Auditing The Art and Science of Assurance Engagements, Fifteenth Canadian Edition, 15E Alvin Arens test bank

TEST BANK Akolisa Ufodike York University Auditing: The Art and Science of Assurance Engagements Fifteenth Canadian Edition Alvin A. Arens Michigan State University Randal J. Elder Syracuse University Mark S. Beasley North Carolina State University Chris E. Hogan Michigan State University Joanne C. Jones York University ISBN: 978-0-13-669229-4 Copyright © 2022 Pearson Canada Inc., Toronto, Ontario. All rights reserved. This work is protected by Canadian copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the Internet) will destroy the integrity of the work and is not permitted. 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Copyright © 2022 Pearson Canada Inc., Toronto, Canada ii CONTENTS Chapter 1 The Demand for Audit and Other Assurance Services Chapter 2 The Public Accounting Profession and Audit Quality Chapter 3 Professional Ethics and Legal Liability Chapter 4 Audit Responsibilities and Objectives Chapter 5 Audit Evidence Chapter 6 Client Acceptance, Preliminary Planning, and Materiality Chapter 7 Risk Assessment and Inherent Risk Chapter 8 Understanding the Internal Control System Chapter 9 Control Risk Assessment Chapter 10 Risk Response: Audit Strategy, Overall Approach, and Audit Program Chapter 11 Audit Sampling Concepts Chapter 12 Audit of the Revenue Cycle Chapter 13 Audit of the Acquisition and Payment Cycle Chapter 14 Audit of the Inventory and Distribution Cycle Chapter 15 Audit of the Human Resources and Payroll Cycle Chapter 16 Audit of Cash and Cash Equivalents Chapter 17 Completing the Audit Chapter 18 Audit Reports on Financial Statements Chapter 19 Other Audits, Assurance Engagements, and Related Services Chapter 20 Audit of the Capital Acquisition and Repayment Cycle 1 Copyright © 2022 Pearson Canada, Inc. Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 1 The Demand for Audit and Other Assurance Services 1.1 Define 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 Diff: 2 Learning Objective: 1-1 Define 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 Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 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 Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 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, need to be audited D) whenever assurance is provided by a practitioner who is independent and unbiased Answer: D Diff: 2 Learning Objective: 1-1 Define an assurance engagement. 2 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 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. Diff: 1 Learning Objective: 1-1 Define an assurance engagement. 1.2 Define 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 Learning Objective: 1-2 Define 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 3 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 4 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 3 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 5 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 1 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 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 Diff: 2 Learning Objective: 1-2 Define auditing and its purpose. 6 Copyright © 2022 Pearson Canada, Inc. 16) Figure 1-2 Use your knowledge of the definition of auditing and Figure 1-2: 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 1-2 relates to the 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 Learning Objective: 1-2 Define auditing and its purpose. 7 Copyright © 2022 Pearson Canada, Inc. 1.3 Explain why there is a demand for audit and other assurance services. 1) A bank manager is evaluating an application for a bank loan from a new corporate client. The bank manager decides to request audited financial statements. Which of the following likely informed this decision? A) The bank manager is seeking to lower the risk-free interest rate that applies to the corporation. B) The bank manager believes the opinion of a knowledgeable third party is necessary to reduce the information risk. C) The bank manager is unsure that the client will be able to continue operating successfully in the future given the economic climate. D) The bank manager believes audited financial statements will be necessary for the Canada Revenue Agency. Answer: B Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 2) What is the most appropriate method for an organization to lower information risk related to its financial statements? A) Hire a good CPA to complete its bookkeeping work. 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 Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 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. Diff: 3 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 8 Copyright © 2022 Pearson Canada, Inc. 4) ZK3 Ltd. is a successful 20-year-old private Canadian family-owned business. The company is owned equally by four siblings who are all involved in managing the daily operations of the company. A private equity company is contemplating an investment in ZK3 and insists on audited financial statements. The following are likely explanations for the private equity company's request except A) biases and motives of ZK3 management. B) Canada Revenue Agency requirements for audited financial statements. C) reducing information risk to the private equity investor. D) remoteness of information related to ZK3's operations. