Chapter 1 Auditing and Assurance Services

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Chapter 1 - Auditing and Assurance Services
Auditing I (The College of The Bahamas)
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Auditing, 14e (Arens)

Chapter 1 The Demand for Audit and Other Assurance Services
1.1 Describe auditing and its purpose
1) Which of the following illustrates the definition of auditing with respect to the evidence analysis
process?
A) accumulation and evaluation of evidence regarding assertions
B) learning about different types of computing technology, such as mainframes
C) writing an operational audit report that is tailored to the client's situation
D) making sure that the auditor is competent and understands evidence gathering
Answer: A
Diff: 1 Type: MC Page Ref: 3
Learning Obj.: 1-1 Describe auditing and its purpose
2) Auditing should be done by a qualified

A) chartered accountant.
B) certified management accountant.
C) competent and independent person.
D) professional accountant.
Answer: C
3) Which of the following illustrates the definition of auditing with respect to the reporting process?
A) accumulation and evaluation of evidence about balance sheet accounts
B) reporting on the degree of correspondence between financial statements and ASPE/IFRS
C) writing an operational audit report that is tailored to the client's situation
D) making sure that the auditor is competent and understands evidence gathering
Answer: B
4) In the audit of historical financial statements by PA firms, the criteria used are
A) generally accepted auditing standards.
B) relevant accounting frameworks.
C) regulations of the Canada Revenue Agency.
D) regulations of the provincial securities commissions.
Answer: B
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5) A large PA firm has assessed evidence collected during an engagement. Criteria used to assess the
financial statements were International Financial Reporting Standards (IFRS). A high level of assurance
was obtained. The type of engagement conducted was
A) an audit.
B) a review.
C) management consulting.
D) a compilation.
Answer: A
6) The auditor and the entities being audited should agree on the criteria to be used in the audit
A) well in advance before the audit starts.
B) after the audit planning has been done.
C) as they progress with the audit, as they can determine which criteria are most suitable.
D) at the end of the audit.
Answer: A
7) George had a conversation with the accounting personnel and documented information about how the
accounting systems function. He has also placed copies of accounting forms in his files. George is
performing which task?
A) accounting procedures
B) evidence gathering
C) tax audit
D) audit report preparation
Answer: B
8) One of the reasons that an auditor must be competent is so that they can
A) understand the engagement risks and the criteria used by the client.
B) explain to staff how the bookkeeping should be done.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
Answer: A
9) One of the reasons that an auditor must be competent is so that they can
A) select the type and amount of evidence to accumulate.
B) explain to staff how the bookkeeping should be done.
C) record the transactions properly for the underlying records.
D) capture the information properly in the computer files.
Answer: A
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10) It is important for the auditor to be independent because

A) otherwise the auditor would not charge a fair rate to the client.
B) otherwise the auditor might not be as knowledgeable of the subject matter and the criteria.
C) this will prevent bias in accumulating and evaluating evidence.
D) the Canadian tax authorities require that the auditor be independent.
Answer: C
11) As an external auditor is paid a fee by a client company, he or she

A) is absolutely independent and may conduct an audit.
B) may still be sufficiently independent to conduct an audit.
C) is never considered to be independent.
D) must receive approval from the relevant provincial securities commission before conducting an audit.
Answer: B
12) The independent auditor's report is the

