Chapter 1

Question 1

is an engagement where a practitioner is engaged to issue a written report and concludes on a subject matter for which the accountable party is responsible.

Answer 1

assurance engagement

Question 2

a prerequisite for an assurance engagement is the existence of an ________, where one party is answerable to another for the subject matter

Answer 2

accountability relationship

Question 3

The financial framework chosen by management to prepare a company’s financial statements. For example, an applicable framework for a reporting issuer would be International Financial Reporting Standards (IFRS). An applicable framework for a private enterprise could be Accounting Standards for Private Enterprises (ASPE), or it could be IFRS.

Answer 3

applicable financial reporting framework

Question 4

Statements made by management regarding the recognition, measurement, and presentation and disclosure of items in the financial statements.

Answer 4

assertions

Question 5

Information used by the auditor to support the audit opinion.

Answer 5

audit evidence

Question 6

The file where the evidence and documentation of the work performed is kept as a permanent record to support the opinion issued.

Answer 6

audit file

Question 7

The list or description of audit procedures to be performed.

Answer 7

audit plan

Question 8

The risk that the auditor may express an inappropriate opinion. This means the auditor may indicate that the financial statements are not materially misstated when in fact they are.

Answer 8

audit risk

Question 9

A structured representation of historical financial information, including the related notes.

Answer 9

financial statements

Question 10

The auditor’s formal expression of opinion on whether the financial statements are in accordance with the applicable financial reporting framework.

Answer 10

independent auditor’s report

Question 11

The processes implemented and maintained by management to help the entity achieve its objectives.

Answer 11

internal control

Question 12

An amount or disclosure that is significant enough to make a difference to a user. For example, if a company reports a profit of $100,000 and the auditor finds an error resulting in an overstatement of net income by $10, this probably wouldn’t affect an investor’s decision. However, if the auditor finds an error overstating revenue by $50,000 or 50 percent of the profit, this likely would affect the user’s decision and would therefore be considered material. The concept of materiality is one of the reasons why an audit never provides 100 percent assurance.

Answer 12

materiality

Question 13

The quantity (sufficiency) and quality (appropriateness) of the evidence collected by the auditor.

Answer 13

sufficient and appropriate evidence

Question 14

The auditor concludes that the financial statements are fairly presented.

Answer 14

unmodified opinion

Question 15

Paper or electronic documentation of the audit created by the audit team as evidence of the work completed.

Answer 15

working papers

Question 16

an entity whose shares, stock, or debt are listed on a stock exchange

Answer 16

listed entities

Question 17

the consistent and faithful application of accounting standards when preparing the financial statements

Answer 17

Fair presentation

Question 18

an audit to determine whether the entity has conformed with regulations, rules, or processes

Answer 18

compliance audit

Question 19

an assessment of the economy, efficiency, and effectiveness of an organization’s operations

Answer 19

operational audits

Question 20

an audit that encompasses a range of audit and audit-related activities, such as a financial statement audit, operational audit, and compliance audit

Answer 20

comprehensive audit

Question 21

an independent service within an entity that generally evaluates and improves risk management, internal control procedures, and elements of the governance process

Answer 21

internal audit

Question 22

non-audit firms that provide assurance services on non-financial information, such as corporate social responsibility and environmental disclosures

Answer 22

consulting firms

Question 23

assurance that provides high but not absolute assurance on the reliability of the subject matter

Answer 23

Reasonable assurance

Question 24

assurance that provides negative assurance on the reliability of the subject matter

Answer 24

Moderate assurance

Question 25

engagement in which the auditor does adequate work to report whether or not anything came to their attention that would lead them to believe that the information being assured is not fairly presented

Answer 25

Review engagement

Question 26

what results when an auditor completes a set of tasks requested by the client and reports factually on the results of that work to the client

Answer 26

No assurance

Question 27

engagement in which an auditor compiles a set of financial statements based on the information provided by the client, ensuring mathematical accuracy

Answer 27

Compilation engagement

Question 28

the communication issued when the auditor performs a compilation engagement

Answer 28

Notice to Reader

Question 29

a clean audit opinion; the auditor concludes that the financial statements are fairly presented

Answer 29

Unmodified opinion

Question 30

what results when an auditor will issue an unmodified audit opinion when there is a significant issue that is adequately disclosed and there is a need to draw the attention of the user to it

Answer 30

Emphasis of matter

Question 31

opinion provided when the auditor concludes that the financial statements contain a material (significant) misstatement

Answer 31

Qualified opinion

Question 32

Theoretical frameworks

Answer 32

Agency theoryInformation hypothesisInsurance hypothesis

Question 33

Agency theory

Answer 33

tells us that due to the remoteness of the owners from the entity, the complexity of items included in the financial statements, and competing incentives between the owners and managers, the owners (principals) have an incentive to hire an auditor (incur a monitoring cost) to assess the fair presentation of the information contained in the financial statements prepared by their managers (agents).

Question 34

Information hypothesis

Answer 34

tells us that due to the demand for reliable, high-quality information, various user groups, including shareholders, banks, and other lenders, will demand that financial statements be audited to aid their decision-making.

Question 35

tells us that investors will demand that financial statements be audited as a way of insuring against some of their loss should their investment fail.

Answer 35

Insurance hypothesis

Question 36

CSA

Answer 36

Canadian Securities Administrators

Question 37

The audit expectation gap can be reduced by:

Answer 37

auditors performing their duties appropriately, complying with auditing standards, and meeting the minimum standards of performance that should be expected of all auditorspeer reviews of audits to ensure that auditing standards have been applied correctlyauditing standards being reviewed and updated on a regular basis to enhance the work being done by auditorseducation of the publicenhanced reporting to explain what processes have been followed in arriving at an audit (reasonable assurance) or a review (limited assurance) opinion (significant improvements have been introduced by standard-setters improving assurance reporting)assurance providers reporting accurately the level of assurance being provided (reasonable, limited, or none).

Question 38

The parties relevant to an assurance engagement are:

Answer 38

assurance practitioner, users, responsible party.

Question 39

Under the Canada Business Corporations Act the auditor has a responsibility to:

Answer 39

form an opinion on the fair presentation of the financial statements.

Question 40

Performance audits are useful because:

Answer 40

they are concerned with the economy, efficiency, and effectiveness of an organization’s activities.

Question 41

The function of internal audit is determined by:

Answer 41

those charged with governance and management.

Question 42

Negative assurance means:

Answer 42

he auditor has done adequate work to report whether or not anything came to their attention that would lead them to believe that the information being assured is not fairly presented.

Question 43

A “clean” audit report is issued when:

Answer 43

the audit opinion is unqualified and unmodified.

Question 44

Those charged with governance have a responsibility to ensure that the information in financial statements is:

Answer 44

relevant and reliable.comparable and understandable.fairly presented

Question 45

Agency theory explains that audits are demanded because:

Answer 45

conflicts can arise between managers and owners.

Question 46

The insurance hypothesis means:

Answer 46

an audit acts as insurance.

Question 47

The audit expectation gap occurs when:

Answer 47

user beliefs do not align with what an auditor has actually done.