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 5) 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 Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 6) 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 Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 7) Michael & Oliver Properties Ltd. is a successful real estate company with headquarters in Oakville, Ontario. Most of its operations occur internationally in Nigeria. Michael & Oliver have a reliable CPA on staff in the Nigerian office who does the bookkeeping and compiles the financial statements. The bookkeeper reports to the CFO in Oakville, who is responsible for filing the taxes in Canada. Lala Inc., a partner on a new development project in Burlington, is insisting on audited financial statements. Which of the following concerns can Lala's financial statement auditors assist in addressing? A) Concerns over business risk B) Concerns over remoteness of information C) Concerns over client risk D) Concerns over assessment risk. Answer: B Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9 Copyright © 2022 Pearson Canada, Inc. 8) Annual financial statement audits are required for which of the following situations? A) Canadian corporations as part of their tax filings with the Canadian Revenue Agency B) American corporations as part of filing their tax returns with the IRS C) Public companies and large not-for-profit organizations D) Private companies Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 9) How does a financial statement auditor help reduce information risk, and make financial statements more trustworthy and reliable? A) By bringing integrity, independence, competence, and knowledge of financial statement reporting to the audit of the financial statements. B) By ensuring the business is using its resources efficiently. C) By verifying that the company has a credible CSR plan. D) By confirming that the company is only taking reasonable business risk. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10) Information risk can be reduced through any one of the following except A) having the user verify the information. B) providing audited financial statements to users. C) having the chief financial officer certify and sign off on the financial statements. D) having the user share information risk with management. Answer: C Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 11) A bank manager is evaluating a loan application for Leonard & Ebelle, the private parent company with three subsidiaries in different sectors, including real estate, retail, and banking. The bank manager has received the unaudited consolidated financial statements for Leonard & Ebelle. The bank manager decides to request audited financial statements from Leonard & Ebelle as a precondition for approving the loan. The following could justify the bank manager's request, except A) audits are mandatory for large private companies. B) concerns over remoteness of information. C) concerns over voluminous data. D) concerns over complex exchange transactions. Answer: A Diff: 2 Learning Objective: 1-3 Explain why there is a demand for audit and other assurance services. 10 Copyright © 2022 Pearson Canada, Inc. 1.4 Explain why there is a demand for audit and other assurance services. 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 Learning Objective: 1-4 Describe major types of assurance engagements 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 11 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 1 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 12 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 13 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 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. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 14 Copyright © 2022 Pearson Canada, Inc. 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 are 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. Diff: 3 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 15 Copyright © 2022 Pearson Canada, Inc. 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 the 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. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 16 Copyright © 2022 Pearson Canada, Inc. 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. Diff: 2 Learning Objective: 1-4 Describe major types of assurance engagements and auditors. 17 Copyright © 2022 Pearson Canada, Inc. 1.5 Distinguish between accounting and financial statement auditing. 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 Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 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 Diff: 3 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 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 Diff: 1 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 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 Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 18 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 6) Auditors are licensed to perform financial statement audits, while accountants are not. Which of the following is a requirement for individuals who perform audits, but not for those performing accounting? A) Objectivity B) Independence C) Integrity D) Requisite education and training Answer: B Diff: 2 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 7) 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 Learning Objective: 1-5 Distinguish between accounting and financial statement auditing. 