A) communication of the outcome of auditor's evaluation to the users.
B) set of audited financial statements.
C) invoice of the auditor detailing the work they have performed.
D) report presented to management about the possible improvements.
Answer: A
13) In the audit of a corporate tax return, the CRA auditor should demonstrate competence in the use of
A) external databases that contain economic statistics.
B) standard personal and corporate tax preparation software.
C) the Income Tax Act and accompanying regulations.
D) database management software for the use of client based research.
Answer: C
14) In the audit of an individual's tax return, the criteria used would be
A) an accounting framework.
B) the Income Tax Act.
C) the client's policies for taxable income.
D) the auditor's judgment.
Answer: B
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15) In the audit of a corporate tax return, the report provided by the Canada Revenue Agency auditor
would describe
A) an opinion on the likelihood of tax return error.
B) the likely accounting errors that could contribute to tax errors.
C) management issues with respect to accurately reporting taxes.
D) that the corporate income tax return is in compliance with the Income Tax Act.
Answer: D
16)
Use your knowledge of the definition of auditing and Figure 1-1: Audit of a Corporate Tax Return to
explain how an auditor would conduct a Corporate Tax Return audit.
Answer: First, the concept of a competent, independent person requires that the practitioner who is
conducting an assurance engagement should have "adequate proficiency," which means that the tax
auditor should be competent in the fields of taxation and the fields that need to be assessed, such as
accounting, information systems, data management and access and internal controls. The auditor should
also use due care and have an objective state of mind. This means that the auditor should be independent
of the client and do their best using their skills when conducting the audit.
The second part of Figure 1-1 relates to accumulation and evaluation of evidence using a risk-based
approach. This means that the auditor would collect evidence based upon risks of violations in the tax
return by the client.
The next three parts are connected. The auditor determines the correspondence of the information
provided by the client (which could be the financial statements, tax return and the quality of the
calculations within the tax return) to established criteria (the Income Tax Act).
Finally, the auditor issues a report (Notice of Assessment) to summarize the findings.
Diff: 2 Type: ES Page Ref: 4-5
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1.2 Distinguish between auditing and accounting
1) Joe is recording sales transactions in the accounting system so that they can be summarized in a logical
manner for the purpose of providing financial information for decision-making. Joe is performing
A) accounting.
B) auditing.
C) review.
D) management consulting.
Answer: A
Learning Obj.: 1-2 Distinguish between auditing and accounting
2) Which of the following is an example of accounting rather than auditing?

A) gathering evidence about the quality of accounts receivable
B) entering sales transactions into the sales order system
C) reviewing sales invoices to see if they have been calculated correctly
D) comparing bank deposit documents to the recorded cash received
Answer: B
3) In auditing accounting data, the concern is with

A) evaluating whether recorded information reasonably reflects the economic events that occurred
during the accounting period within specified dollar ranges.
B) determining if fraud has occurred.
C) determining if taxable income has been calculated correctly.
D) analyzing the financial information to be sure that it complies with government requirements.
Answer: A
4) Which of the following is an example of auditing rather than accounting?

A) recording purchase amounts in the expense accounts
B) posting the daily sales totals to the general ledger
C) recording cash received in the customer account files
D) evaluating whether accounts receivable are collectible
Answer: D
5) An accountant records information. When conducting an audit, the auditor must possess
A) an ability to interpret relevant accounting frameworks.
B) an education beyond the bachelor's degree.
C) an ability to classify transactions by type.
D) an ability to organize and summarize economic events.
Answer: A
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6) Discuss the differences and similarities between the roles of accountants and auditors. What additional
expertise must an auditor possess beyond that of an accountant?
Answer: The role of accountants is to record, classify, and summarize economic events in a logical
manner for the purpose of providing financial information for decision making. To do this, accountants
must have a thorough understanding of the principles and rules that provide the basis for preparing the
accounting information. In addition, accountants also help to develop systems to ensure that the entity's
economic events are properly recorded in a timely manner and at a reasonable cost.
The role of auditors is to determine whether the recorded financial information prepared by accountants
reasonably reflects the economic events that occurred. To do this, the auditor must not only understand
the principles and rules that provide the basis for preparing financial information, but must also possess
expertise in the accumulation and evaluation of audit evidence. It is this latter expertise that distinguishes
auditors from accountants.
Diff: 1 Type: ES Page Ref: 6
1.3 Explain how auditing reduces information risk
1) How does a financial statement audit affect a bank manager's decisions in providing loans to a
corporate client?
A) Information risk is reduced and the bank manager can lower the interest rate charged.
B) The bank manager will lower the risk-free interest rate that applies to the corporation.
C) The business risk for the client will be reduced, so the borrowing costs will decline.
D) The business risk for the client will be increased, so the borrowing costs will be lowered.
Answer: A
Learning Obj.: 1-3 Explain how auditing reduces information risk
2) What is the most appropriate method for an organization to lower information risk related to its
financial statements?
A) Have good bookkeeping work completed on the accounts.
B) Use a high quality software package to keep track of information.
C) Have an independent financial statement audit conducted.
D) Have an independent operational audit conducted on effectiveness.
Answer: C
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3) Frederic is an account manager at a large Canadian bank. Frederic has to decide if the bank will make a
loan to Frost Corp, a snow removal company. Further, Frederic has to decide how much they will lend to
Frost and at what rate.
Assuming that Frederic makes the loan, what factors will he use to decide the rate of interest? What
factors are impacted by auditing and how?
Answer: Factors:
1. Risk free interest rate: The rate the bank could earn in a risk-free investment such as Canada Treasury
bills.
2. Business risk for the customer: Possibility that the customer will not be able to repay their loan because
of economic or business conditions.
3. Information risk: Possibility that the information upon which the business decisions are made were
inaccurate.
Audits impact information risk. Having a set of audited financial statements can reduce the information
risk and increase the likelihood that the bank will make the loan and even at a reduced interest rate due
to the reliance it can place on the audited financial statements.
1.4 Determine the causes of information risk
1) Which of the following is not a cause of information risk?

