EAU1M12 CGA-Canada, 2012 Page 1 of 6

CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
March 2012
Marks Time: 3 Hours

30 Question 1
Select the best answer for each of the following unrelated items. Answer each of these items in your
examination booklet by giving the number of your choice. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will
not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.

Note:
2 marks each

a. The relevance and reliability of audit evidence refers to which of the following concepts?
1) Appropriateness
2) Sufficiency
3) Going concern
4) Professional skepticism

b. Which of the following is true concerning Canadian Auditing Standards (CAS)?
1) CAS override the responsibilities of the auditor that exist in legislation in connection with the
offering of securities to the public.
2) CAS do not impose responsibilities on management.
3) CAS require the auditor to obtain absolute assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error.
4) If an auditor follows CAS, it will not be necessary for the auditor to exercise professional
judgment.

c. Which of the following statements about auditing is true?
1) The quantity of the audit evidence needed is affected by the auditors assessment of the risks of
material misstatement and also by the quality of such audit evidence.
2) The quality of the audit evidence needed is affected by the quantity of such audit evidence.
3) The quantity of the audit evidence needed is affected by the auditors assessment of the risks of
material misstatement and also by the cost of obtaining such audit evidence.
4) The quality of the audit evidence needed is affected by the cost of obtaining such audit evidence.

d. Which of the following best describes the concept of professional skepticism?
1) Being aware that management is always biased and possibly deceitful
2) Being alert to conditions of possible misstatement due to error or fraud and making a critical
assessment of audit evidence
3) Being trustful of management and obtaining persuasive audit evidence when managements
assertions seem unreasonable
4) Being alert to conditions of possible misstatement due to unadjusted errors from the previous
years financial statements






Continued...

EAU1M12 CGA-Canada, 2012 Page 2 of 6
e. Which party has a responsibility with respect to fraud in a companys financial statements?
1) Management has the responsibility for the prevention of fraud but the auditor has the
responsibility to detect fraud.
2) Management should be reasonably confident that there is no fraud in the financial statements
before the audit begins, and then the auditor takes responsibility for any fraud found once the
audit starts.
3) The auditor is responsible for obtaining reasonable assurance that the financial statements are free
from material misstatement caused by fraud.
4) The auditor has the responsibility to design internal controls that will prevent fraud.

f. Why is the auditor concerned with collusion?
1) Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact,
false.
2) Collusion always exists, therefore the auditor must design audit procedures to detect it.
3) Management must disclose any collusion occurring in the year in the financial statements.
4) Management is not responsible for fraud if it is related to collusion.

g. When does the auditor assess the risk of material misstatement in a clients financial statements?
1) The auditor has to determine the risk before accepting the audit.
2) The auditor sets the risk at the beginning of the audit and does not allow subsequent findings
during the audit to affect the assessment.
3) The auditors assessment of the risk of material misstatement may change during the audit as
more evidence is obtained.
4) The auditor determines the risk only at the conclusion of the audit, after considering all of the
audit evidence.

h. How would an auditor use the critical cut-off percentage in an audit?
1) It allows the auditor to determine the correct percentage to use when determining materiality.
2) It allows the auditor to identify items that may not exceed materiality, but for which the
percentage change is so large that it indicates potential problems.
3) It identifies items that exceed the auditors materiality limit, and therefore indicates actual
problems.
4) It identifies deviation rates of internal controls as percentages for easier comparison.

i. Abcom Ltd. had net income of $4,900,000 in 2010, which was $175,000 higher than the previous
year. The 2010 income included a loss of $400,000 due to uninsured damage to a factory building
from a hurricane. The loss was not insured because the company has been in operation for 27 years
and never experienced a hurricane before. Which of the following would be the best choice for
materiality in the companys statements?
1) 5% to 10% of $4,325,000
2) 5% to 10% of $4,725,000
3) 5% to 10% of $4,900,000
4) 5% to 10% of $5,300,000

j. Which of the following is most likely to result from management optimism and bias?
1) A higher inherent risk of overstatement in revenue accounts
2) A higher inherent risk of overstatement in liability accounts
3) A lower inherent risk of overstatement in asset accounts
4) A lower inherent risk of overstatement of expense accounts