19 Copyright © 2022 Pearson Canada, Inc. 1.6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 20 Copyright © 2022 Pearson Canada, Inc. 5) What type of information is available from (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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 21 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 a lower cost, improving product quality. D) automated controls improve customer service, resulting in higher product sales. Answer: B Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 1 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 22 Copyright © 2022 Pearson Canada, Inc. 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 Diff: 2 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 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 Diff: 3 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 23 Copyright © 2022 Pearson Canada, Inc. 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 Learning Objective: 1-6 Describe assurance and nonassurance services provided by public accountants and distinguish the financial statement audit from other assurance services. 1 Copyright © 2022 Pearson Canada, Inc. Auditing: The Art and Science of Assurance Engagements, 15ce (Arens) Chapter 2 The Public Accounting Profession and Audit Quality 2.1 Describe the public accounting industry. 1) One of the main advantages of a "big" public accounting firm is A) their lower professional fees due to economies of scale. B) their ability to share with the client knowledge and experience from similar companies they have audited. C) their ability to audit nearly all the largest companies worldwide. D) the increased reliability of their audit reports. Answer: C Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2) National network firms are those with A) offices in all major OECD nations. B) international representation in most cities around the world. C) offices in all major Canadian cities. D) national and international affiliations providing services in all major centres. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 3) Public accounting firms in Canada that have more than 50 professional staff are called A) the "Big Four" firms. B) national network firms. C) large regional and local firms. D) small local firms. Answer: C Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 4) What is the size of most small local public accounting firms in Canada? A) fewer than 25 employees B) between 25 and 49 employees C) between 50 and 75 employees D) more than 75 employees Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 2 Copyright © 2022 Pearson Canada, Inc. 5) The most common organizational form used by public accounting firms is A) sole proprietorship or partnership. B) limited liability corporation. C) corporation. D) co-operative. Answer: A Diff: 1 Learning Objective: 2-1 Describe the public accounting industry. 6) Large accounting firms are often limited liability partnerships (LLPs) because if their audits are conducted in accordance with CAS (Canadian Auditing Standards), A) partners not on the engagement would not be liable to pay with their personal assets when the LLP is sued. B) improved quality control practices can be initiated using technical personnel. C) more formal requirements are in place when reporting to federal tax authorities. D) partners are liable to pay with only a limited portion of their personal assets when the LLP is sued. Answer: A Diff: 3 Learning Objective: 2-1 Describe the public accounting industry. 7) Most international and national accounting firms in Canada are comprised of professional accountants with the designation A) CIA. B) CPA. C) CFE. D) CISA. Answer: B Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 8) What are the staff levels and responsibilities at public accounting firms? Answer: 1. Partner - Leads the engagement, reviews the overall audit work, and is involved in significant audit decisions. A partner has the ultimate responsibility for conducting the audit and maintaining client relations. Average experience of 10 years. 2. Senior manager - Leads the engagement and reviews the team's work. Works directly with the partner and assists them in client relationships. Average experience of 7-10 years. 3. Manager - Helps the in-charge plan and manage the audit, reviews the in-charge's work, and manages relations with the client. A manager may be responsible for more than one engagement at the same time. Average experience of 5-7 years. 4. Senior or in-charge auditor - Coordinates and is responsible for the audit field work, including supervising and reviewing staff work. Average experience of 2 to 5 years. 5. Staff accountant - Performs most of the detailed audit work. Average experience of 0-2 years. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 3 Copyright © 2022 Pearson Canada, Inc. 9) What are the different business organization structures that an accountant may use? What are the advantages of these structures? Answer: Accountants may establish a sole proprietorship, a partnership, a limited liability partnership, or a limited liability corporation. The latter two structures are permitted only in certain provinces, based upon provincial legislation. Advantages: A sole proprietorship is the only choice if there is only one PA. It is a simple business structure. A partnership is used to allocate income to all partners and helps ensure that all partners are responsible for the actions of the organization. A limited liability partnership (or limited liability corporation) is used to limit liability to only those partners who worked on or supervised a particular engagement. This helps protect the personal assets of partners. Diff: 2 Learning Objective: 2-1 Describe the public accounting industry. 