A) simple exchange transactions
B) voluminous data
C) remoteness of information
D) biases and motives of the provider
Answer: A
Learning Obj.: 1-4 Determine the causes of information risk
2) Information risk can be caused through any one of the following except
A) remoteness of information.
B) low volume of data.
C) biases and motives of the provider.
D) complex exchange transactions.
Answer: B
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3) The underlying conditions that create demand by users for reliable financial information include the
fact that
A) more reliable information will allow investors to calculate the rate of return on their investment.
B) governments rely on such information to create tax policies.
C) there is a need for the expression of an opinion as to the fairness of financial statements.
D) users are separated from accounting records by distance and time.
Answer: D
4) The risk that financial statements may be materially false and misleading is called
A) information risk.
B) client risk.
C) business risk.
D) assessment risk.
Answer: A
1.5 Explain how information risk can be reduced
1) Which of the following terms best describes the increased likelihood that unreliable information will be
provided to decision makers?
A) audit risk
B) information risk
C) inherent risk
D) business risk
Answer: B
Learning Obj.: 1-5 Explain how information risk can be reduced
2) Information risk can be reduced through any one of the following except
A) having the user verify the information.
B) having the chief financial officer certify and sign-off on the financial statements.
C) having the user share information risk with management.
D) providing audited financial statements to users.
Answer: B
Learning Obj.: 1-5 Explain how information risk can be reduced
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1.6 Identify major types of audits and auditors
1) Blader Ng. Inc. has recently placed new air-cleaning systems in their smokestacks to meet air quality
regulations. An auditing firm has been engaged to assess air quality and compare results to legislated
requirements. What type of audit or engagement is the auditor conducting?
A) financial statement
B) compliance
C) operational
D) review
Answer: B
Diff: 3 Type: MC Page Ref: 9-10
Learning Obj.: 1-6 Identify major types of audits and auditors
2) As part of its loan agreement, Big Bank requires that only accounts receivable less than 60 days old be
used as collateral. An auditor has been engaged to provide assurance that the accounts receivable on the
list provided to the bank are indeed less than 60 days old. What type of engagement is the auditor
conducting?
A) financial statement
B) compliance
C) operational
D) review
Answer: B
3) A review of any part of an organization's procedures and methods for the purpose of evaluating
efficiency and effectiveness is classified as a(n)
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
Answer: C
4) Which of the following is most difficult to evaluate objectively?

A) efficiency and effectiveness of operations
B) compliance with government regulations
C) presentation of financial statements in accordance with a generally accepted accounting framework
D) internal controls in use at a small company
Answer: A
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5) A typical objective of an operational audit is for the auditor to

A) determine whether the financial statements fairly present the entity's operations.
B) evaluate the feasibility of attaining the entity's operational objectives.
C) evaluate the effectiveness of an internal process.
D) report on the entity's relative success in attaining profit maximization.
Answer: C
6) Which of the following audits can be regarded as being solely "compliance" audits?
A) Canada Revenue Agency's examinations of the returns of taxpayers.
B) the Auditor General's evaluation of the computer operations of governmental units.
C) an internal auditor's review of his employer's payroll authorization procedures.
D) a public accounting firm's audit of the local school district.
Answer: A
7) Which of the following is an example of a financial statement audit?