Continued...
EAU1M12 CGA-Canada, 2012 Page 3 of 6
k. How would an auditor make use of the audit risk (AR) formula?
1) The auditor measures the inherent risk (IR), control risk (CR), and detection risk (DR) and
calculates the audit risk for the engagement.
2) The auditor measures the AR, IR, and CR and calculates the DR for the engagement.
3) The auditor measures the IR and CR and calculates the appropriate DR to achieve the desired AR.
4) The auditor measures the DR, IR, and AR and calculates the CR for the engagement.

l. If IR =0.30, CR =0.40, and DR =0.05, what would the risk of material misstatement (RMM) be?
1) 0.006
2) 0.120
3) 0.700
4) 0.750

m. Which of the following best describes the auditors business risk?
1) The risk that the auditor will be sued after completing the audit of financial statements.
2) The risk that the auditor will issue an incorrect audit opinion.
3) The risk that the auditor will fail to detect a material misstatement in the financial statements.
4) The risk that the auditee will suffer financial losses after the audit is completed and the financial
statements are published.

n. What should the auditor do if the upper error limit (UEL) of the population of payables controls is 6%,
the tolerable deviation rate (TDR) is 5%, and the audit risk is 5%?
1) Accept the control as effective because the TDR is less than the UEL
2) Reject the control as ineffective because UEL exceeds TDR
3) Accept the control as effective as the UEL does not exceed the audit risk
4) Select a new sample as the UEL exceeds the audit risk

o. Which of the following is an advantage of non-statistical sampling?
1) Random numbers can more easily be associated with population items in non-statistical sampling.
2) The results are easier to defend than for statistical sampling.
3) It allows more objective control of audit risks than statistical sampling.
4) It permits auditors to apply evaluation judgments based on factors in addition to the sample
evidence.




















Continued...
EAU1M12 CGA-Canada, 2012 Page 4 of 6
12 Question 2
Roy is a CGA who started a sports equipment importing business. The business became very successful
and he sold it to his neighbour. As part of the sale agreement, Roy agreed to perform an audit of the
financial statements for the first year at no charge. Roy told the new owner that there would be no problem
in issuing an unqualified opinion if the new owner operated the business without increasing the debt levels
and kept inventory low. Roy also has been a partner in an audit firm for several years and to avoid any
ethical problems, Roy arranged for other staff to do the audit. Roy only reviewed the work of the other
auditors and did not do any of the audit planning or testing himself. The audit for the first year was free,
and if the new owner wanted an audit for the second year, Roys firm would only charge 5% of the net
income of the company.

Roys firm found no material misstatements but the audit report noted a going-concern issue. The new
owner took on extra debt from a private source, trying to expand the business too quickly. The excess debt
caused the companys current ratio to fall below 1.8, which violated a covenant of the companys bank
loan agreement. Under the terms of the lending agreement, the bank then called its loan and the new owner
went into bankruptcy within 18 months.

The new owner sued Roys audit firm for negligence, claiming that Roy had issued an audit report that
ruined her business.

Required
8 a. Explain the ethical issues in the above situation. Include at least four points.

4 b. Explain whether or not Roys audit firm could be found negligent by issuing the audit report that
harmed the clients business.

6 Question 3
Kai is considering whether to accept UTE Inc. as an audit client. UTE has had 3 different audit firms in the
past 5 years. Kai decided to contact all 3 of the previous auditors and ask them if they had experienced any
difficulty in collecting their audit fees from the client. The previous auditors all confirmed to Kai that the
client paid the audit fees as billed, therefore Kai recommended that the firm accept UTE as a new client.

Required
Identify what other information Kai should have asked for when contacting the previous auditors. Give
four examples.