2.2 Identify the organizations that affect the public accounting profession and their role. 1) The Canada Business Corporation Act gave authority to Canadian accounting and auditing standard-setters by stating that financial statements A) must be compiled in accordance with International Financial Reporting Standards. B) should be prepared in accordance with the standards in the CPA Canada Handbook. C) must be audited by accountants that reside in Canada. D) should be prepared in accordance with local financial reporting standards. Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 2) The reason for adopting the CASs is to A) comply with requirements in the Canada Business Corporations Act. B) respond to the increased litigation risks faced by auditors. C) be consistent with the international standards of auditing. D) simplify the auditing process. Answer: C Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 4 Copyright © 2022 Pearson Canada, Inc. 3) The implementation of the Sarbanes-Oxley requirements in the U.S. resulted in the creation of the PCAOB to oversee listed companies' auditors and develop audit standards. The impact of this requirement in Canada was A) the creation of new auditing standards to ensure better quality control for audits. B) revision to the rules of professional conduct for CPAs. C) additional training requirements for becoming an auditor. D) the creation of the CPAB to oversee Canadian audit professionals. Answer: D Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 4) Zara works as an auditor for Quincy, Quentin and Quaid, a public accounting firm in Richmond Hill, Ontario. Zara has decided to leave the firm and establish her own firm in Whitby, Ontario. She plans to offer audits and taxation services. Which organization is responsible for licensing Zara? A) CPA Canada B) CPAB C) PCAOB D) CPA Ontario Answer: D Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 5) What is the purpose of assurance standards issued by the AASB (Auditing and Assurance Standards Board) in Canada? A) to expose the newly established standards to as many groups as possible B) to provide current copies of the standards in advance of being placed in the CPA Handbook C) to provide supporting reference material and other resources D) to set standards for engagements such as reviews and compilations Answer: D Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 5 Copyright © 2022 Pearson Canada, Inc. 6) Lala graduated from York University with a Bachelor of Commerce. He now lives and works in Kingston, Ontario for a small local audit firm. Lala has written and passed the Common Final Exam (CFE) to become a CPA. Which organization is responsible for awarding Lala the CPA designation? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: B Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 7) Securities regulations in Canada are the responsibility of A) a national securities commission. B) provincial securities commissions. C) the professional accounting organizations. D) office of the Auditor General of Canada. Answer: B Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 8) Hannah graduated from York University with a Bachelor of Commerce and is now preparing to write the Common Final Exam (CFE). Which organization is responsible for setting the examination and establishing examination standards? A) CPA Canada B) CPA Ontario C) PCAOB D) CPAB Answer: A Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 9) Who is responsible for developing financial statement audit and assurance standards in Canada? A) AASB (Auditing and Assurance Standards Board) B) standards staff at CPA Canada C) provincial securities commissions D) the accounting firms who conduct financial statement audits Answer: A Diff: 1 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 6 Copyright © 2022 Pearson Canada, Inc. 10) A PA firm is conducting an audit of a public company that has operations in both Canada and Finland. There is a conflict between ISAs (International Statements on Auditing) and CASs (Canadian Auditing Standards) for the foreign operations that will be consolidated with the Canadian operations. Which reporting standards should the PA firm follow? A) Finnish reporting standards B) Canadian reporting standards C) international financial reporting standards D) the best of Canadian or international standards Answer: C Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 11) CPAB's purpose is to A) develop auditing standards. B) provide training and continuing education to auditors. C) clarify and communicate the role of the auditor to the public. D) improve the public's confidence in independent auditing. Answer: D Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 12) Nancy is a partner at a small local accounting firm in Markham, Ontario licensed to perform audits. She has been approached by n-Newi Technologies Inc., a TSX-listed public company, to complete the audit of its financial statements. This is Nancy's firm's first public company client. Which organization is responsible for licensing Nancy to