A) determining whether ABC's financial statements overall do not violate any debt covenants
B) determining whether ABC's overall financial statements are stated in conformity with IFRS
C) evaluating the effectiveness and efficiency of internal controls used to create account balance
D) evaluating the effectiveness and efficiency of internal controls used to record transactions
Answer: B
8) What is the primary difference between internal and external auditors?

A) the methodology used to conduct financial statement audits
B) the level of competence required
C) the parties to whom the auditor is responsible
D) the level of objectivity required
Answer: C
9) Which of the following organizations establishes ethical standards and standards for the practice of
Internal Auditing?
A) Information Systems Audit and Control Association (ISACA).
B) Institute of Internal Auditors (IIA).
C) Society of Management Accountants of Canada (SMAC).
D) Chartered Professional Accountants of Canada (CPA).
Answer: B
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10) Auditors General are responsible for auditing which types of organizations?
A) public companies with shares issued to investors
B) private companies that have loans outstanding to banks or other creditors
C) ministries, departments, agencies that report to Government
D) any organization that submits tax returns to the tax authorities
Answer: C
11) The extent and the scope of the audits conducted by Auditors General are determined by
A) legislation in the Auditor General's jurisdiction.
B) audit partner planning and audit program development.
C) the Auditor General and his/her staff.
D) the financial statement auditors of the client.
Answer: A
12) To operate effectively, an internal auditor must be independent of the

A) line functions of the organization.
B) entity that is being audited.
C) employer-employee relationship that exists for other employees in the organization.
D) outsourcing organizations used.
Answer: A
13) The internal audit group typically reports directly to the

A) board of directors.
B) management of the company.
C) external auditor.
D) audit committee.
Answer: D
14) An example of a forensic accounting assignment might be