12 Question 4
The auditors assessed the internal control during the interim audit (September 15 to September 30), using
flowcharts, questionnaires, and narratives and decided to use a combined audit approach. The only
changes recommended by the auditors were that that the accounting clerks each have their own user ID
and password for access to the computer and that the duties of recording and authorization be separated.
The auditors were otherwise satisfied with the effectiveness of the controls at that time. The auditors
decided to use the combined audit approach when they returned to complete the audit at the end of the
year. When the audit was completed in March of the following year, the auditors met with the client
management and reviewed all of their audit findings, including their suggestions for the internal controls.

Required
Evaluate the auditors procedures assessing the clients internal controls. Include at least four points in
your answer.





Continued...
EAU1M12 CGA-Canada, 2012 Page 5 of 6
8 Question 5
YTZ Inc. is in its third year of business and sells specialized clothing items for hiking and camping
activities. All sales are on the Internet, and the company has approximately 70 different clothing items for
sale. You have studied the controls that the company has in place and found the following:
An order is not accepted by the companys server unless the customers name, shipping address, and
email address are entered.
An order is not accepted until payment is made by credit card, using the companys credit card
processing system.
Once an order is accepted by the system, the companys sales journal is updated.
The sales journal is linked to the companys inventory sub-system, and approved sales orders create a
shipping request that is sent to the companys warehouse.
The warehouse prints a shipping label, selects the goods, and sends the goods by mail to the customer.
The sales records are accessible only to head office staff as the warehouse staff receives a separate
shipping order, which is the only record they need.
Software is updated by consultants when the company feels changes are needed. The IT manager at the
company used to be an accountant but now only works with IT issues.

The company is not concerned about uncollectible accounts since a sale is not recorded nor shipped until it
is paid for.

Required
Identify four concerns you would have as an auditor regarding the controls over the Internet sales.

10 Question 6
J uanitas CGA firm is conducting an external audit of TYY Inc.s financial statements (for the period
ended December 31, 2010). The audit manager has assigned J uanita to analyze the replies for the
confirmations sent to TYYs accounts receivables, and also to prepare the aging of the accounts
receivables, segregating accounts into 30, 60, 90, and 120 days.

J uanita reviewed the confirmations, which had asked customers to reply whether they agreed with the
recorded amount or not, and compared the confirmation to the recorded amount. When the amounts
agreed, Juanita concluded that the recorded amount was accurate. J uanita then used an approximation
(found in last years audit working papers) of 1% of the 30-day group, 4% of the 60-day group, 6% of the
90-day group, and 30% of the 120-day group to determine collectability.

Required
7
1
/2 a. Explain three additional steps J uanita should take to determine the collectability of the accounts
receivable.

2
1
/2 b. Indicate whether the confirmations are positive or negative confirmations. Briefly explain your
answer.













Continued...
EAU1M12 CGA-Canada, 2012 Page 6 of 6
12 Question 7
Tai Inc. is an investment company that manages other peoples savings. The company is owned by one
individual, Bernard. The company is so successful that Bernard only accepts clients that he knows
personally or that have been referred by friends. Due to recent frauds in this industry, Bernard has decided
to have the companys financial statements audited. He has asked you, a CGA, to do the audit of Tai.
Bernard has been successful by investing only in interest-bearing investments. In a typical year, the
company will buy and sell several investments. To help you get started, Bernard has prepared a schedule
of investments, listing all investments, purchases, and sales for the year.

Required
2 a. Explain one use of the schedule of investments provided to the auditor by Bernard.

4 b. Design two audit procedures to test the valuation assertion for the companys investment account.

6 c. Design three audit procedures to test the completeness assertion for the companys investment income
account.

10 Question 8
YCO Inc. is a privately-owned company that operates a childrens toy store. The owner, Sue, wants to
expand the business by opening 2 more stores, and she approached her bank for a large loan. The loan
would pay for construction of one of the stores (the other one will be rented) and provide operating funds
for both of the new stores for the 3 years that the owner estimates it will take for the new stores to become
established and profitable.

One of the banks conditions for the new financing is that YCO provide audited financial statements for
the year ended December 31, 2011. Sue hires J ohn, a CGA, to conduct the audit. He does not have much
auditing experience but is confident that if he follows generally accepted auditing standards (GAAS), there
will be no problems. J ohn started the audit on December 31, 2011 by attending the inventory count, as
inventory is the largest current asset on YCOs balance sheet.