complete n-Newi's audit? A) CPA Canada B) CPAB C) PCAOB D) CPA Ontario Answer: B Diff: 3 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 7 Copyright © 2022 Pearson Canada, Inc. 13) CPA Canada is the professional accounting organization for Chartered Professional Accountants (CPAs) in Canada. Describe the role and responsibilities of the organization in serving its members. Answer: Research and Publication: CPA Canada publishes the CPA Discussion & Analysis (D&A) Magazine along with accounting and auditing research studies. CPA Canada also coordinates the CFE exam. Continuing Education: CPA Canada provides courses, seminars, and online material to update its members on a variety of topics relating to accounting and auditing. It also has six specific specializations for its members. Establishing Standards and Rules: CPA Canada sets accounting and auditing standards that are published by the CPA and that must be followed by public accountants. Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 14) For each of the following situations, state which element of the profession or society encourages the public accountant to conduct himself or herself at a high level. A. Marco attended a seminar on the topic of business combinations to ensure he was up to date with the new standard. B. Barbara referred to the standard on hedging to ensure that her client had the appropriate documentation to qualify for hedge accounting. C. Gretchen refused to perform the audit of her uncle's restaurant chain. D. Walid worked overtime all week to ensure that the file was properly documented and met the quality control requirements. E. Sarah took the summer off to study for the Common Final Examination (CFE) to ensure that she would pass the entrance exam to become a Chartered Professional Accountant. Answer: A. Continuing Education. B. CPA Canada Handbook. C. Code of professional conduct. D. CPAB review and quality control. E. Professional examination. Diff: 2 Learning Objective: 2-2 Identify the organizations that affect the public accounting profession and their role. 8 Copyright © 2022 Pearson Canada, Inc. 2.3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 1) When the CPA Canada Handbook is silent on an auditing issue, which of the following is the best of the other authoritative sources that the auditor could use? A) Assurance and Related Services Guidelines (AuG) B) audit firm practice manuals C) past practice at the client D) the PA firm's audit standards partner Answer: A Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 2) The most authoritative requirements for public accountants performing financial statement audits in Canada are the A) standards used by the client. B) industry-specific standards. C) CPA Canada Handbook requirements. D) assurance guidelines. Answer: C Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 3) Which standards relate to public accounting firms' systems of quality control? A) Canadian auditing standards. B) Assurance and related services guidelines. C) Canadian standards on quality control. D) Provincial securities commissions standards. Answer: C Diff: 2 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 4) As per Canadian Auditing Standards CAS 200.11, the CAS helps the auditors fulfill which of the overall objectives relating to financial statement audits? Answer: 1. To provide reasonable assurance that the financial statements are not materially misstated. 2. To consider both potential fraud and error. 3. To communicate whether the financial statements comply with an applicable financial reporting framework by using the expression of an opinion. 4. To report on the financial statements, and communicate auditor findings in accordance with the CASs. Diff: 3 Learning Objective: 2-3 Describe how the CPA Canada Handbook–Assurance and Canadian Auditing Standards are organized. 9 Copyright © 2022 Pearson Canada, Inc. 2.4 Explain the purpose of and the principles underlying the financial audit. 1) What is an auditor required to do with respect to a client's financial reporting framework? A) assess whether the framework selected by management is suitable B) select an applicable framework for use with the financial statements C) make sure that ASPE or ASNPO are in use for publicly listed companies D) select the accounting principles to be used as part of the reporting framework Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 2) When the criteria to be used in the financial statement audit are established, the auditor's responsibility is to A) evaluate the reporting framework used. B) select the acceptable financial reporting framework. C) make a recommendation to management for selecting the framework. D) create and document the framework used. Answer: A Diff: 2 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 3) What is one of the ways that the Canadian Auditing Standards (CASs) make management directly responsible for an organization's financial statements? A) all listed company management must certify the accuracy of the evidence provided B) management must provide evidence to support financial statement data C) management must implement and carry out the development of high-quality internal controls D) companies must use internal auditors to assess the quality of the financial statements Answer: B Diff: 3 Learning Objective: 2-4 Explain the purpose of and the principles underlying the financial audit. 4) What is one of the ways that the C