A) determining whether overall financial statements are stated in conformity with IFRS.
B) estimating the value of inventory lost in a warehouse theft.
C) evaluating the effectiveness of an internal process.
D) ensuring compliance with specific legislation.
Answer: B
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15) In operational auditing, the auditor studies business operations and makes recommendations about
all of the following except
A) economic and efficient use of resources.
B) the fairness of the financial statements.
C) effective achievement of business objectives.
D) compliance with company policies.
Answer: B
16) We discuss four types of auditors: public accountants, government auditors, Canada Revenue Agency
auditors, and internal auditors. Briefly describe the work and responsibilities of each type of auditor.
Answer: Public Accountants: Primary function is the audit of financial statements of publicly traded
companies and of other organizations requiring audits. The type of audit normally performed is known
as an attestation engagement because they attest to the fair presentation of the financial statements. To
conduct the audit of financial statements, the auditor must be a licensed public accountant.
Government Auditors: Primary function is the audit of ministries, departments, and agencies that report
to the government. A government auditor performs the audit function for the government.
Canada Revenue Agency Auditors: Primary responsibility is the enforcement of federal tax laws. The
Canada Revenue Agency auditors audit the returns of taxpayers to determine whether they have
complied with the tax laws. They only perform compliance audits.
Internal Auditors: Internal auditors are normally members of the IIA and work for individual companies
to audit for management. The internal auditor's responsibilities can vary considerably but often include
operations auditing and reporting their findings directly to the board of directors and audit committee.
The internal auditor must be independent from the line function in the organization he/she is auditing.
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17) To do an audit, it is necessary to have information in a verifiable form and some criteria by which the
auditor can evaluate the information.
Required:
A) What information and criteria would a public accounting firm use when auditing a company's
financial statements?
B) What information and criteria would a Canada Revenue Agency auditor use when auditing that same
company's tax return?
C) What information and criteria would an internal auditor use when performing an operational audit to
evaluate whether the company's computerized payroll processing system is operating efficiently and
effectively?
Answer: A) The information used by a public accounting firm in a financial statement audit is the
financial information in the company's financial statements. The criteria used are a relevant accounting
framework such as IFRS or ASPE.
B) The information used by a Canada Revenue Agency auditor is the financial information in the
auditee's federal tax return. The criteria is the Income Tax Act and interpretations.
C) The information used by an internal auditor when performing an operational audit of the payroll
system could include various items such as the number of errors made, costs incurred by the payroll
department, and number of payroll records processed each month. The criteria would consist of company
standards for departmental efficiency and effectiveness.
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18) Mega Manufacturing Company (Mega) is thinking about acquiring Localized Small Producer Inc.
(LSP), a small manufacturing company that produces related products. Mega has examined the financial
statements of LSP, which show only a small profit in the last five years. Management of LSP has taken
reasonable salaries, and cost of goods sold is higher than the industry average for LSP. Mega believes that
it will be able to introduce operational efficiencies at LSP, improving the profitability of the small
company, if acquired.
Required:
A) What type of engagement should be conducted to assess the operational efficiencies of LSP? Justify
your response.
B) Who should be engaged to conduct the engagement?
C) What major problems might the auditors encounter when conducting the audit and writing the
report?
Answer: A) Mega should have an operational audit conducted. An operational audit is a review of any
part of an organization's operating procedures and methods for the purpose of evaluating economy,
efficiency, and effectiveness.
B) The operational audit could be conducted by Mega's internal auditors, assuming that they have
internal auditors. It could also be conducted by a public accounting firm. For reasons of independence, if
Mega is a listed company, then Mega should engage a different public accounting firm than its present
auditors.
C) Operational audits are not easily defined. First, the auditors would need to prepare criteria with the
assistance of management to define efficiency. Then, the auditors would need to consider the type of
evidence that might be available. For example, if LSP has older manufacturing equipment than Mega,
LSP might be operating at peak efficiency - evidence will need to be geared to the criteria. Then, the
report will need to be prepared in the context of the criteria and the evidence that will be collected. As
there are no standard reports in operational auditing, the auditors will need to customize the report
based upon the criteria and evidence collected.
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19) Jordan set up a not-for-profit corporation several years ago to provide scholarships to disadvantaged
youth in his community. Scholarships Get Up and Go Foundation now has assets of over $5 million and
provides about ten university scholarships every year. Jordan is proud of the new doctors, dentists, and
other healthcare practitioners that his foundation has funded.
Jordan is thinking of starting another foundation in an old building that he has purchased. It would be a
youth drop-in centre offering music lessons, art facilities, and gym facilities, and would have links to local
high schools to offer homework clubs to encourage good grades.
Required:
A) Why should Jordan have the financial statements of both of these foundations audited?
B) Who would be the users of the financial statements of the foundations?
C) What other types of services could PAs provide to Jordan and the foundations?
Answer: A) Auditing provides added assurance with respect to the information provided in the financial
statements: perhaps he could get a better interest rate on invested funds at a financial institution. It might
also give added credibility to potential donors of funds, and would also show the assets, liabilities, and
any surplus/deficit are reported in the proper entity and have not been reported or used in the wrong
entity.
B) Users could be financial institutions that are holding the Foundations' money, Jordan, his employees,
donors and potential donors, tax authorities, and organizations that regulate charitable organizations,
such as provincial and federal regulatory agencies. If the foundations receive government funding, then
the organizations providing funding would also be users of the financial statements.
C) PAs could provide advice on how to invest the capital funding that is used for the scholarships. They
could help design the accounting procedures in place at both foundations. They could provide
bookkeeping and compilation assistance, as well as prepare tax returns and any regulatory filings. They
could assist the foundation in obtaining working capital funding for the new drop-in centre, if needed.
20) An example of a forensic accounting assignment might be

A) determining whether overall financial statements are stated in conformity with IFRS.
B) estimating the value of inventory lost in a warehouse theft.
C) evaluating the effectiveness of an internal process.
D) ensuring compliance with specific legislation.
Answer: B
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1.7 Explain the general characteristics of an assurance engagement
1) What is the nature of the service provided when an auditor evaluates information using suitable
criteria and issues a report that attests to the reliability of the information?
A) internal audit engagement
B) review engagement
C) compilation engagement
D) attestation engagement
Answer: D
Learning Obj.: 1-7 Explain the general characteristics of an assurance engagement
2) The No-Name Agency conducts an independent service for a company to determine if its suppliers
have complied with health and safety regulations, child labour guidelines, and other employee welfare
issues. What type of service is No-Name providing?
A) assurance
B) attest
C) review
D) compilation
Answer: A
3) Which of the following is an example of an attestation engagement?