YCO had 3 teams of employees counting inventory, and the count was completed in 2 hours. John walked
through the inventory storage area, listening to the count teams as they did their work, and asking the staff
if they had any problems. J ohn told the employees that during the count, they were to report any problems
to him, and to turn in their completed count sheets only to him. J ohn was not concerned about count sheets
that were not used (empty sheets) by the employees as he knows that the most important concern about
inventory is to ensure it is not overstated. J ohn then took a random sample of the inventory count sheets
that the employees had used, and checked the counts himself. He found 12 errors where the counter had
transposed numbers, and John corrected them all. He then adjusted the inventory account in the trial
balance to agree with the count results and made the appropriate notes in his working papers for the
adjusting entry.

After the count was finished, the first thing J ohn did was to review the inventory counting instructions
prepared by Sue, to make sure they were effective.

Required
Explain five important mistakes that John has made in his audit of the inventory account.


END OF EXAMINATION

100


EXTERNAL AUDITING [AU1]
EXAMINATION














AU1
















Before starting to write the examination, make sure that it is complete and that there are no
printing defects. This examination consists of 6 pages. There are 8 questions for a total of
100 marks.

READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.


To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.

Calculate Mathematically determine the amount
or number, showing formulas used and
steps taken. (Also Compute).
Compare Examine qualities or characteristics that
resemble each other. Emphasize
similarities, although differences may
be mentioned.
Contrast Compare by observing differences.
Stress the dissimilarities of qualities or
characteristics. (Also Distinguish
between)
Criticize Express your own judgment concerning
the topic or viewpoint in question.
Discuss both pros and cons.
Define Clearly state the meaning of the word or
term. Relate the meaning specifically to
the way it is used in the subject area
under discussion. Perhaps also show
how the item defined differs from items
in other classes.
Describe Provide detail on the relevant
characteristics, qualities, or events.
Design Create an outcome (e.g., a plan or
program) that incorporates the relevant
issues and information.
Determine Calculate or formulate a response that
considers the relevant qualitative and
quantitative factors.
Diagram Give a drawing, chart, plan or graphic
answer. Usually you should label a
diagram. In some cases, add a brief
explanation or description. (Also Draw)
Discuss This calls for the most complete and
detailed answer. Examine and analyze
carefully and present both pros and
cons. To discuss briefly requires you to
state in a few sentences the critical
factors.
Evaluate This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not sufficient.)
Cite authorities. Cite advantages and
limitations.
Explain In explanatory answers you must clarify
the cause(s), or reasons(s). State the
how and why of the subject. Give
reasons for differences of opinions or of
results. To explain briefly requires you
to state the reasons simply, in a few
words.
Identify Distinguish and specify the important
issues, factors, or items, usually based on
an evaluation or analysis of a scenario.
Illustrate Make clear by giving an example, e.g., a
figure, diagram or concrete example.
Interpret Translate, give examples of, solve, or
comment on a subject, usually making a
judgment on it.
Justify Prove or give reasons for decisions or
conclusions.
List Present an itemized series or tabulation.
Be concise. Point form is often
acceptable.
Outline This is an organized description. Give a
general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Prove Establish that something is true by citing
evidence or giving clear logical reasons.
Recommend Propose an appropriate solution or course
of action based on an evaluation or
analysis of a scenario.
Relate Show how things are connected with
each other or how one causes another,
correlates with another, or is like
another.
Review Examine a subject critically, analyzing
and commenting on the important
statements to be made about it.
State Clearly provide a position based on an
evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in
condensed form, like the summary of a
chapter, omitting details and illustrations.
Trace In narrative form, describe progress,
development, or historical events from
some point of origin.

