at risk of material misstatement.

B) Audit work required.

i. Tests of controls to evaluate the actual effectiveness of control policies and procedures.
ii. Documentation of the results of tests of controls.
iii. Documentation of control risk assessment.

C) Should an auditor always seek to assess control risk below maximum?

i. Not necessarily. Assessing control risk at maximum is acceptable and, in fact, may be the onl
ii. The cost of performing the work should always be considered in light of the benefits to be o
may be more efficient to assess control risk at maximum and perform expanded substantive pr
only.

36) Why should an auditor not rely on substantive testing to the exclusion of testing internal controls?
Answer: A major goal in audits is to be efficient. This means performing the work in minimum time
while still obtaining sufficient, appropriate audit evidence. The allocation of work between
control testing and substantive testing is a cost-benefit trade-off. The more auditors rely on
internal controls, the less substantive year-end work they need to do. However, auditors do not
need to evaluate the entire internal control system. They should test controls in situations
when it is more efficient to test controls than to do substantive testing, such as when there is a
large number of small transactions making up an account balance.

7
37) What internal control objective is affected by cut off errors? Why are they of such concern to
auditors?
Answer: The control objective of proper period cutoff relates to the cutoff aspect of the existence and
completeness assertions. The risk of errors occurring is high because they are somewhat
non-routine events. Cutoff errors can also easily occur as a result of management manipulation
such as recording sales early or expenses late.

38) Below are the six internal control objectives.

A) Validity
B) Completeness
C) Authorization
D) Accuracy
E) Classification
F) Proper period cutoff

For each of the following control procedures, identify the internal control objective that applies and p
correct letter in the space provided.

1. Match shipping documents to sales invoices before recording the transaction in the sales jour
2. Ensure that the sales invoices are recorded in the correct month.
3. The sales manager must approve any discounts taken after the discount period.
4. Compare the quantity shipped per the shipping documents to the quantity billed per the sales
check prices to approved price lists, and recalculate extensions and totals before the recording the sal
5. Account for numerical sequence of pre-numbered shipping documents.
Answer: 1. A
2. F
3. C
4. D
5. B

39) List and give some examples of five security components of a well-designed IT system.
Answer: i. Network security refers to network segmentation, intrusion detection software, all network d
current patch level.
ii. Database security refers to control administrator access accounts, update access restrictions.
iii. Operating system security refers to O/S upgrades and penetration audits.
iv. External security refers to firewalls, modem and wireless access, logging account usage.
v. Application security refers to restricting access for users, review transaction routing, applica
triggers for unusual items, purge old users.
vi. Physical security refers to annual restricting access to machines, video surveillance, cardkey
physical security audit, intrusion tests.
vii. Business continuance and disaster preparedness refers to server, applications, firewall and I
redundancy, business continuance security plan stored off-site.

8
40) For auditsof financial institutions, auditors have a well-being reporting requirement. List four
matters that must be reported under federal institutions legislation.
Answer: Examples of reportable conditions include any four of the following:

i. Significant weaknesses in internal control.

ii. Going concern uncertainties that require disclosure or change in accounting basis.
iii. Reservations in the audit opinion.
iv. Indicators of a lack of good faith by management.
v. Contraventions of legislated capital requirements.

9
Answer Key
Testname: UNTITLED9

1) D
2) B
3) D
4) D
5) D
6) D
7) C
8) C
9) A
10) B
11) A
12) D
13) A
14) A
15) C
16) B
17) B
18) D
19) B
20) TRUE
21) FALSE
22) FALSE
23) FALSE
24) TRUE
25) TRUE
26) FALSE
27) TRUE
28) FALSE
29) TRUE
30) FALSE
31) FALSE
32) FALSE
33) FALSE
34) Any three of the following:

i. Invalid transactions are recorded. An example would be if fictitious sales to non-existent customers are r
ii. Valid transactions are omitted from the accounts. For example, if shipments to customers are not recorde
iii. Unauthorized transactions are executed and recorded. An example would be if a credit is not approved f
customer order but the goods are shipped and invoiced anyway.
iv. Transaction amounts are not recorded accurately. An item is recorded as sold but the quantity shipped is
incorrectly on the invoice.
v. Transaction amounts recorded in the wrong account. For example, direct labour is recorded as a salary e
rather than as a cost of production.
vi. Transactions are recorded in the wrong period. For example, products shipped after year-end are recorde
sale during the year.

10
Answer Key
Testname: UNTITLED9

35) A) Reasons for obtaining an understanding of internal control.

i. To assist the auditor in determining the nature, timing, and extent of substantive procedures.
ii. To obtain information about control weaknesses that should be reported to management, and the board o
iii. To identify areas at risk of material misstatement.

B) Audit work required.

i. Tests of controls to evaluate the actual effectiveness of control policies and procedures.
ii. Documentation of the results of tests of controls.
iii. Documentation of control risk assessment.

C) Should an auditor always seek to assess control risk below maximum?

i. Not necessarily. Assessing control risk at maximum is acceptable and, in fact, may be the only option.
ii. The cost of performing the work should always be considered in light of the benefits to be obtained. It m
efficient to assess control risk at maximum and perform expanded substantive procedures only.
36) A major goal in audits is to be efficient. This means performing the work in minimum time while still
obtaining sufficient, appropriate audit evidence. The allocation of work between control testing and
substantive testing is a cost-benefit trade-off. The more auditors rely on internal controls, the less
substantive year-end work they need to do. However, auditors do not need to evaluate the entire internal
control system. They should test controls in situations when it is more efficient to test controls than to do
substantive testing, such as when there is a large number of small transactions making up an account
balance.
37) The control objective of proper period cutoff relates to the cutoff aspect of the existence and completeness
assertions. The risk of errors occurring is high because they are somewhat non-routine events. Cutoff
errors can also easily occur as a result of management manipulation such as recording sales early or
expenses late.
38) 1. A
2. F
3. C
4. D
5. B

11
Answer Key
Testname: UNTITLED9

39) i. Network security refers to network segmentation, intrusion detection software, all network devices at cur
level.
ii. Database security refers to control administrator access accounts, update access restrictions.
iii. Operating system security refers to O/S upgrades and penetration audits.
iv. External security refers to firewalls, modem and wireless access, logging account usage.
v. Application security refers to restricting access for users, review transaction routing, application triggers
unusual items, purge old users.
vi. Physical security refers to annual restricting access to machines, video surveillance, cardkey access, phy
security audit, intrusion tests.
vii. Business continuance and disaster preparedness refers to server, applications, firewall and ISP redunda
business continuance security plan stored off-site.
40) Examples of reportable conditions include any four of the following:

i. Significant weaknesses in internal control.

ii. Going concern uncertainties that require disclosure or change in accounting basis.
iii. Reservations in the audit opinion.
iv. Indicators of a lack of good faith by management.
v. Contraventions of legislated capital requirements.

12