A) accounting and bookkeeping services for the accounts
B) an audit of internal controls over financial reporting
C) preparation of the annual financial statements with notes
D) completion of provincial and federal tax returns
Answer: B
4) When do individuals and organizations typically need assurance services?

A) usually only when organizations obtain debt or other loans
B) for five years from the start of an organization until debt is retired
C) only when historical data, such as financial information, needs to be audited
D) whenever assurance is provided by a practitioner who is independent and unbiased
Answer: D
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5) A major type of assurance service performed by large public accounting firms is

A) auditing.
B) reviewing.
C) compilation.
D) management consulting.
Answer: A
6) Two types of services provided by public accounting firms are audits and reviews. Discuss the
similarities and differences between these two types of services. Which type provides the most
assurance?
Answer: Two primary types of services are audits of historical financial statements and reviews of
historical financial statements. While both services involve the accumulation and evaluation of evidence
regarding assertions made by management in the company's financial statements, an audit involves a
more extensive examination and provides a higher level of assurance about the client's financial
statements than a review.
1.8 Describe assurance and nonassurance services provided by public accountants and distinguish the
audit of financial statements from other assurance services
1) What impact is the presence of factors such as real-time information (such as via the Internet) expected
to have upon the demand for assurance services?
A) Demand is expected to decline due to the lack of adequate resources.
B) Demand is expected to grow due to the increase in large corporations.
C) Demand is expected to grow due to the need for forward-looking information.
D) Demand is expected to decline as small businesses use the Internet more.
Answer: C
Learning Obj.: 1-8 Describe assurance and nonassurance services provided by public accountants and
distinguish the audit of financial statements from other assurance services
2) The need to implement philosophies and practices commonly referred to as "improved business
practices" comes from
A) increased competition resulting in public accounting firms being concerned about keeping clients and
maintaining a reasonable profit.
B) a CAS pronouncement.
C) an IFRA pronouncement.
D) a need to increase profitability on assurance type mandates.
Answer: A
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3) In Canada, publicly traded companies are

A) required to have audits.
B) strongly encouraged to have audits.
C) not required to have an audit if they have a review.
D) not required to have an audit.
Answer: A
4) A shareholder of a public Canadian firm can have access to the audited financial statements
A) on the Internet.
B) by calling the accounting department of the company.
C) by requesting a copy from the auditors.
D) if he/she holds more than 1% of the shares of the company.
Answer: A
5) What type of information is available from www.sedar.com (System for Electronic Document Analysis
and Retrieval)?
A) minutes of shareholders and directors meetings
B) transaction reports from major credit card companies
C) annual reports and management discussion and analysis
D) listings of all of the shareholders on record
Answer: C
6) A reason for a not-for-profit organization to be audited is to

A) comply with the laws requiring them to be audited.
B) meet requirements of lenders or funding sources.
C) have a professional accountant perform their bookkeeping.
D) ensure that their financial statements do not contain errors.
Answer: B
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7) Which of the following services provides a moderate level of assurance about the client's financial
statements?
A) forecasts and projections
B) compliance
C) review
D) audit
Answer: C
8) Which of the following is an advantage of a review engagement as compared to an audit engagement?

A) For the review engagement, information risk is reduced more than for an audit.
B) For the review engagement, the documentation to be provided by the client is greater.
C) For the review engagement, the financial statements assessed will have more detail.
D) The review engagement requires considerably less work, so is less costly.
Answer: D
9) The Sarbanes-Oxley Act requires the auditor to attest to the