SAU1M12 CGA-Canada, 2012 Page 1 of 4
CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
March 2012
SUGGESTED SOLUTIONS

Marks Time: 3 Hours

30 Question 1
Note:
2 marks each

Sources/Calculations:
a. 1) Topic 1.1 (Level 1)

b. 2) Topic 1.1 (Level 1)

c. 1) Topic 1.1 (Level 1)

d. 2) Topic 1.1 (Level 1)

e. 3) Topic 3.1 (Level 2)

f. 1) Topic 3.1 (Level 2)

g. 3) Topic 4.6 (Level 1)

h. 2) Topic 4.3 (Level 1)

i. 4) Topic 4.4 (Level 1)
Materiality = $4,900,000 + $400,000 = $5,300,000

j. 1) Topic 4.6 (Level 1)

k. 3) Topic 4.7 (Level 1)

l. 2) Topic 4.6 (Level 1)
RMM = IR CR = 0.30 0.40 = 0.120

m. 1) Topic 4.6 (Level 1)

n. 2) Topic 6.6 (Level 2)

o. 4) Topic 6.3 (Level 2)









Continued...
SAU1M12 CGA-Canada, 2012 Page 2 of 4
12 Question 2
8 a. Source: Topics 2.3 and 2.4 (Level 1)
A self-interest threat occurs when a member, firm, or member of the assurance team could benefit
from a financial interest in, or other self-interest conflict with, an assurance client.
A self-review threat occurs when any product or judgment of a previous assurance engagement or
non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance
engagement; or when members or a member of the assurance team was previously a director or
officer of the assurance client or was an employee in a position to exert direct and significant
influence over the subject matter of an assurance engagement.
A familiarity threat occurs when a member, firm, or member of the assurance team becomes too
sympathetic to the clients interests, by virtue of a close relationship with an assurance client, its
directors, officers, or employees.
Roy cannot promise or suggest an unqualified opinion before he obtains and reviews sufficient
appropriate evidence to support the opinion.
Roy cannot accept an audit fee of zero or of a percentage of the clients net income.

Note:
2 marks per bullet to a maximum of 8 marks

4 b. Source: Topic 2.6 (Level 1)
The audit firm is not negligent to issue the audit report if the audit evidence shows that the opinion
issued is supported.
Roy had sufficient appropriate audit evidence that the bank loan was in default, therefore if this
supported a going-concern comment in the report, the audit firm would not be negligent.

Note:
2 marks per bullet to a maximum of 4 marks

6 Question 3
Source: Topic 3.6 (Level 1)

The information obtained from the predecessor auditor is very useful for deciding whether or not to accept
the engagement. This information includes:
Any scope limitations imposed by the client
Significant differences over applicability of accounting principles
Indications of unethical management practices
Managements attempt to influence the audit report (such as opinion shopping)
Note:
1
1
/2 points per bullet to a maximum of 6 marks












Continued...
SAU1M12 CGA-Canada, 2012 Page 3 of 4
12 Question 4
Source: Topic 5.4 (Level 1)
The auditors assessed the controls without testing them (they did not proceed to the third stage in control
evaluation).
The auditor must verify that internal control was in place and working (or not working) during the entire
period of reliance (usually the year under audit).
The auditor must be careful not to reach an incorrect conclusion about internal control as a consequence
of focusing on a limited period.
The deficiencies noted by the auditors at the interim audit appear quite serious. Therefore, control risk
should likely have been assessed as high to maximum, and the combined approach should not be used.
The auditor has a responsibility to report internal control deficiencies to the appropriate level of
management.

Note
3 marks per bullet to a maximum of 12 marks

8 Question 5
Source: Topic 7.1 (Level 1)
There are no controls to detect or prevent duplicate orders.
There are no controls to ensure correct pricing.
There is no cancellation or modification procedure of a sale if the customer has made a mistake in
selecting merchandise online.
There are no controls to ensure that the sale is shipped to the correct address; therefore, the company
may have to either re-ship the goods or refund the sale.
There is no control to ensure that the companys records are backed up, or properly retained for the
auditor.
There should be password control to restrict head office staff access to only those persons who need
access.
There is no control over access to the software and only one IT person at the company, indicating that
the company may not have up-to-date systems.