A) accuracy of the financial statements.
B) efficiency of the internal controls in financial reporting.
C) effectiveness of internal controls.
D) compliance of the company with the generally accepted accounting framework.
Answer: C
10) The reasoning behind the requirements of the Sarbanes-Oxley Act's section 404 (attestation on internal
control over financial reporting) is that
A) effective controls result in greater profits to organizations, reducing business failures.
B) effective controls reduce the likelihood of future misstatements in the financial statements.
C) better internal controls can be implemented at lower cost, improving product quality.
D) automated controls improve customer service, resulting in higher product sales.
Answer: B
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11) There is an increasing demand for assurance about computer controls surrounding financial
information transacted electronically and the security of the information related to the transaction. This is
in large part due to
A) the increasing presence of Internet sales in many businesses.
B) the use of computer-assisted auditing tools.
C) the large volume of transactions and information shared online and in real-time by companies.
D) client's uncertainty about the proper functioning of their computer systems.
Answer: C
12) Which of the following services provides no assurance about the client's financial statements?
A) compilation
B) review
C) audit
D) SysTrust
Answer: A
13) Herbert Zora is having financial statements prepared by his PA to accompany his tax return. His
primary concern is cost. Of the following, the lowest-cost engagement that the PA can perform for Zora's
financial statements is
A) compilation.
B) review.
C) audit.
D) WebTrust.
Answer: A
14) When readers are cautioned that the financial statements may not be appropriate for their purposes,
the non-assurance service is called a(n)
A) SysTrust.
B) compilation.
C) review.
D) audit.
Answer: B
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15) As a PA, you have been asked to prepare your sister Betty's year-end financial statements. Betty is a
photographer and is the sole shareholder of a small company called Best Weddings Ltd. She photographs
weddings, graduations, and schools, and earns about $75 000 per year. Betty has said that she only needs
the financial statements for her tax returns and would like you to prepare the tax returns too.
Required:
A) Would you be able to prepare the financial statements for your sister? Why or why not?
B) If yes, what type of report would you prepare to accompany the financial statements?
C) Would you be able to prepare the tax returns for your sister? Why or why not?
Answer: A) Yes the PA would be able to prepare the financial statements as a bookkeeping (or
compilation) assignment. No assurance is provided for a compilation, so independence is not required.
An audit or review could not be prepared because for those engagements, assurance is provided, which
means that the PA would need to be independent.
B) A compilation report would be prepared to accompany the financial statements. The report would
need to disclose the relationship and that independence was absent.
C) Yes, the PA would be able to prepare the tax returns, as assurance is not required for tax returns.
Identification of the preparer is required on tax returns. It would be important to discuss with your sister
why she wants you to prepare the tax returns (Does she just want to save some money? Or is she trying
to prepare tax returns that are fraudulent?). It would be inappropriate (and professionally dangerous) to
be associated with false and misleading information, as one could be sued by the tax department and
expelled from the profession.
Diff: 3 Type: ES Page Ref: 18
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Chapter 1 Auditing and Assurance Services

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Chapter 1 - Auditing and Assurance Services

Auditing I (The College of The Bahamas)

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Auditing, 14e (Arens)

1.1 Describe auditing and its purpose

2) Auditing should be done by a qualified

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10) It is important for the auditor to be independent because

11) As an external auditor is paid a fee by a client company, he or she

12) The independent auditor's report is the

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1.2 Distinguish between auditing and accounting

2) Which of the following is an example of accounting rather than auditing?

3) In auditing accounting data, the concern is with

4) Which of the following is an example of auditing rather than accounting?

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1.3 Explain how auditing reduces information risk

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1.4 Determine the causes of information risk

1) Which of the following is not a cause of information risk?

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1.5 Explain how information risk can be reduced

A) having the user verify the information.

D) providing audited financial statements to users.

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1.6 Identify major types of audits and auditors

4) Which of the following is most difficult to evaluate objectively?

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5) A typical objective of an operational audit is for the auditor to

7) Which of the following is an example of a financial statement audit?

8) What is the primary difference between internal and external auditors?

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12) To operate effectively, an internal auditor must be independent of the

13) The internal audit group typically reports directly to the

14) An example of a forensic accounting assignment might be

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20) An example of a forensic accounting assignment might be

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1.7 Explain the general characteristics of an assurance engagement

3) Which of the following is an example of an attestation engagement?

4) When do individuals and organizations typically need assurance services?

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5) A major type of assurance service performed by large public accounting firms is

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3) In Canada, publicly traded companies are

6) A reason for a not-for-profit organization to be audited is to

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8) Which of the following is an advantage of a review engagement as compared to an audit engagement?

9) The Sarbanes-Oxley Act requires the auditor to attest to the

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