Note
2 marks per bullet to maximum of 8 marks

10 Question 6
7
1
/2 a. Source: Topic 8.6 (Level 1)
For significant accounts receivable shown as outstanding for less than 60 days, Juanita should
review TYYs related invoices and shipping documents to ensure that those amounts have not been
receivable for a longer period.
Juanita should vouch the significant accounts receivable for which payments were received by TYY
after year end and before the end of the audit to deposit slips and bank statements, to ensure that the
payments received relate to the accounts receivable listed at year-end.
Juanita should test the accuracy of the approximation percentages by comparing them to last years
actual results for TYYs receivables and for the industry.

Note
2
1
/2 marks for each procedure to a maximum of 7
1
/2 marks

2
1
/2 b. Source: Topic 8.7 (Level 1)
The confirmations are positive confirmations because they request an answer whether or not the
customer agrees with the recorded amount.

Continued...
SAU1M12 CGA-Canada, 2012 Page 4 of 4
12 Question 7
Source: Topic 10.1 (Level 2)

2 a. The auditor should reconcile the schedule to the investment account and the investment income
account in the general ledger (G/L).

4 b. Vouch the cost of the investments to brokers reports, contracts, and cancelled cheques.
Obtain market value of investments and compare to cost to calculate lower of cost or market
(LCM), and prepare any necessary mark-downs.
Recalculate foreign exchange rates for foreign currency accounts and compare to investment income
account.

Note:
2 marks per bullet to a maximum of 4 marks

6 c. Inspect the investments and any related documents, such as contracts, to determine interest rates;
recalculate interest income; and compare to G/L recorded interest income.
Vouch recorded sales to brokers reports and bank deposits, and recalculate gains/losses and
compare to investment income account in G/L.
Review deposits received after year end (cut-off tests) to verify income accrued in investment
income account by adjusting entries.
Foot journals and reconcile to general ledger control accounts.
Trace a sample of income receipts in the journals to ensure all are recorded in the general ledger
control account.

Note:
2 marks per bullet to a maximum of 6 marks

10 Question 8
Source: Topic 9.3 (Level 1)
John should have reviewed the count instructions before the count, to ensure that he was satisfied that
they would be adequate.
When he found errors, he should have tested more of the counts instead of just correcting the errors,
possibly having the inventory re-counted.
John has to reconcile the count to the companys trial balance, not simply adjust the trial balance. If the
trial balance is incorrect, there will likely be other misstatements associated with the inventory errors,
such as payables, expenses, or even sales.
Management should control the inventory count, not the auditor.
John should have collected all of the count sheets. John will not know if a sheet that was not turned in to
him actually had inventory counted on it, or was lost.
John did not take any steps to test the quality of the inventory, such as obsolete or damaged goods.
John did not follow any procedures to ensure that the inventory was valued at the lower of cost or
market (LCM).
John should have ensured that the employees were adequately trained.

Note:
2 marks per bullet to a maximum of 10 marks
END OF SOLUTIONS

100

AU1M12 CGA-Canada, 2012
CGA-CANADA

EXTERNAL AUDITING [AU1] EXAMINATION
March 2012
EXAMINERS COMMENTS
General Comments
The overall performance of the students on this examination was very good.

Students demonstrated a good awareness of reporting, fraud, management assertions, risk assessment, and
materiality. In some cases, students answers did not address the required; for example, they provided
answers that identified examples but did not explain how these related to the required, and therefore did
not obtain full marks. When the required asks students to explain, they must clarify the reasons for their
answer. Examination questions will typically allocate most of the marks for reasoning, not just for a
conclusion.
Specific Comments
Question 1 Multiple choice (Levels 1 and 2)
This question was answered very well. See specific comments below regarding problems noted.

Several students chose an incorrect option on parts (b), (c), and (k).

b. CASs do not address the responsibilities of the auditor that may exist in legislation, nor do the
standards require an auditor to obtain absolute assurance, nor do the standards replace the need for an
auditor to exercise professional judgment. Therefore, options 1), 3), and 4) are incorrect. CAS are
standards for auditors, not for managers, therefore option 2) is the best choice.

c. Evidence can be of various forms and the AU1 course discusses which types of evidence are more
reliable. Neither the quality nor the quantity of evidence that an auditor needs can ever be reduced
simply due to the cost of obtaining such evidence; therefore, options 3) and 4) cannot be correct. Nor
could the quality of evidence needed be reduced simply by the amount of evidence; therefore,
option 2) cannot be correct. An auditor must assess the risks of material misstatement and the quality
of evidence, and then determine the quantity of evidence needed. Therefore option 1) is the best
choice.

k. There are many types of risk that an auditor must consider in conducting an audit of financial
statements, and only some are controllable. The auditor must determine the level of audit risk (AR)
that is acceptable in a particular audit. The auditor reduces the level of AR to this level by first
measuring the clients inherent risk and control risks, and then adjusting the detection risk
accordingly. This is shown in the audit risk formula. Therefore options 1), 2), and 4) are incorrect and
option 3) is the best choice.

Question 2 Professional ethics, legal liability, and ethical responsibility (Level 1)
a. This part was answered well by almost all students, with many obtaining full or almost full marks.
Most students identified several ethical issues, but some students simply listed the issues or the
examples and so could only obtain part marks. Full marks could only be awarded for an explanation,
as stated in the required.

b. This part was answered satisfactorily by many students. Students who had difficulty tended to answer
in terms of the ethics issues from part (a) of the question, instead of answering the required, which
addressed the question of whether the auditor was negligent by issuing the audit report.



Continued...
AU1M12 CGA-Canada, 2012
Question 3 Pre-engagement arrangements (Level 1)
Question 3 was answered very well by almost all students, with many students obtaining either full or
almost full marks. Some students thought that the auditor should ask the previous auditor for the clients
financial statements and previous audit reports, when these would be readily provided either publicly or
from the client directly.

Question 4 Evaluation of internal control (Level 1)
Question 4 was answered satisfactorily. Some students overlooked the fact that internal controls must be
assessed for the entire audit period, and the auditor must conduct sufficient tests of controls to support the
assessment. A few students simply ignored the question situation altogether and simply provided a generic
statement of how an auditor assesses the control risk in an audit. It is important to always relate the
concepts in your answer to the fact situation in the question.

Question 5 Company operations and computer systems (Level 1)
Question 5 was answered very well with almost all students obtaining full marks. No problems were
noted.

Question 6 Accounts receivable Substantive procedures; Accounts receivable Confirmations (Level 1)
a. This part was answered satisfactorily, but some students were unable to provide three additional steps
that the auditor could take in this situation. Some answers were simply too brief or too vague to be
awarded full marks, for example, stating check cash received after the year end, which does not
indicate how this would be done, nor what evidence this would provide, related to the collectability of
the receivables. Students should not assume that a marker will complete their answer markers can
only award marks for what students state in their answer booklet.

b. This part was answered very well with no overall problems noted, but a few students again simply
ignored the question situation altogether and simply provided a generic statement of positive and
negative confirmations, without applying this knowledge to the facts of the question.

Question 7 Investments Substantive procedures (Level 2)
a. This part was not answered well. Many students answers indicated that they would take the schedule
as given and use it without verifying it first. Students are reminded that both the form and the source
of evidence must be considered when determining the quality of the evidence. Most students obtained
part marks for this question.

b. This part was answered well by most students. Some students prepared audit procedures that did not
address the valuation assertion, or were too brief to obtain full marks. Most students obtained part
marks for this question.

c. This part was answered well by most students. Some students prepared audit procedures that did not
address the completeness assertion, or were too brief to obtain full marks. Students are reminded that
when testing for completeness, the direction of testing is critical, so, for example, tracing from the
investment income account to the bank deposits could provide evidence for validity but could not
provide any evidence for completeness.

Question 8 Inventory Observation (Level 1)
Question 8 was answered very well by most students. Students who obtained less than full marks tended to
provide answers that were too brief, simply listing or identifying examples, instead of providing an
explanation as was required.